-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GvJjc9ufuaWV4EFg8f7ppuK7LWYHeOViX6+3+XuxHQUnVcCrxF6w9HodlMe1wff+ 5MFNNdekz02/14Rb3ADJIw== 0000950144-96-003306.txt : 19960613 0000950144-96-003306.hdr.sgml : 19960613 ACCESSION NUMBER: 0000950144-96-003306 CONFORMED SUBMISSION TYPE: N-2/A PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 19960611 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIRROM CAPITAL CORP CENTRAL INDEX KEY: 0000933166 STANDARD INDUSTRIAL CLASSIFICATION: LOAN BROKERS [6163] IRS NUMBER: 621583116 STATE OF INCORPORATION: TN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-04023 FILM NUMBER: 96579174 BUSINESS ADDRESS: STREET 1: 511 UNION ST STREET 2: STE 2310 CITY: NASHVILLE STATE: TN ZIP: 37219 BUSINESS PHONE: 6152560701 N-2/A 1 SIRROM CAPITAL CORP. AMEND. #1 TO FORM N-2 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 11, 1996 1933 ACT REGISTRATION NO. 333-4023 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 AMENDMENT NO. 1 TO FORM N-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 SIRROM CAPITAL CORPORATION (Exact Name of Registrant as Specified in Charter) 500 CHURCH STREET, SUITE 200 NASHVILLE, TENNESSEE 37219 (615) 256-0701 (Address and Telephone Number of Principal Executive Offices) CARL W. STRATTON 500 CHURCH STREET, SUITE 200 NASHVILLE, TENNESSEE 37219 (Name and Address of Agent For Service) COPIES OF INFORMATION TO: BOB F. THOMPSON DONALD I.N. MCKENZIE BASS, BERRY & SIMS PLC SHERRARD & ROE, PLC FIRST AMERICAN CENTER 424 CHURCH STREET NASHVILLE, TENNESSEE 37238-2700 NASHVILLE, TENNESSEE 37219 (615) 742-6200 (615) 742-4200
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the Registration Statement becomes effective. If any securities being registered on this form will be offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933, other than securities offered in connection with a dividend reinvestment plan, check the following box. / / / / This Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act and the Securities Act registration statement number of the earlier effective registration statement for the same offering is 333- --------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 SIRROM CAPITAL CORPORATION CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY PARTS A AND B OF FORM N-2 REGISTRATION STATEMENT
ITEM REGISTRATION STATEMENT ITEM AND CAPTION OR LOCATION NUMBER HEADING IN PROSPECTUS - ------ ------------------------------------- ------------------------------------------------ 1. Outside Front Cover.................. Outside front cover 2. Inside Front and Outside Back Cover Page................................. Inside front and outside back cover page 3. Fee Table and Synopsis............... Prospectus Summary; Fees and Expenses; Additional Information 4. Financial Highlights................. Selected Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations 5. Plan of Distribution................. Outside front cover; Certain Transactions; Underwriting 6. Selling Shareholders................. Not Applicable 7. Use of Proceeds...................... Use of Proceeds 8. General Description of Registrant.... Outside front cover, Prospectus Summary; Investment Objectives and Policies; The Company; Business; Risk Factors; Distributions and Price Range of Common Stock; Portfolio Companies 9. Management........................... Management; Custodian, Transfer and Dividend Paying Agent and Registrar 10. Capital Stock, Long-Term Debt, and Other Securities..................... Description of Capital Stock; Distributions and Price Range of Common Stock; Reinvestment Plan; 11. Defaults and Arrears on Senior Securities........................... Investment Objectives and Policies; Tax Status; Regulation 12. Legal Proceedings.................... Not applicable 13. Table of Contents of the Statement of Additional Information............... Not applicable 14. Cover Page........................... Not applicable 15. Table of Contents.................... Not applicable 16. General Information and History...... The Company 17. Investment Objective and Policies.... Investment Objectives and Policies 18. Management........................... Management 19. Control Persons and Principal Holders of Securities........................ Principal Shareholders; Risk Factors 20. Investment Advisory and Other Services............................. Custodian, Transfer and Dividend Paying Agent and Registrar; Independent Public Accountants; Investment Objectives and Policies 21. Brokerage Allocation and Other Practices............................ Not applicable 22. Tax Status........................... Tax Status 23. Financial Statements................. Financial Statements
- --------------- * Pursuant to General Instruction on Form N-2, all information required to be set forth in Part B: Statement of Additional Information has been included in Part A: The Prospectus. All items required to be set forth in Part C are set forth in Part C. 3 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 OFFERS 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 JUNE 11, 1996 2,000,000 SHARES SIRROM CAPITAL CORPORATION COMMON STOCK --------------------- The shares of common stock, no par value (the "Common Stock"), offered hereby (the "Offering"), are being sold by Sirrom Capital Corporation ("Sirrom" or the "Company"). The Company is a specialty finance company that makes loans to small businesses and has elected to be treated as a business development company (a "BDC") under the Investment Company Act of 1940, as amended (the "1940 Act"). The Company's investment objectives are to achieve both a high level of income from interest on loans and other fees and long-term growth in the value of its shareholders' equity through the appreciation of the equity interests in its portfolio companies. See "Business." No assurances can be given that the Company will continue to achieve these objectives. The Common Stock is traded on The Nasdaq Stock Market's National Market (the "Nasdaq National Market") under the symbol "SROM." On June 7, 1996, the last reported sale price for the Common Stock was $27.75. This Prospectus sets forth concisely the information about the Company that a prospective investor should know before investing and should be retained for future reference. Additional information about the Company has been filed with the Securities and Exchange Commission (the "Commission") and is available upon written or oral request without charge. See "Additional Information." SEE "RISK FACTORS" ON PAGES 10 THROUGH 13 OF THIS PROSPECTUS FOR MATTERS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- PRICE TO PROCEEDS TO PUBLIC UNDERWRITING COMPANY(2) DISCOUNTS AND COMMISSIONS(1) - ------------------------------------------------------------------------------------------------- Per Share......................... $ $ $ - ------------------------------------------------------------------------------------------------- Total(3).......................... $ $ $ - ------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses of the Offering payable by the Company estimated at $ . (3) The Company has granted the Underwriters a 30-day option to purchase up to 300,000 additional shares of Common Stock on the same terms and conditions set forth above, solely to cover over-allotments, if any. See "Underwriting." If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions, and Proceeds to the Company will be $ , $ and $ , respectively. --------------------- The Common Stock is offered by the Underwriters named herein, subject to prior sale, when, as, and if received and accepted by them, subject to their right to reject orders, in whole or in part, and to certain other conditions. It is expected that delivery of the certificates representing the Common Stock will be made on or about June , 1996. THE ROBINSON-HUMPHREY COMPANY, INC. J.C. BRADFORD & CO. EQUITABLE SECURITIES CORPORATION June , 1996 4 SIRROM CAPITAL CORPORATION The following map sets forth, as of March 31, 1996, the 22 states in which the Company's borrowers maintain their principal place of business and the number of borrowers in each state. [MAP] IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SHARES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10b-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). SEE "UNDERWRITING." 2 5 PROSPECTUS SUMMARY The following summary is qualified in its entirety by and should be read in conjunction with the more detailed information and the financial statements and notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. THE COMPANY Sirrom Capital Corporation is a specialty finance company that makes loans to small businesses. The Company believes the market for small commercial loans is underserved by traditional lending sources and that competitors generally are burdened with an overhead and administrative structure that hinders them from competing more effectively in this market. The Company's loans are typically made in the form of secured debt with relatively high fixed interest rates and with warrants to purchase an equity interest in the borrower. The objectives of the Company are to achieve both a high level of current income from interest on loans and other fees and long-term growth in the value of its shareholders' equity through the appreciation of the equity interests in its portfolio companies. The Company, which was founded in May 1992, has experienced significant growth in both the size and diversity of its loan portfolio. The Company's loan portfolio balance at December 31, 1993, 1994 and 1995 was $42.4 million, $72.3 million and $144.9 million, respectively. At March 31, 1996, the Company had loans outstanding with an aggregate principal balance of $166.9 million to 97 companies in a variety of industries located in 22 states. The average rate of interest on the Company's loan portfolio at March 31, 1996, was 12.9%. The Company's loans typically range from $500,000 to $4.0 million in size, are non-amortizing, have a five-year maturity and are accompanied by warrants to purchase an equity interest in the borrower at a nominal exercise price (usually $.01 per share). The Company targets borrowers that it believes meet certain criteria, including the potential for significant growth, adequate collateral coverage, experienced management teams with a significant ownership interest in the borrower, sophisticated outside equity investors and profitable operations. To develop new lending opportunities, the Company markets to an extensive referral network comprised of venture capitalists, investment bankers, attorneys, accountants, commercial bankers and business brokers. Sirrom, based in Nashville, Tennessee, is licensed as a small business investment company ("SBIC") by the Small Business Administration ("SBA"). As an SBIC, the Company is eligible to borrow up to $90.0 million from the SBA. As of March 31, 1996, the Company had borrowed $83.3 million in debentures from the SBA. The interest rate paid on the Company's long-term borrowings from the SBA was 7.02% at March 31, 1996. The Company has supplemented its SBA borrowings with equity capital and a $50.0 million revolving credit facility from First Union National Bank of Tennessee and a syndicate of other banks (the "Revolving Credit Facility"). The interest rate paid on the Revolving Credit Facility was 7.43% at March 31, 1996. In order to provide the Company more flexibility in its financing alternatives, the terms of the loans it originates and the nature of its borrowers, the Company has requested permission from the Commission to create a wholly-owned subsidiary for its SBIC activities. The Company intends to transfer the majority of its assets, including its SBIC license, and all of its liabilities, including its SBA debt and indebtedness under the Revolving Credit Facility, to the new subsidiary. Following the transfer, the subsidiary would carry on the Company's SBIC activities, and the Company would be able to provide a broader range of financing opportunities to small businesses. Specifically, following the reorganization, the Company would continue to make loans to small businesses; however, the Company would be able to make loans outside the specific parameters imposed by the SBA. In contemplation of this corporate reorganization, the Company has signed an engagement letter and preliminary term sheet with a financial institution to establish a special purpose borrowing facility ("Special Purpose Facility") that would provide up to $100.0 million in additional debt financing to support the Company's future loan origination activities outside the SBIC subsidiary. Assuming the Commission and the SBA approve the reorganization on the basis requested in the application, the Company anticipates the reorganization to be effected during the second half of 1996, although there can be 3 6 no assurance that the Commission or the SBA will grant the Company permission to consummate the reorganization. In order to broaden the range of services offered to businesses in its target market, the Company has entered into an acquisition agreement pursuant to which, upon satisfaction of various conditions, it would acquire Harris Williams & Co., L.P. ("Harris Williams"), a merger and acquisition advisory firm located in Richmond, Virginia. Harris Williams provides advisory services with respect to small and medium sized companies throughout the United States that are similar in size to Sirrom's portfolio companies. Upon consummation of the acquisition, the owners of Harris Williams would receive approximately 950,000 restricted shares of the Company's Common Stock. One of the conditions to the acquisition is receipt by the Company of an exemption from the Commission with respect to certain provisions of the 1940 Act. There can be no assurance that the Commission will grant the requested exemption. The Company is also a non-diversified, closed-end investment company that has elected to be treated as a BDC under the 1940 Act. In addition, it has elected to be treated for tax purposes as a regulated investment company ("RIC") under Subchapter M of the Internal Revenue Code of 1986 (the "Code"). As such, the Company must distribute at least 90% of its net investment income (net interest income plus net realized short-term capital gains) to shareholders on a quarterly basis. The Company may retain all or a portion of realized long-term capital gains, net of applicable taxes, to supplement equity capital and to support growth in its portfolio. Since inception, the Company has realized $12.4 million in gains from the sale of its equity positions in portfolio companies. At March 31, 1996, the combined value of these gains from equity positions and the $15.2 million in unrealized appreciation of equity interests was $27.6 million. Since inception, the Company has realized losses of $6.1 million on loans and equity interests and at March 31, 1996, had provided for $3.5 million of unrealized depreciation on loans. THE OFFERING Common Stock offered by the Company.................. 2,000,000 shares Common Stock to be outstanding after the Offering................. 11,130,116 shares Nasdaq National Market Symbol............ SROM Use of Proceeds by the Company.............. Origination of loans and investments. See "Use of Proceeds." Distributions.............. The Company has distributed and currently intends to continue to distribute quarterly to its shareholders at least 90% of its net investment income. See "Distributions." Risk Factors............... Investment in shares of the Common Stock involves certain risks relating to the structure and investment objectives of the Company that should be considered by purchasers of the Common Stock. See "Risk Factors." Risk of Unavailability of Funds. As the Company grows, it will have a continuing need for long-term capital to finance its lending activities. Generally, the Company's capital needs have been met by borrowings under SBA programs, from commercial banks and through the sale of equity securities. The maximum amount of funding available to an SBIC from the SBA is $90.0 million. At April 30, 1996, the Company had outstanding borrowings of $83.3 million from the SBA and anticipates that it will request funding of the remaining $6.7 million by the end of 4 7 May 1996. No assurances can be made that the Company will receive such funding from the SBA. At April 30, 1996, the Company had outstanding borrowings of $28.6 million under its $50.0 million Revolving Credit Facility. The Company has signed an engagement letter and preliminary term sheet with another financial institution to establish the Special Purpose Facility that would provide the Company with additional funds in an amount of up to $100.0 million that would be collateralized by certain of the Company's future small business loans and the related equity interests. There can be no assurances that the Company will obtain this facility. Risks Associated with Investments in Small, Privately Owned Companies. The portfolio of the Company consists primarily of loans to and securities issued by small, privately owned businesses. There is generally no publicly available information about such companies, and the Company must rely on the diligence of its employees and agents to obtain information in connection with the Company's investment decisions. In addition, there is typically no public market for securities of privately owned companies. The Company's portfolio securities are and will usually 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 the ability of the Company to dispose of such securities in a timely matter and at a fair price at times when the Company deems it necessary or advantageous. The valuation of securities in the Company's portfolio is determined in good faith by the Company's Board of Directors. Risk of Payment Default. The loans made by the Company to small businesses carry a relatively high fixed rate of interest. The small businesses may have limited financial resources and may be unable to obtain financing from traditional sources. In addition, a small business' ability to repay its loans may be adversely affected by numerous factors, including the failure to meet its business plan, a downturn in its industry, or negative economic conditions. A deterioration in a borrower's financial condition and prospects usually will be accompanied by a deterioration in collateral for the loan including the likelihood of realizing on any guarantees obtained from the borrower's management. Investment in small businesses, therefore, involves a high degree of business and financial risk, which can result in substantial losses and accordingly, should be considered speculative. Leverage Risks. The Company's use of leverage and the result of required interest payments to its funding sources tends to increase the amount of risk associated with the Company's operations. Leverage magnifies the potential for gain and loss on monies invested and, therefore, results in an increase in the risks associated with an investment in the Company's securities. Risk of Voluntary or Involuntary Termination of Pass-through Tax Treatment. The Company has qualified for and elected to be taxed as a RIC. In any year in which the Company qualifies as a RIC, it generally will not be subject to federal income tax on net investment income and net capital gains distributed to its shareholders. However, the Company may retain part or all of its realized long-term capital gains, in which case the Company would be required to pay tax on such capital gains and 5 8 the shareholders would receive a deemed distribution and a tax credit for their pro-rata portion of the tax paid by the Company. However, because the Company uses leverage, it is subject to certain asset coverage ratio requirements set forth in the 1940 Act and could, under certain circumstances, be restricted from making distributions necessary to qualify as a RIC under Subchapter M of the Code. The election to qualify as a RIC is made on an annual basis, and no assurance can be given that the Company will continue to elect or to qualify for such treatment. Furthermore, once the new subsidiaries are created in connection with the acquisition of Harris Williams and the corporate reorganization of the Company, it is possible that the Company and any of its subsidiaries may not continue to meet the tests for qualification as a RIC. Harris Williams will not qualify or be taxed as a RIC and will therefore pay taxes at the subsidiary level. If the Company were to fail to qualify or elect not to qualify as a RIC and its income became fully taxable, a substantial reduction in the Company's net assets, the amount of income available for distribution to the Company's shareholders and the percentage of such income actually distributed could result. FEES AND EXPENSES The purpose of the following table is to assist the investor in understanding the various costs and expenses that an investor in the Company will bear directly or indirectly. SHAREHOLDER TRANSACTION EXPENSES Sales load (as a percentage of offering price)............................. 5.5%(1) Reinvestment Plan fees..................................................... None(2) ANNUAL EXPENSES (as a percentage of net assets attributable to common shares)(3) Operating expenses......................................................... 3.9%(4) Interest payments on borrowed funds........................................ 5.1% Total Annual Expenses (estimated)............................................ 9.0% =====
- --------------- (1) The underwriting discount, which is a one-time fee paid by the Company to the Underwriters in connection with this Offering, is the only sales load paid in connection with this Offering. (2) The expenses of the Company's Dividend Reinvestment Plan are included in stock record expenses, a component of "Operating expenses." The Company has no cash purchase plan. The participants in the Reinvestment Plan will bear a pro rata share of brokerage commissions incurred with respect to open market purchases. (3) Assumes a net asset value of $141.4 million, which will be the Company's estimated shareholders' equity upon completion of the Offering. Operating expenses and interest payments are calculated on an annualized basis based on the three months ended March 31, 1996. (4) Operating expenses consist primarily of compensation and employee benefits, travel and other marketing expenses, rent and other similar expenses. EXAMPLE The following example demonstrates the projected dollar amount of total cumulative expenses that would be incurred over various periods with respect to a hypothetical investment in the Company. These amounts assume no additional leverage and are based upon the payment by an investor of a 5.5% sales load (the underwriting discount paid by the Company in connection with this Offering) and the payment by the Company of operating expenses at the levels set forth in the table above.
1 YEAR 3 YEARS 5 YEARS 10 YEARS ------- ------- -------- -------- You would pay the following expenses on a $1,000 investment, assuming a 5.0% annual return................................ $ 144 $ 337 $549 $1,179
6 9 This example should not be considered a representation of the future expenses of the Company, and actual expenses may be greater or less than those shown. Moreover, while the example assumes (as required by the Commission) a 5.0% annual return, the Company's performance will vary and may result in a return greater or less than 5.0%. In addition, while the example assumes reinvestment of all dividends and distributions at net asset value, participants in the Company's Dividend Reinvestment Plan (the "Reinvestment Plan") may receive shares purchased by First Union National Bank, as administrator of the Reinvestment Plan (the "Reinvestment Plan Administrator") at the market price in effect at the time, which may be at, above or below net asset value. See "Reinvestment Plan." 7 10 SUMMARY HISTORICAL FINANCIAL AND OTHER DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FROM THREE MONTHS INCEPTION YEAR ENDED ENDED THROUGH DECEMBER 31, MARCH 31, DECEMBER 31, ---------------------------- ------------------- 1992 1993 1994 1995 1995 1996 ------------ ------- ------- -------- ------- ------- (UNAUDITED) STATEMENTS OF OPERATIONS DATA: Total operating income........ $ 918 $ 4,214 $ 8,238 $ 15,575 $ 2,965 $ 5,783 Interest expense.............. 128 1,427 3,123 4,771 999 1,790 General, administrative and amortization expenses...... 217 928 1,313 2,702 703 1,404 ------------ ------- ------- -------- ------- ------- Pretax operating income....... $ 573 $ 1,859 $ 3,802 $ 8,102 $ 1,263 $ 2,589 ========== ======= ======= ======== ======= ======= Pretax operating income per share...................... $ 0.22 $ 0.55 $ 0.88 $ 0.99 $ 0.19 $ 0.27 Dividends per share........... -- -- -- 0.89 0.14 0.24 Fully diluted weighted average number of shares outstanding................ 2,650 3,376 4,324 8,174 6,666 9,733 OTHER OPERATING DATA: Number of portfolio companies with loans outstanding at period end................. 17 38 57 91 68 97 Number of new portfolio companies.................. 17 24 25 44 12 10 Principal amount of loans originated................. $ 14,639 $31,470 $40,785 $101,505 $27,792 $32,324 Principal amount of loan repayments................. 0 2,013 7,585 14,414 1,560 4,775 Net interest spread(1)........ 5.6% 5.8% 5.5% 5.8% 5.6%(2) 5.8%(2) General and administrative expenses as a percentage of assets..................... 1.5% 1.6% 1.3% 1.4% 2.3%(3) 2.4%(3)
MARCH 31, 1996 ------------------------- ACTUAL AS ADJUSTED(4) -------- -------------- BALANCE SHEET DATA: Cash and cash equivalents.......................................... $ 78 $ 47,078 Loans.............................................................. 166,936 166,936 Equity interests................................................... 22,549 22,549 Warrants........................................................... 11,199 11,199 Total assets....................................................... 206,206 253,206 Revolving Credit Facility.......................................... 24,916 24,916 Debentures payable to SBA.......................................... 83,260 83,260 Total shareholders' equity......................................... 94,406 141,406
- --------------- (1) Net interest spread represents the weighted average gross yield on the Company's interest bearing investments less the weighted average cost of long-term borrowed funds. (2) Calculated on an annualized basis. (3) Calculated on an annualized basis. Includes accrual and payment of annual bonuses. (4) Adjusted to reflect the sale by the Company of 2,000,000 shares of Common Stock offered hereby by the Company at an offering price of $25.00 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds." 8 11 THE COMPANY The Company was incorporated under the laws of the State of Tennessee in November 1994. The Company's principal executive offices are located at 500 Church Street, Suite 200, Nashville, Tennessee 37219 and its telephone number is (615) 256-0701. The Company is the successor to Sirrom Capital, L.P., a Tennessee limited partnership (the "Partnership"), which was organized under the laws of Tennessee in 1991. Pursuant to a conversion (the "Conversion") consummated on February 1, 1995, all partners of the Partnership (the "Partners") transferred their Partnership interests to the Company in exchange for the issuance of 5,050,116 shares of Common Stock. The Common Stock was received by each Partner in proportion to the Partner's percentage interest in the Partnership. As a result of this exchange, the Partnership was dissolved and liquidated by operation of law, with all of the assets and liabilities of the Partnership (including the SBIC license which was obtained by the Partnership in May 1992) being thereby assigned and transferred to the Company. Unless otherwise indicated, all references to the Company include the Partnership and its historical operations. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement on Form N-2 (the "Registration Statement") under the Securities Act, with respect to the shares of Common Stock offered by this Prospectus. This Prospectus, which is a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement or the exhibits and schedules thereto. For further information with respect to the Company and the Common Stock, reference is made to the Registration Statement, including the exhibits and schedules thereto. The Company is subject to the informational requirements of the Exchange Act, and, in accordance therewith, files reports, proxy statements and other information with the Commission. The Registration Statement and the exhibits and schedules thereto filed with the Commission, as well as such reports, proxy statements and other information, may be inspected, without charge, at the public reference facility maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices located at Seven World Trade Center, New York, New York 10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may also be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Common Stock is listed on the Nasdaq National Market, and such reports, proxy statements and other information can also be inspected at the offices of the National Association of Securities Dealers, Inc., Corporate Financing Department, 9513 Key West Avenue, 3rd Floor, Rockville, Maryland 20850. 9 12 RISK FACTORS The purchase of the shares offered by this Prospectus involves a number of significant risks and other factors relating to the structure and investment objectives of the Company. As a result, there can be no assurance that the Company will continue to achieve its investment objectives. In addition to the other information contained in this Prospectus, the following risk factors should be carefully considered in evaluating an investment in the Common Stock. RISK OF UNAVAILABILITY OF FUNDS The Company has a continuing need for capital to finance its lending activities. Generally, the Company's capital needs have been met by borrowings under SBA programs and from commercial banks, and through the sale of equity securities. The maximum amount of funding available to an SBIC from the SBA is $90.0 million. As of May 31, 1996, the Company had borrowed $83.3 million from the SBA. In May 1996, the Company requested funding of the remaining $6.7 million; however, there is no assurance that the Company will be able to obtain such funding. From the time the Company obtains such additional SBA funding until repayment of the outstanding debentures, it will not be eligible to borrow additional funds from the SBA. The Company also has the $50.0 million Revolving Credit Facility, which had an outstanding balance of $28.6 million on April 30, 1996. In addition, the Company has signed an engagement letter and preliminary term sheet with a financial institution to establish the Special Purpose Facility. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition, Liquidity and Capital Resources." The financial institution has not issued a commitment letter for the Special Purpose Facility nor has definitive documentation with respect thereto been executed, and no assurance can be given that such commitment or definitive documentation will be negotiated on terms satisfactory to the Company. Reductions in the availability of funds from commercial banks or other sources on terms favorable to the Company could have a material adverse effect on the Company. Furthermore, because the Company presently distributes to its shareholders at least 90% of its investment company taxable income, such earnings are not available to fund loan originations. RISKS ASSOCIATED WITH INVESTMENTS IN SMALL, PRIVATELY OWNED COMPANIES The portfolio of the Company consists primarily of loans to and securities issued by small, privately owned businesses. There is generally no publicly available information about such companies, and 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 their company. Moreover, small businesses frequently have smaller product lines and market shares than their competition. Small companies 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, which can result in substantial losses and accordingly should be considered speculative. The Company's operating history is relatively limited and it has not operated in recessionary economic periods during which the operating results of small business companies such as those in the Company's portfolio often are adversely affected. While the Company generally seeks to make senior secured loans, its loans are often made on a subordinated basis, which results in a higher degree of risk of collection. The Company also has the ability to make unsecured loans or invest in equity securities which likewise may involve a higher degree of risk. RISK OF PAYMENT DEFAULT The Company makes non-amortizing, five-year term loans with relatively high fixed rates of interest to small companies that may have limited financial resources and that may be unable to obtain financing from traditional sources. These loans are generally secured by the assets of the borrower. A borrower's ability to repay its loan may be adversely affected by numerous factors, including the failure to meet its business plan, a downturn in its industry or negative economic conditions. A deterioration in a borrower's financial condition 10 13 and prospects usually will be accompanied by a deterioration in the collateral for the loan, including the likelihood of realizing on any guaranties obtained from the borrower's management. Although the Company seeks to be the senior, secured lender to a borrower, the Company is not always the senior lender, and its collateral for a loan may be subordinate to another lender's security interest. RISK OF LOAN LOSSES EXCEEDING CURRENT ESTIMATES There is typically no public market for the debt or equity securities of small, privately owned companies. As a result, the valuation of securities in the Company's portfolio is subject to the good faith determination of the Company's Board of Directors. See "Determination of Net Asset Value." Unlike certain lending institutions, the Company does not establish reserves for loan losses, but adjusts quarterly the valuation of its portfolio to reflect the Company's estimate of the current realizable value of the loan portfolio. At March 31, 1996, management's estimate of potential loan losses in its loan portfolio was $3.5 million. There can be no assurance that this estimate reflects the amounts that ultimately will be realized on these loans. See "Business -- Operations." RISK OF ILLIQUIDITY OF PORTFOLIO INVESTMENTS Liquidity relates to the ability of the Company to sell either a debt or equity security in a timely manner at a price that reflects the fair market value of that security. Most of the investments of the Company are or will be securities acquired directly from small, privately owned companies. The Company's portfolio securities are and will usually be subject to restrictions on resale or otherwise have no established trading market for such securities. The illiquidity of most of the Company's portfolio securities may adversely affect the ability of the Company to dispose of such securities in a timely manner and at a fair price at times when the Company deems it necessary or advantageous. INTEREST RATE RISK The Company's income is materially dependent upon the "spread" between the rate at which it borrows funds and the rate at which it loans these funds. The Company anticipates that it will utilize a combination of long-term and short-term borrowings to finance its lending activities, and that it will engage in interest rate risk management techniques, including various interest rate hedging activities. In order to manage the interest rate risk associated with the variable interest rate provided for under the Revolving Credit Facility, the Company entered into an interest rate swap agreement that effectively converts the variable rate on a portion of the Revolving Credit Facility to a fixed rate. Under this agreement, in April 1996, the Company began converting up to $30.0 million under the Revolving Credit Facility to a fixed rate in $3.0 million increments per month. It is also anticipated that a newly formed subsidiary of the Company would enter into appropriate swap agreements to attempt to hedge the interest rate risk related to the Special Purpose Facility inherent in the maturing and reissuing of commercial paper at market rates. The Company anticipates entering into similar arrangements to convert its variable rate debt obligations into fixed rate obligations in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition, Liquidity and Capital Resources." Since inception the Company's net interest spread has averaged 5.7% (570 basis points). There can be no assurance that the Company can maintain this net interest spread or that a significant change in market interest rates would not have a material adverse effect on the Company's profitability. LEVERAGE RISKS The Company has borrowed funds from the SBA and pursuant to its Revolving Credit Facility, and as a result, the Company is leveraged. Leverage magnifies the potential for gain and loss on monies invested and, therefore, results in an increase in the risks associated with an investment in the Company's securities. The Company's creditors have claims on the Company's assets superior to the claims of the Company's shareholders. At March 31, 1996, the Company's debt as a percentage of total liabilities and shareholders' equity was 52.5%. In addition, the ability of the Company to achieve its investment objectives may depend in part on its ability to achieve leverage on favorable terms, and there can be no assurance that such terms can be obtained. 11 14 On March 31, 1996, the Company had borrowed $83.3 million from the SBA evidenced by debentures having a fixed rate of interest, a ten-year term and a prepayment option after five years without penalty. These debentures have maturities ranging from the years 2002 to 2006 and interest rates varying from 6.12% to 8.20% per annum. Amounts outstanding under the Revolving Credit Facility bear interest at a variable rate based on LIBOR plus 1.75% and are secured by all assets of the Company. The Revolving Credit Facility matures on December 27, 1998. As of March 31, 1996, there was approximately $24.9 million outstanding under the Revolving Credit Facility. The interest rate paid on the Revolving Credit Facility was 7.43% at March 31, 1996. In order for the Company to cover annual interest payments on the debt described above, it must achieve annual returns of at least 3.1% on its portfolio. The purpose of the following table is to illustrate the effect of leverage on returns to a shareholder on an investment in the Company's Common Stock assuming various annual returns, net of expenses. The calculations set forth in the table are hypothetical and actual returns may be greater or less than those appearing below.
ASSUMED RETURN ON THE COMPANY'S PORTFOLIO (NET OF EXPENSES) ----------------------------------------- -10% -5% 0% 5% 10% ----- ----- ---- --- ---- Corresponding return to shareholder(1)................. -22.9% -14.2% -5.4% 3.3% 12.1%
- --------------- (1) Assumes (i) $247.6 million in investments, (ii) an average cost of funds of 7.10%, (iii) $108.2 million in debt outstanding and (iv) $141.4 million of shareholders' equity. POSSIBLE VOLUNTARY OR INVOLUNTARY TERMINATION OF PASS-THROUGH TAX TREATMENT The Company historically has qualified for and elected to be taxed as a RIC. To qualify, the Company must meet certain income distribution and diversification requirements. However, because the Company uses leverage, it is subject to certain asset coverage ratio requirements set forth in the 1940 Act and could, under certain circumstances, be restricted from making distributions necessary to qualify as a RIC under Subchapter M. See "Tax Status." In any year in which the Company so qualifies, it generally will not be subjected to federal income tax on net operating income and net capital gains distributed to its shareholders. However, the Company may retain part or all of its realized long-term capital gains, in which case the Company would be required to pay tax on such capital gains and the shareholders would receive a deemed distribution and a tax credit for their pro rata portion of the tax paid by the Company. The election to qualify as a RIC is made on an annual basis, and no assurance can be given that the Company will continue to elect or to qualify for such treatment. See "Tax Status." Furthermore, following the creation of new subsidiaries in connection with the acquisition of Harris Williams, the consummation of the corporate reorganization of the Company and the establishment of the Special Purpose Facility, it is possible that the Company and any of its subsidiaries that currently intend to elect RIC status may not continue to meet the tests for qualification as a RIC. Harris Williams will not qualify or be taxed as a RIC and therefore, will pay tax at the subsidiary level. If the Company were to fail to qualify or elect not to qualify under Subchapter M and its income became fully taxable, a substantial reduction in the Company's net assets and the amount of income available for distribution to the Company's shareholders and the percentage of such income actually distributed could result. For financial accounting purposes, the Company does not currently provide for deferred taxes on the amount of unrealized appreciation of its equity securities because of the uncertainty as to whether any long-term capital gain will be distributed to shareholders when realized. If the Company were to retain substantially all of its realized gains as a matter of general practice, the Company would be required to provide for deferred taxes on the amount of unrealized gains in its portfolio. In so doing, the Company would accrue a one time charge to earnings and shareholders' equity for financial reporting purposes for taxes on accumulated unrealized appreciation at that time, and thereafter would recognize unrealized appreciation net of long-term capital gains tax. See "Tax Status" and "Regulation." 12 15 COMPETITIVE MARKET FOR INVESTMENT OPPORTUNITIES A large number of entities and individuals compete for the types of investments made by the Company. Many of these entities and individuals have greater financial resources than the Company. As a result of this competition, the Company may from time to time be precluded from entering into attractive transactions. There can be no assurance that the Company will be able to identify and complete investments which satisfy the Company's investment objectives or that it will be able to invest fully its available capital. CONTROL BY CERTAIN SHAREHOLDERS Upon completion of this Offering, the Company's executive officers and directors will beneficially own 28.6% of the outstanding shares of Common Stock. Accordingly, these shareholders, through their stock ownership, control the Company. See "Principal Shareholders." RISK OF FAILURE TO COMPLETE CORPORATE REORGANIZATION The Company has filed an application with the Commission requesting approval of a corporate reorganization of the Company that would allow the Company to transfer its SBIC related assets and liabilities to a wholly-owned subsidiary. The Commission's approval of the corporate reorganization must occur prior to the creation of any new subsidiaries of the Company, although there can be no assurance that the Commission or the SBA will grant the Company permission to consummate the reorganization. In addition, a new, bankruptcy remote subsidiary must be created in order to establish the Special Purpose Facility. Therefore, failure to obtain approval of the corporate reorganization will prevent the Company from establishing the Special Purpose Facility. RISK OF FINANCIAL ADVISORY BUSINESS The Company has agreed to acquire Harris Williams, a company which provides merger and acquisition financial advisory services with respect to small and medium sized businesses. This business combination is subject to various conditions, including approval by the Company's shareholders and receipt of an exemption from the Commission with respect to certain provisions of the 1940 Act, and there can be no assurance that the Commission will grant the requested exemption. Harris Williams' income is derived from fees received for its financial advisory engagements, which typically provide for a monthly retainer and a success fee contingent upon the closing of each transaction. If the acquisition is consummated, there can be no assurance that Harris Williams' fee income will continue at or exceed historical levels or levels anticipated by the Company in entering into the acquisition agreement. See "Business -- Pending Acquisition." DEPENDENCE ON MANAGEMENT The Company is dependent for the selection, structuring, closing and monitoring of its loans and investments on the diligence and skill of management, particularly of George M. Miller, II, the loss of whose services could have a material adverse effect on the operations of the Company. See "Management." Under the Revolving Credit Facility, if either Mr. Miller or David M. Resha ceases to be employed by the Company, the lenders have the ability to accelerate the repayment of any amounts outstanding. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition, Liquidity and Capital Resources." SHARES ELIGIBLE FOR FUTURE SALE Upon consummation of this Offering, the Company will have 11,130,116 shares of Common Stock outstanding. Following the Offering, sales of substantial amounts of the Common Stock in the public market pursuant to Rule 144 or otherwise, or the availability of such shares for sale, could adversely affect the prevailing market prices for the Common Stock and impair the Company's ability to raise additional capital through the sale of equity securities should it desire to do so. See "Description of Capital Stock -- Registration Rights" and "Shares Eligible for Future Sale." 13 16 USE OF PROCEEDS The net proceeds to be received from this Offering by the Company are estimated to be approximately $ million (after deducting estimated underwriting discounts and expenses). The Company intends to use the net proceeds to originate new loans. The Company estimates that the net proceeds will be applied as set forth above by the end of 1996. Pending such application, the Company intends to invest the net proceeds of this Offering in time deposits and income producing securities with maturities of 15 months or less that are issued or guaranteed by the federal government or agencies thereof. See "Investment Objectives and Policies." DISTRIBUTIONS AND PRICE RANGE OF COMMON STOCK The Company has distributed and currently intends to continue to distribute to its shareholders at least 90% of its net operating income and net realized short-term capital gains, if any, on a quarterly basis. Net realized long-term capital gains may be retained to supplement the Company's equity capital and support growth in its portfolio, unless the Board of Directors determines in certain cases to make a distribution. Pursuant to the Reinvestment Plan, a shareholder whose shares are registered in his own name can elect to have all or a portion of the distributions reinvested in additional shares of Common Stock by the Reinvestment Plan Administrator, by letter to the Company received prior to the corresponding record date. There is no assurance that the Company will achieve investment results or maintain a tax status that will permit any specified level of cash distributions or year-to-year increases in cash distributions. See "Reinvestment Plan," "Regulation" and "Tax Status." The Common Stock is quoted on the Nasdaq National Market under the symbol SROM. On June 7, 1996, the last reported sale price of the Common Stock was $27.75 per share (a 157% premium to net asset value per share on such date). The following table sets forth the range of high and low closing sale prices of the Common Stock as reported on the Nasdaq National Market, the net asset value per share, the premium of high closing sale price to net asset value and the premium of low closing sale price to net asset value for the period from February 6, 1995, when public trading of the Common Stock commenced, through June 7, 1996. The Common Stock has historically traded at a premium to net asset value per share.
CLOSING SALE PREMIUM OF PREMIUM OF PRICE NET ASSET HIGH CLOSING SALE LOW CLOSING SALE ----------------- VALUE PER PRICE TO NET PRICE TO NET DIVIDEND HIGH LOW SHARE(1) ASSET VALUE ASSET VALUE DECLARED ------ ------ --------- ----------------- ---------------- -------- 1995 First Quarter (beginning February 6, 1995)....... $11.63 $10.75 $7.86 48% 37% $ 0.14 Second Quarter............. 13.75 11.13 8.05 71 38 0.26 Third Quarter.............. 18.75 13.25 10.11 85 31 0.23 Fourth Quarter............. 20.00 16.75 9.23 117 81 0.26 1996 First Quarter.............. 23.75 18.63 9.70 145 92 0.24 Second Quarter (through June 7, 1996)........... 29.50 22.63 10.80(2) 171(2) 110(2) N/A
- --------------- (1) Fully diluted net asset value per share is determined as of the last day in the relevant quarter and therefore may not reflect the net asset value per share on the date of the high and low sale price. Historically, the Company's net assets have been highest at the end of the quarter. (2) Net asset value is as of April 30, 1996. 14 17 SELECTED FINANCIAL DATA The following tables set forth selected financial data of the Company, which should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and with the Company's Financial Statements and Notes thereto included elsewhere in this Prospectus. The selected financial data set forth below as of and for the period from inception to December 31, 1992, and as of and for each of the three years in the period ended December 31, 1995, have been derived, in part, from the financial statements of the Company which have been audited by Arthur Andersen LLP, independent public accountants, whose report for the period from inception to December 31, 1992, and each of the three years in the period ended December 31, 1995, is included elsewhere in this Prospectus. Also included are unaudited financial statements for the three months ended March 31, 1995 and 1996. The selected financial data for the three months ended March 31, 1996, has been derived from the unaudited financial statements of the Company which, in the opinion of management, include all adjustments (which consist of only normal recurring adjustments) necessary for a fair presentation of the financial condition and results of operations of the Company for that period.
FROM INCEPTION THREE MONTHS ENDED THROUGH YEAR ENDED DECEMBER 31, MARCH 31, DECEMBER 31, ------------------------------------ ----------------------- 1992 1993 1994 1995 1995 1996 ------------ ---------- ---------- ---------- ---------- ---------- (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA: Operating income: Interest on investments..................... $ 636 $ 3,515 $ 7,337 $ 13,452 $ 2,424 $ 4,862 Loan processing fees........................ 282 699 901 1,900 541 921 Other income................................ -- -- -- 223 -- -- ------------ ---------- ---------- ---------- ---------- ---------- Total operating income................ 918 4,214 8,238 15,575 2,965 5,783 Operating expenses: Interest expense............................ 127 1,427 3,124 4,771 999 1,790 Salaries and benefits....................... -- -- -- 1,082 451 739 Management fees............................. 210 709 1,073 -- -- -- Other operating expenses.................... -- 166 122 1,412 222 477 State income tax on interest................ -- 231 457 109 52 -- Amortization expense........................ 8 54 118 208 30 188 ------------ ---------- ---------- ---------- ---------- ---------- Total operating expenses.............. 345 2,587 4,894 7,582 1,754 3,194 ------------ ---------- ---------- ---------- ---------- ---------- Net operating income.......................... 573 1,627 3,344 7,993 1,211 2,589 Realized gain (loss) on investments......... 198 (799) (538) 1,759 50 5,756 Change in unrealized appreciation (depreciation) of investments............. 1,813 (50) 3,357 4,694 1,603 2,241 Provision for income taxes.................... -- -- -- (1,020) -- (2,135) ------------ ---------- ---------- ---------- ---------- ---------- Net increase in partners' capital and shareholders' equity resulting from operations.................................. $ 2,584 $ 778 $ 6,163 $ 13,426 $ 2,864 $ 8,451 ============ ========= ========= ========= ========= ========= Per share: Pretax operating income..................... $ 0.22 $ 0.55 $ 0.88 $ 0.99 $ 0.19 $ 0.27 Net increase in partners' capital and shareholders' equity resulting from operations................................ 0.98 0.23 1.43 1.64 0.43 0.87 Dividends................................... -- -- -- 0.89 0.14 0.24 Fully diluted weighted average shares outstanding................................. 2,650,000 3,376,000 4,324,000 8,174,000 6,666,000 9,733,000 OPERATING STATISTICS: Number of portfolio companies with loans outstanding at period end................... 17 38 57 91 68 97 Number of new portfolio companies............. 17 24 25 44 12 10 Principal amount of loans originated.......... $ 14,639 $ 31,470 $ 40,785 $ 101,505 $ 27,792 $ 32,324 Principal amount of loan repayments........... -- 2,013 7,585 14,414 1,560 4,775 Loan portfolio at period end.................. 14,639 42,441 72,336 144,855 97,378 166,936 Average net interest spread at period end..... 5.6% 5.8% 5.5% 5.8% 5.6% 5.8%
MARCH 31, 1996 DECEMBER 31, ----------------------- ----------------------------------------- AS 1992 1993 1994 1995 ACTUAL ADJUSTED(1) -------- -------- -------- -------- -------- ------------- (DOLLARS IN THOUSANDS) (UNAUDITED) BALANCE SHEET DATA: Cash and cash equivalents............................. $ 4,601 $ 1,633 $ 137 $ 195 $ 78 $ 47,078 Loans................................................. 14,639 42,441 72,336 144,855 166,936 166,936 Equity interests...................................... 4,233 3,591 7,577 15,912 22,549 22,549 Warrants.............................................. 951 4,219 7,549 11,513 11,199 11,199 Total assets.......................................... 24,850 53,289 90,969 177,030 206,206 253,206 Revolving credit facility............................. -- -- 6,389 13,200 24,916 24,916 Debentures payable to SBA............................. 10,000 34,000 51,000 73,260 83,260 83,260 Total shareholders' equity............................ 14,702 18,651 32,383 88,346 94,406 141,406
- --------------- (1) Adjusted to reflect the sale by the Company of 2,000,000 shares of Common Stock offered hereby by the Company at an offering price of $25.00 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds." 15 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following analysis of the financial condition and results of operations of the Company should be read in conjunction with the preceding "Selected Financial Data," the Company's Financial Statements, the Notes thereto and the other financial data included elsewhere in this Prospectus. The financial information provided below has been rounded in order to simplify its presentation. However, the ratios and percentages provided below are calculated using the detailed financial information contained in the Financial Statements, the Notes thereto and the financial data included elsewhere in this Prospectus. Due to the limited operating results and history of the Company, there can be no assurances that the Company's historical financial performance is indicative of the Company's future results of operations. RESULTS OF OPERATIONS The Company's principal investment objectives are to achieve both a high level of income from interest on loans and fees and long-term growth in its shareholders' equity through the appreciation in value of equity interests in its portfolio companies. Therefore, the Company's loans are typically made in the form of secured debt with relatively high fixed interest rates and with warrants to purchase equity securities of the borrower. In addition to interest on investments, the Company also typically collects an up-front processing fee on each loan it originates. The Company's financial performance in the Statements of Operations is composed of three primary elements. The first is "Net operating income," which is the difference between the Company's income from interest, dividends and fees and its total operating expenses, including interest expense. The second element is "Realized gain (loss) on investments," which is the difference between the proceeds received from the disposition of portfolio assets in the aggregate during the period and their stated costs at the beginning of the period. The third element is the "Change in unrealized appreciation (depreciation) of investments," which is the net change in the fair values of the Company's portfolio assets compared with their fair values at the beginning of the period or their stated costs, if purchased during the period. Generally, "Realized gain (loss) on investments" and "Change in unrealized appreciation (depreciation) of investments" are inversely related in that when an appreciated asset is sold to realize a gain, a decrease in unrealized appreciation occurs when the gain associated with the asset is transferred from the "unrealized" category to the "realized" category. Conversely, when a loss is realized on a depreciated portfolio asset, the reclassification of the loss from "unrealized" to "realized" causes an increase in unrealized appreciation and an increase in realized loss. Three Months Ended March 31, 1996 and 1995 Net Operating Income. During the quarter ended March 31, 1996, interest on investments was $4.9 million, a 104.2% increase over the $2.4 million earned in the same quarter of 1995. During the first quarter of 1996, the Company collected $921,000 in processing fees, a 70.2% increase over the $541,000 collected in the same quarter of 1995. This increase in interest income and processing fees is a result of the increase both in the dollar amount of loans outstanding during the quarter and of loans originated during the period and a result of the recognition and collection of certain contingent processing fees in the first quarter of 1996 for loans closed during the fourth quarter of 1995. The Company's loan portfolio increased 71.4% to $166.9 million at March 31, 1996, from $97.4 million at March 31, 1995. The $32.3 million of loans originated during the first quarter of 1996 was a 16.2% increase over the $27.8 million of loans originated in the same quarter of 1995. In addition, the weighted average interest rate charged on the loan portfolio at March 31, 1996 was 12.9%, as compared to 12.6% at March 31, 1995. The most significant portion of the Company's total operating expenses is interest expense. The Company's interest expense, most of which is related to the SBA-guaranteed debentures of the Company and the Revolving Credit Facility, increased to $1.8 million in the first quarter of 1996, an 80.2% increase over the $999,000 paid in the first quarter of 1995. The increase in interest expense from 1995 to 1996 is primarily attributable to increased borrowings from the SBA and establishment of and borrowing under the Revolving Credit Facility. Borrowings from the SBA were $83.3 million on March 31, 1996, and $51.0 million on 16 19 March 31, 1995. Amounts outstanding under the Revolving Credit Facility at March 31, 1996, were $24.9 million. The other significant components of total operating expenses are (i) overhead, which relates to employee compensation, travel and marketing expenses, office expenses and legal fees, (ii) amortization of borrowing costs and (iii) state taxes. These expenses totaled $1.4 million in the first quarter of 1996, an 85.4% increase over the $755,000 of such expenses in the same quarter of 1995. These increases can be largely attributed to the increase in the number of employees from 10 in the first quarter of 1995 as compared to 16 in the first quarter of 1996. Although the dollar amount of these expenses increased, overhead expenses (or general and administrative expenses) as a percentage of average assets decreased slightly from 2.6% to 2.5% from the first quarter of 1995 to the first quarter of 1996, respectively. The first quarter overhead expenses for both years include the accrual and payment of annual bonuses, and thus, first quarter overhead expenses have historically been higher as a percentage of average assets than in other quarters. For the quarter ended March 31, 1996, the Company paid dividends of $2.4 million from net operating income. The Company paid no dividends in the first quarter of 1995. Taxes. Beginning in February 1995, the Company elected to be taxed as a RIC under Subchapter M of the Code. If the Company, as a RIC, satisfies certain requirements relating to the source of its income, the diversification of its assets and the distribution of its net income, the Company is generally taxed as a pass through entity which acts as a partial conduit of income to its shareholders. In order to maintain its RIC status, the Company must in general derive at least 90% of its gross income from dividends, interest and gains from the sale or disposition of securities; derive less than 30% of its gross income from the sale or disposition of securities held for less than three months; meet investment diversification requirements defined by the Code; and distribute to shareholders 90% of its net income (other than long-term capital gains). The Company presently intends to meet the RIC qualifications in 1996. However, no assurance can be given that the Company will continue to elect or qualify for such treatment after 1996. For the quarter ended March 31, 1996, the Statements of Operations include a provision for taxes totaling $2.1 million for federal income tax at a 35% rate on realized gains not distributed to shareholders. The majority of this tax related to the retained long-term capital gain of $6.3 million on the Company's sale of half of its equity position in Premiere Technologies, Inc. Realized Gain (Loss) on Investments. The Company's net realized gain on investments was $5.8 million during the quarter ended March 31, 1996, largely resulting from gains of $6.7 million on the sale of equity positions in Premiere Technologies, Inc. and American Remedial Technologies, Inc., which were partially offset by a $1.1 million loan write-off of Medical Associates of America, Inc. The net realized gain for the first quarter of 1995 was $50,000, primarily resulting from $560,000 in gains on the sale of equity positions in Republic Automotive Parts, Inc. and American Retirement Corporation, which were largely offset by a write-off of $515,000 of equity positions in Medical Associates of America, Inc. Management does not attempt to maintain a comparable level of realized gains from year to year, but instead attempts to maximize total investment portfolio appreciation. Change in Unrealized Appreciation (Depreciation) of Investments. For the quarters ended March 31, 1996, and 1995, the Company recorded net increases in unrealized appreciation of investments of $2.2 million and $1.6 million, respectively. These increases are the result of the Company's quarterly revaluation of its portfolio in accordance with its Valuation Policy to reflect the fair value of each of its portfolio assets. Fiscal Years Ended December 31, 1995, 1994 and 1993 Net Operating Income. During the fiscal year ended December 31, 1995, the Company earned interest on investments of $13.5 million, an 84.9% increase over the $7.3 million earned in 1994, which was a 108.6% increase over the $3.5 million earned during fiscal 1993. During fiscal 1995, the Company collected $1.9 million in processing fees, a 110.9% increase over the $901,000 collected in 1994, which was a 28.9% increase over the $699,000 collected in 1993. These increases in interest income and processing fees are a result of increases in the dollar amount of loans outstanding and originated during the applicable periods. The Company's loan portfolio increased to $144.8 million at December 31, 1995, an increase of 100.3% from 17 20 $72.3 million at December 31, 1994, which in turn was a 70.5% increase from $42.4 million at December 31, 1993. The $101.5 million of loans originated during fiscal 1995 was a 148.8% increase over the $40.8 million of loans originated in 1994, which was a 29.5% increase over the $31.5 million originated in 1993. In addition, the weighted average interest rate charged on the loan portfolio at December 31, 1995 was 12.8%, as compared to 12.3% and 12.5% at December 31, 1994 and 1993, respectively. The Company also earned income from miscellaneous sources in an amount equal to $223,000 in 1995, primarily from interest paid on loans to employees made in connection with purchases of equity in the Company. The Company's interest expense, most of which was related to the SBA-guaranteed debentures of the Company, increased to $4.8 million in 1995, a 54.8% increase over the $3.1 million paid in 1994, which in turn was a 121.4% increase over the $1.4 million of interest expense in 1993. The increase in interest expense from 1993 to 1995 was primarily attributable to increased borrowings from the SBA, which were $73.3 million on December 31, 1995, $51.0 million on December 31, 1994 and $34.0 million on December 31, 1993. Overhead, amortization of borrowing costs and state taxes totaled $2.8 million in fiscal 1995, a 55.6% increase over the $1.8 million of such expenses in 1994, which in turn was a 50.0% increase over the total of such expenses in 1993. These increases can be largely attributed to the increase in the number of employees from four in 1993 to 13 in 1995 and the Company's relocation to new office space in 1995. Although the dollar amount of these expenses increased over the three-year period, overhead expenses as a percentage of total assets remained fairly constant at 1.4%, 1.3% and 1.6% for fiscal 1995, 1994 and 1993, respectively. During 1995, the Company paid dividends of $5.2 million, $4.0 million of which was derived from net operating income and $1.2 million of which was derived from realized capital gains. The Company also elected to designate $2.1 million of the undistributed realized capital gains as a "deemed" distribution to shareholders of record as of the end of the year. Accordingly, $1.4 million, net of taxes of $737,000, of this "deemed" distribution has been retained and reclassified from undistributed net realized earnings to Common Stock. For the years ended December 31, 1995, 1994 and 1993, the Statements of Operations include a provision for state income taxes on interest totaling $109,000, $457,000 and $231,000, respectively. For the year ended December 31,1995, the Company also provided for federal income tax at a 35% rate and excise tax at a 4% rate on taxable net investment income and realized gains not distributed to shareholders. The provision for income taxes includes the $737,000 of tax related to the retained "deemed" distribution discussed above. Realized Gain (Loss) on Investments. The Company's net realized gain on investments was $1.8 million during the year ended December 31, 1995, largely resulting from gains of $3.9 million on the sale of equity positions in American Retirement Corporation, BiTec Southeast, Inc., Central Tennessee Broadcasting, Inc., Patton Management Corporation, PMT Services, Inc., Termnet Merchant Services, Inc., Truckload Management, Inc., One Stop Acquisitions, Inc. and Republic Auto Parts, Inc., which were largely offset by a $515,000 write-off of Medical Associates of America, Inc. equity positions and a $1.5 million write-off of a loan to Quality Care Networks, Inc. The realized loss on investments for 1994 was $538,000, primarily resulting from $1.6 million of write-offs, including loans to ETC Peripherals, Inc., Stewart Foods, Inc. and TCOM Systems, Inc., offset partially by approximately $1.1 million in gains on the sale of equity positions in PMT Services, Inc. and Softkey International, Inc. The realized loss on investments for 1993 was $799,000, primarily resulting from a $1.0 million loan write-off of ETC Peripherals, Inc., offset slightly by gains on the sale of equity positions in Anasazi, Inc. and Ideals Publications, Inc. Management does not attempt to maintain a comparable level of realized gains from year to year, but instead attempts to maximize total investment portfolio appreciation. Change in Unrealized Appreciation (Depreciation) of Investments. For the years ended December 31, 1995 and 1994, the Company recorded net increases in unrealized appreciation of investments of $4.7 million and $3.4 million, respectively, and a net decrease of $50,000 for the year ended December 31, 1993. These increases are the result of the Company's quarterly revaluation of its portfolio in accordance with its Valuation Policy to reflect the fair value of each of its portfolio assets. A description of all of the Company's investments is included in the Financial Statements that are presented in this Prospectus under the caption "Portfolio of Investments as of March 31, 1996." 18 21 FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES At March 31, 1996, the Company had $78,000 in cash and cash equivalents, and approximately $8.3 million of the Company's investment portfolio consisted of publicly-traded securities, which have an ascertainable market value and represent an additional source of liquidity. However, the Company's ability to realize such values on a short-term basis is limited by market conditions and various securities law restrictions. See "Summary of Significant Accounting Policies" in the Notes to Financial Statements. The Company's principal sources of capital to fund its portfolio growth have been borrowings through the SBA sponsored SBIC debenture program, sales of the Company's equity securities, both privately and publicly, and funds borrowed from banking institutions. In February 1995, the Company consummated an initial public offering of 2,645,000 shares of Common Stock resulting in net proceeds of $26.5 million. In August 1995, the Company consummated a second public offering of 1,500,000 shares of Common Stock generating net proceeds to the Company of approximately $21.2 million. The Company used $32.6 million of these proceeds to originate new loans and $15.1 million to repay indebtedness outstanding on the Company's Revolving Credit Facility, which was subsequently reborrowed to originate additional loans. During the first quarter of 1996, the Company borrowed an additional $10.0 million from the SBA, bringing total SBA borrowings to $83.3 million at March 31, 1996. Each borrowing from the SBA has a term of ten years and can be prepaid without penalty after five years. The interest rate on these borrowings was 7.02% as of March 31, 1996, and none of these borrowings mature prior to 2002. Based on the Company's leverageable capital (as defined by the SBA), it is eligible to borrow up to a total of $90.0 million from the SBA, the maximum amount of SBA loans available to an SBIC. In May 1996, the Company requested the remaining $6.7 million of SBA funding available to it. Given the increased demand for borrowings under the SBA sponsored SBIC debenture program and concurrent decrease in funds appropriated by Congress to the SBA, no assurances can be given as to the amount or timing of additional SBA borrowing that might be granted to the Company. As of March 31, 1996, the Company had $24.9 million outstanding under its $50.0 million Revolving Credit Facility, which is secured by all of the Company's assets. The interest rate on these borrowings was 7.43% at March 31, 1996. The Revolving Credit Facility matures on December 27, 1998. The Revolving Credit Facility requires that the Company obtain the lenders' consent prior to, among other things, encumbering its assets, merging or consolidating with another entity and making investments other than those permitted by the SBA. In addition, the Revolving Credit Facility provides that the repayment of any amounts outstanding can be accelerated if either George M. Miller, II or David M. Resha ceases to be employed by the Company. In order to manage the interest rate risk associated with the variable interest rate provided for under the Revolving Credit Facility, the Company entered into an interest rate swap agreement that effectively converts the variable rate on a portion of the Revolving Credit Facility to a fixed rate of 8.15% per annum. Under this agreement, in April 1996, the Company began converting $30.0 million to this fixed rate in $3.0 million increments per month. The Company has signed an engagement letter and preliminary term sheet with a financial institution to establish the Special Purpose Facility in the amount of $100.0 million. The Special Purpose Facility would be collateralized by certain of the Company's future small business loans and their related equity interests. Under the Special Purpose Facility, it is anticipated that the Company would form a special purpose, bankruptcy remote subsidiary ("Newco"), that would buy new loans and the related warrants originated by the Company and use the loans and warrants purchased as collateral to secure the issuance of commercial paper by the financial institution. Newco would pay a spread to the financial institution over the rate paid on the commercial paper issued, along with other fees to originate and administer the Special Purpose Facility. It is anticipated that Newco would enter into appropriate swap agreements to attempt to hedge the interest rate risk inherent in the maturing and reissuing of commercial paper at market rates. Based on current commercial paper rates, the total cost of the debt is anticipated to be approximately 8.25%. The Special Purpose Facility will require Newco to be capitalized with a minimum of $20.0 million in equity, so it is anticipated that some or all of the new loans originated from the proceeds of this Offering will be contributed as equity to Newco. The financial institution has not issued a commitment letter for the Special Purpose Facility nor has definitive 19 22 documentation with respect thereto been executed, and no assurance can be given that such commitment or definitive documentation will be negotiated on terms satisfactory to the Company. The Company believes that the net proceeds of this Offering, anticipated borrowings from the SBA and under the Revolving Credit Facility, together with cash flow from operations (after distributions to shareholders), will be adequate to fund the continuing growth of the Company's investment portfolio through early 1997. In order to provide the funds necessary for the Company to continue its growth strategy beyond that period, the Company expects to incur, from time to time, additional short and long-term borrowings from the SBA (to the extent allowed) and other sources, and to issue, in public or private transactions, its equity and debt securities. The availability and terms of any such borrowings will depend upon interest rate, market and other conditions. There can be no assurance that such additional funding will be available on terms acceptable to the Company. 20 23 BUSINESS Sirrom Capital Corporation is a specialty finance company that makes loans to small businesses. The Company believes the market for small commercial loans is underserved by traditional lending sources and that competitors generally are burdened with an overhead and administrative structure that hinders them from competing more effectively in this market. The Company's loans are typically made in the form of secured debt with relatively high fixed interest rates and with warrants to purchase an equity interest in the borrower. The objectives of the Company are to achieve both a high level of current income from interest on loans and other fees and long-term growth in the value of its shareholders' equity through the appreciation of the equity interests in its portfolio companies. The Company, which was founded in May 1992, has experienced significant growth in both the size and diversity of its loan portfolio. The Company's loan portfolio balance at December 31, 1993, 1994 and 1995 was $42.4 million, $72.3 million and $144.9 million, respectively. At March 31, 1996, the Company had loans outstanding with an aggregate principal balance of $166.9 million to 97 companies in a variety of industries located in 22 states. The rate of interest on the Company's loan portfolio at March 31, 1996, was 12.9%. The Company's loans typically range from $500,000 to $4.0 million in size, are non-amortizing, have a five-year maturity and are accompanied by warrants to purchase an equity interest in the borrower at a nominal exercise price (usually $.01 per share). The Company targets borrowers that it believes meet certain criteria, including the potential for significant growth, adequate collateral coverage, experienced management teams with a significant ownership interest in the borrower, sophisticated outside equity investors and profitable operations. Sirrom, based in Nashville, Tennessee, is licensed as an SBIC by the SBA. As an SBIC, the Company is eligible to borrow up to $90.0 million from the SBA. As of March 31, 1996, the Company had borrowed $83.3 million in debentures from the SBA and requested the remaining $6.7 million in May 1996. The average interest rate paid on the Company's long-term borrowings from the SBA was 7.02% at March 31, 1996. The Company has supplemented its SBA borrowings with equity capital and a $50.0 million Revolving Credit Facility. The interest rate paid on the Revolving Credit Facility was 7.43% at March 31, 1996. In contemplation of the corporate reorganization described below under "-- Proposed Corporate Reorganization," the Company has signed an engagement letter and preliminary term sheet with a financial institution to establish a Special Purpose Facility which would provide up to $100.0 million in additional debt financing to support the Company's future loan origination activities outside the newly formed SBIC subsidiary. STRATEGY The Company's strategic objective is to provide financial services to small and medium sized growth businesses. The Company traditionally has focused and will continue to focus on making loans with equity features to borrowers that the Company believes meet certain criteria. In order to broaden the range of services it offers to businesses in its target market, the Company recently agreed to acquire Harris Williams, a merger and acquisition advisory firm located in Richmond, Virginia. Harris Williams provides merger and acquisition advisory services with respect to small and medium sized companies throughout the United States that are similar in size to Sirrom's portfolio companies. Sirrom's management believes that the acquisition of Harris Williams provides the Company an opportunity to obtain significant fee income and cross-sell services between the two companies. See "-- Pending Acquisition." The Company targets borrowers that it believes meet certain criteria, including the potential for significant growth, adequate collateral coverage, experienced management teams with a significant ownership interest in the borrower, sophisticated outside equity investors and profitable operations. To develop new lending opportunities, the Company markets to an extensive referral network comprised of venture capitalists, investment bankers, attorneys, accountants, commercial bankers and business brokers. Generally, the Company's investments are structured as loans evidenced by debt securities that are accompanied by warrants to acquire equity securities of the borrower. These warrants usually have a nominal exercise price (usually $.01 per share). Typically, the loans are collateralized by a security interest in assets of the borrower and are generally senior to the investments of sophisticated equity investors. The personal 21 24 guaranty of the major shareholder of the borrower or other collateral may also be required. The debt securities issued to evidence the Company's loans generally carry a fixed rate of interest and have a maturity of five years from their respective dates of issuance. In most cases, the loans are structured to require the payment of interest only on a monthly basis, with a single payment of principal at maturity. The Company typically charges borrowers a processing fee of approximately 2.0% to 2.5% of the amount of each loan. Unlike most lenders, the Company does not impose prepayment penalties on borrowers that repay loans prior to maturity. Instead, the Company's warrants typically contain a "ratchet" provision that increases the Company's equity position, by one to three percentage points per year, until repayment of the loan in full. Although the Company's loans provide for a five year maturity, the warrant "ratchet" may have the effect of encouraging borrowers to repay loans as soon as possible. The Company benefits from such repayments, because of the direct relationship that exists between the Company's ability to generate asset turnover (i.e., redeploy capital) and the return on equity to shareholders. The Company seeks to maximize the difference, or "spread," between the rate at which it borrows long-term funds from the SBA and other sources and the rate at which it loans these funds to small companies. At March 31, 1996, the weighted average coupon on the Company's loans outstanding was 12.9%, and its weighted average cost of funds from the SBA and the Revolving Credit Facility was 7.11%. On March 14, 1996, the Company borrowed $10.0 million from the SBA at an annual interest rate of 7.08%. The Company has also recently begun making debtor-in-possession ("DIP") loans. The aggregate principal amount of loans to these borrowers at March 31, 1996, was $2.6 million, which constituted less than 2.0% of total loans outstanding. It is the Company's intention to make DIP loans to borrowers who, when emerging from bankruptcy, would generally meet the criteria applied to the Company's other borrowers. The Company believes these DIP loans should involve risks similar to those of other loans in its portfolio because the Company is granted a super priority security interest in the assets of the DIP borrower during bankruptcy. Additionally, the Company believes it has the potential for greater returns on these loans, as the Company generally receives a larger equity position in the borrower upon emergence from bankruptcy than it typically receives for its other loans. All of the borrowers of the $2.6 million in DIP loans had successfully emerged from bankruptcy as of March 31, 1996. SELECTION OF LOAN AND INVESTMENT OPPORTUNITIES Since inception, the Company has identified certain common characteristics in lending to emerging growth businesses. These criteria, which are listed below, are applied to all investment decisions, although all criteria may not be met in every instance and their importance may vary depending on the relevant circumstances. Growth. In addition to generating sufficient cash flow to service the prospective loan, the potential borrower typically must have an annual projected growth rate of at least 20%. Anticipated growth is a key factor in determining the potential valuation of warrants in the Company's equity portfolio. Liquidation Value of Assets. While the Company does not market itself as an asset-based lender, the liquidation value of assets securing the loans is an important component in the credit decision. Valuations include both hard assets (accounts receivable, inventory, and property, plant and equipment), as well as intangibles, such as customer lists, networks, databases, and recurring revenue streams. Sophisticated Equity Shareholders. Many of the borrowers in the Company's portfolio have sophisticated equity investors whose equity position is subordinate to the debt securities of the Company. These investors allow the Company to maximize its resources by enhancing the due diligence process and financial sophistication of the borrower, and by providing increased controls and a source of potential additional follow-on capital. The interest and support of sophisticated equity investors tends to increase the Company's confidence in the borrower, its management team and the potential long-term value of the borrower's business. Experienced Management Teams. The Company seeks to identify potential borrowers that have management teams that are experienced, have a significant ownership interest in the borrower and 22 25 include a chief executive officer and chief financial officer who demonstrate the ability to accomplish the objectives set forth in the borrower's business plan. Profitable Operations. The Company focuses on portfolio companies that have positive earnings from operations (before interest, depreciation and amortization). The Company does not typically lend to start-up companies. Exit Strategy. Prior to making an investment, the Company analyzes the potential for the borrower to repay its loan and to experience a liquidity event that would allow the Company to realize value for its equity position. Liquidity events include, without limitation, an initial public offering, a sale of the borrower and a repurchase by the borrower of the Company's equity position. LOAN REPAYMENT; VALUATION AND REALIZATION OF EQUITY INVESTMENTS The Company's investments in small businesses are made with the intent of having the loans repaid within five years and liquidating the equity portion of the investments for cash within five to ten years. If an investment is successful, not only will the loan made by the Company have been repaid with interest, but the Company may be in a position to realize a gain on the equity security obtained in connection with the loan. Although the Company expects to dispose of an investment after a certain time, situations may arise in which it may hold equity securities for a longer period. Since inception, $220.7 million of loans have been originated and $28.8 million or 13.0% have been repaid. Each loan the Company makes generally has a related five-year warrant to buy common stock of the borrower. These warrants are exercisable at a nominal price (usually $.01 per share) and typically represent 3% to 15% of a borrower's fully diluted common stock. The warrants are generally structured to provide both registration rights that entitle the Company to sell the equity securities of the borrower in a public offering and a put option that requires the borrower to repurchase the warrant after five years at the fair market value of the shares issuable. As of March 31, 1996, the Company had four stock positions in publicly traded companies that had a fair market value of $11.6 million on that date. In accordance with the Company's valuation policy, the securities were carried at a fair value of $8.3 million at March 31, 1996. In addition, at that date, the Company owned common stock and preferred stock investments in 24 non-public companies with a fair value of approximately $14.3 million. The Company has also converted 17 equity positions to cash since inception with gains approximating $12.4 million. At March 31, 1996, the Company held warrant positions in 94 companies that it carried at a fair value, as determined in good faith by the Board of Directors in accordance with the Company's Valuation Policy, of approximately $11.2 million. For a discussion of the Company's Valuation Policy see "Summary of Significant Accounting Policies" in the Notes to Financial Statements included elsewhere in this Prospectus. TEMPORARY INVESTMENTS Pending investment in the types of securities described above, the Company will invest its otherwise uninvested cash in (i) federal government or agency issued or guaranteed securities that mature in 15 months or less; (ii) repurchase agreements with banks whose deposits 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. OPERATIONS Marketing. The Company currently employs four lending officers who cover certain geographic territories. In order to originate loans, these lending officers make use of an extensive referral network comprised of investment bankers, venture capitalists, attorneys, accountants, commercial bankers and business brokers. A lending officer typically receives between five and ten informational packages per week from these sources. On average, each lending officer closes one loan per month. In an effort to expand its geographic 23 26 presence, the Company has entered into a consulting arrangement with an experienced small business finance professional located in northern California who assists the Company in identifying potential borrowers and referral sources in the western United States and structuring loan and warrant transactions with small businesses so identified. It is the Company's intention to open a loan production office in the San Francisco area and management is in the process of locating office space for that purpose. The Company is also considering expanding its presence into other geographic markets. Loan Approval Process. The Company's lending officers review informational packages in order to identify potential borrowers. After identifying applicants that meet the Company's investment criteria, the loan officer, in conjunction with the Chief Operating Officer, selects applicants that merit additional consideration. See " -- Selection of Loan and Investment Opportunities." The lending officer then conducts a more thorough investigation and analysis ("due diligence") of the applicant. The due diligence process usually includes on-site visits, review of historical and prospective financial information, interviews with management, employees, customers and vendors of the applicant, background checks and research on the applicant's product, service or particular industry. Upon the completion of due diligence, the lending officer completes a standard borrower profile that summarizes the borrower's historical financial statements, its industry and management team, and its conformity to the Company's investment criteria. The lending officer then presents the profile, along with his due diligence findings, to a Loan Approval Committee comprised of the Chief Executive Officer, Chief Operating Officer, the Company's Vice President -- Workouts and the Chief Financial Officer, which committee evaluates the merits and risks of each potential loan and must approve each loan. Additional due diligence is conducted by the Company's attorneys prior to funding the loan. Loan Grading. In 1994, the Company implemented a system by which it graded all loans on a scale of 1 to 6. The system was intended to reflect the performance of the borrower's business as well as the collateral coverage of the loan and other factors considered relevant. During late 1995, the system was refined to reflect management's additional experience in monitoring its growing loan portfolio. Each loan is evaluated by the respective lending officer and the Chief Operating Officer based on the financial performance of the borrower and other borrower-specific risk factors that may include management quality, capitalization, collateral coverage, value of intangible assets and availability of working capital. All new loans are assigned a grade 3 for a period of six months in the absence of an extraordinary event during that period. After the initial six months, loans are assigned a grade of 1 to 6. Thereafter, all loans are reviewed and graded on at least a quarterly basis. Management believes that loans with a grade 1 involve the least amount of risk in the Company's portfolio, as the borrower is performing well above expectations financially, and other risk factors are clearly favorable. Management believes that loans with a grade 2 involve low risk relative to other loans in the Company's portfolio, as the borrower is performing above expectations financially and the majority of risk factors are favorable. Management believes that loans with a grade 3 involve an acceptable risk, as the borrower is performing as expected financially and the other risk factors are generally favorable. Management believes that loans with a grade 4, while still involving an acceptable level of risk, require additional attention from the lender. A loan with a grade 4 typically involves a borrower that is performing marginally below expectations, and short term trends or negative events have occurred that have created some concern. However, other risk factors are favorable. Loans in this category require a proactive action plan to be executed by the borrower's management that is monitored by the lender. A grade 4 is considered to be a temporary rating (generally no longer than six months) that will result in either an upgrade or downgrade. The loan is usually serviced by the lending officer or a member of the workout area. Management believes that loans with a grade 5 involve greater than an acceptable level of risk. The borrower is performing substantially below expectations financially and negative trends persist. Other risk factors are marginal and the execution of an action plan is critical to the long term viability of the borrower. The loan may be in default, and interest is probably not being accrued, but Sirrom's management believes the borrower's management is capable of executing a plan to return the borrower to an acceptable risk level. 24 27 Management believes that loans with a grade 6 involve an unacceptable level of risk with substantial probability of loss. The borrower has grossly failed to perform financially over an extended period and other unacceptable risk factors exist. Sirrom has or will most likely assume management control of the borrower and will most likely be responsible for executing an action plan to return the borrower to a satisfactory risk level or to liquidate the borrower or its collateral. Interest is not being accrued and the Company has or fully expects to realize a loss on some or all of the loan's principal balance. Loans graded 5 or 6 are placed on the Company's Credit Watch List and are serviced by a member of the workout area. The workout area consists of two officers of the Company. See "Business -- Delinquency and Collections." Loan Portfolio. During the three months ended March 31, 1996, the Company originated loans to 29 companies, including 10 new borrowers, in the aggregate principal amount of approximately $32.3 million, in several industries. During the same period, the Company realized $6.9 million in gains, $6.3 million of which represented gains realized upon the sale of equity interests in Premiere Technologies, Inc., and realized approximately $1.1 million in loan losses. The following table sets forth, the amount of the Company's loans originated, renewed and repaid for the periods indicated, as well as the realized and unrealized gain on investments.
FROM THREE MONTHS INCEPTION ENDED THROUGH YEAR ENDED DECEMBER 31, MARCH 31, DECEMBER 31, ---------------------------- ------------------ 1992 1993 1994 1995 1995 1996 ------------ ------- ------- -------- ------- -------- (DOLLARS IN THOUSANDS) Loans originated.................... $ 14,639 $31,470 $40,785 $101,505 $27,792 $ 32,324 Loan repayments, including renewals.......................... -- 2,013 7,585 14,414 1,560 4,775 Loan amounts converted to equity.... -- 500 2,150 3,751 -- 890 Realized (losses) on loans.......... -- (1,155) (1,155) (1,500) -- (1,100) Loans receivable -- end of period... 14,639 42,441 72,336 144,855 97,378 166,936 Net realized gains on equity investments....................... 198 355 617 3,260 50 6,856 Change in unrealized appreciation (depreciation) of investments..... 1,813 (50) 3,356 4,694 1,603 2,241
25 28 The table below sets forth, as of March 31, 1996, the 22 states in which the Company's borrowers maintain their principal place of business, the number of borrowers and the percent of total loan principal balance outstanding to borrowers located in such states.
% OF TOTAL LOAN PRINCIPAL BALANCE NUMBER OF STATE OUTSTANDING BORROWERS --------------------------------------------- ----------------- --------- Alabama...................................... 1.9% 2 California................................... 3.7 3 Connecticut.................................. 2.8 2 Florida...................................... 16.8 18 Georgia...................................... 10.4 9 Kentucky..................................... 6.3 4 Michigan..................................... 3.1 2 North Carolina............................... 8.0 9 New Jersey................................... 2.6 3 Ohio......................................... 2.7 3 South Carolina............................... 3.6 3 Tennessee.................................... 10.7 14 Texas........................................ 9.8 7 Virginia..................................... 7.2 9 *Other states(8)............................. 10.5 9 ------ ------ Total.............................. 100.0% 97 ============= =======
- --------------- * The other states in which the Company has only a single borrower are Colorado, Iowa, Illinois, Maryland, Mississippi, Oklahoma, Pennsylvania and Wisconsin. The Company also has one borrower in Washington, D.C. DELINQUENCY AND COLLECTIONS When a borrower fails to make a required payment by the tenth of the month, it is notified by telephone by the Company's Controller who discusses with the borrower the expected timing of the payment. If the payment is delinquent more than 30 days, the Chief Operating Officer and responsible lending officer jointly determine an appropriate course of action on the account, which could include transferring responsibility for the loan to the Company's workout area. When a loan reaches 60 days past due, the Company normally discontinues accruing interest, and all loans over 60 days past due become the responsibility of the Company's workout area. Management determines the most appropriate course of action given the particular circumstances with respect to protecting its interest in a defaulted loan, which may involve, among other things, the sale of the borrower or foreclosure proceedings. At March 31, 1996, the Company had seven loans with an aggregate principal balance of $11.3 million that were graded a 5 or 6 for which accrued interest payments of $46,000 were delinquent for 60 days or more. Based on the particular circumstances involved, the Board of Directors estimated the aggregate fair value of these loans to be $7.8 million, and therefore provided for unrealized depreciation of $3.5 million on these loans. CUSTODIAL SERVICES First American National Bank (Trust Department) acts as the custodian of all the Company's portfolio assets pursuant to a Custodial Services Agreement and in accordance with SBA Regulations and the 1940 Act. 26 29 THE COMPANY'S OPERATIONS AS A BDC As a BDC, the Company may not acquire any asset other than Qualifying Assets unless, at the time the acquisition is made, Qualifying Assets represent at least 70% of the value of the Company's total assets. The principal categories of Qualifying Assets relevant to the business of the Company are the following: (i) securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer is an "eligible portfolio company." An eligible portfolio company is defined as any issuer that (a) is organized and has its principal place of business in the United States, (b) is not an investment company other than a SBIC wholly-owned by the BDC and (c) does not have any class of publicly-traded securities with respect to which a broker may extend margin credit; (ii) securities received in exchange for or distributed with respect to securities described above, or pursuant to the exercise of options, warrants or rights relating to such securities; and (iii) cash, cash items, Government securities, or high quality debt securities maturing in one year or less from the time of investment. The Company may not change the nature of its business so as to cease to be, or withdraw its election as, a BDC unless authorized by vote of a majority, as defined in the 1940 Act, of the Company's shares. Since the Company made its BDC election, it has not made any substantial change in its structure or in the nature of its business. The Company has requested permission from the Commission to create a wholly-owned subsidiary into which it will transfer its SBIC operations. Following this reorganization, the subsidiary will operate as an investment company and an SBIC and the Company will continue to operate as a BDC. As a BDC, the Company is entitled to borrow money and issue senior securities representing indebtedness as long as its indebtedness has asset coverage to the extent of at least 200%. This limitation is not applicable to borrowings made by the Company from the SBA, which totaled $83.3 million at April 30, 1996. In December 1995, the Company obtained the $50.0 million Revolving Credit Facility which is secured by all of the Company's assets. The interest rate on amounts outstanding under the Revolving Credit Facility at March 31, 1996, was 7.43%. The Revolving Credit Facility matures on December 27, 1998. At April 30, 1996, there were $28.6 million outstanding under the Revolving Credit Facility. The Revolving Credit Facility requires that the Company must obtain the lenders' consent prior to, among other things, encumbering its assets, merging or consolidating with another entity and making investments other than those permitted by the SBA. In order to manage the interest rate risk associated with the variable interest rate provided for under the Revolving Credit Facility, the Company entered into an interest rate swap agreement that effectively converts the variable rate on a portion of the Revolving Credit Facility to a fixed rate of 8.15% per annum. Under this agreement, in April 1996, the Company began converting up to $30.0 million borrowed under the Revolving Credit Facility to this fixed rate in $3.0 million increments per month. PROPOSED CORPORATE REORGANIZATION The Company has filed an application under the 1940 Act for an order of the Commission granting exceptions from certain sections of the 1940 Act (the "Application") to permit the establishment and operation of a wholly-owned subsidiary of the Company. As stated in the Application, the proposed reorganization would permit the Company to engage in investment opportunities in which SBICs cannot participate. The SBA has established specific criteria for SBIC investments that take into account, among other things, the size of the portfolio company and the terms of the investment. The Company believes that there are many companies that offer good investment opportunities, but that do not meet the SBA requirements for size or type of business or otherwise are not within the terms specified by SBA regulations. In creating a parent-subsidiary organization, the Company could continue to provide loans meeting the SBA requirements through its SBIC subsidiary, but also would be able to take advantage of the additional investment opportunities that exist beyond those parameters. The proposed reorganization would allow the Company to seek debt financing under the Special Purpose Facility, which it would be unable to do under its current structure. The Company has also requested approval from the SBA to permit the reorganization. 27 30 There can be no assurance, however, that the Commission or the SBA will grant the Company permission to consummate the reorganization. In the proposed reorganization, the Company intends to transfer a majority of its assets, including its license to operate as an SBIC and excluding the net proceeds of this Offering, to a new wholly-owned subsidiary, Sirrom Investments, Inc. ("Investments"). In return, Investments would assume all of the Company's indebtedness outstanding to the SBA and under the Revolving Credit Facility and issue to the Company all of its outstanding capital stock. Following the transfer, Investments would carry on the SBIC activities previously conducted by the Company and the Company would expand its operations to include a broader range of financing and other services to small businesses. After the application of the net proceeds of this Offering, the Company presently intends to keep Investments fully invested at all times and to make loans through Investments when funds are available in that subsidiary. Therefore, upon completion of the corporate reorganization, the Company would continue to make loans until the net proceeds of this Offering are fully invested and then make loans through the SBIC subsidiary as long as funds are available in that subsidiary to so do. When Investments is fully invested, the Company will begin making loans with funds available to it under the Special Purpose Facility. In the event that funds thereafter become available at the SBIC level through repayments, realized gains, etc., the SBIC would make the next loan available from the Company's pipeline. COMPETITION The Company's principal competitors include financial institutions, venture capital firms and other non-traditional lenders. Many of these entities have greater financial and managerial resources than the Company. The Company believes that it competes effectively with such entities primarily on the basis of the quality of its service, its reputation, and the timely credit analysis and decision-making processes it follows, and to a significantly lesser degree on the interest rates, maturities and payment schedules it offers on the loans to borrowers. EMPLOYEES The Company currently has 17 employees. The Company believes its relations with its employees are excellent. The Company believes that it has maintained low overhead as a percentage of its assets as a result of outsourcing all job functions not directly related to the marketing or underwriting of small business loans or the executive management of the Company. PENDING ACQUISITION The Company has entered into an acquisition agreement pursuant to which it will acquire Harris Williams. Harris Williams is a merger and acquisition advisory firm that currently focuses exclusively on providing advisory services with respect to small and medium sized companies throughout the United States that are similar in size to Sirrom's portfolio companies. Harris Williams' clients have included divisions of large companies, portfolio companies of professional investor groups, and privately owned businesses. The typical Harris Williams engagement includes a monthly retainer and a success fee contingent upon closing the transaction. The firm has consistently grown since inception with the number of professionals increasing from two to nine over the past three years, and Harris Williams anticipates adding an additional five professionals by August 1996. Management believes that future growth of Harris Williams is attainable through adding additional merger and acquisition professionals, by gaining additional market share and by realizing the benefits of its rapidly increasing client base, which should expand as a result of its relationship with the Company. However, no assurance can be given that such growth can be achieved. 28 31 The following table sets forth selected financial and operating data for Harris Williams for the years ended December 31, 1993, 1994 and 1995 and the three months ended March 31, 1995 and 1996.
THREE MONTHS YEARS ENDED ENDED DECEMBER 31, MARCH 31, -------------------------- --------------- 1993 1994 1995 1995 1996 ---- ------ ------ ---- ------ (DOLLARS IN THOUSANDS) Revenues......................................... $569 $1,682 $2,578 $645 $1,392 Pretax operating income.......................... 207 553 812 194 795 Number of transactions closed.................... 4 5 8 1 3
Consummation of the acquisition of Harris Williams is subject to certain conditions, including (i) that the transaction will qualify for pooling of interests accounting treatment, (ii) receipt of approval from the shareholders of the Company, (iii) receipt by the Company of a fairness opinion that the consideration being given by the Company in the acquisition is fair from a financial point of view to the shareholders of the Company, which the Company received on June 5, 1996, and (iv) receipt of an exemptive order from the Commission required under the 1940 Act because of the common ownership by John A. Morris, Jr., M.D., Chairman and a director of the Company, in each of the Company and Harris Williams, and there can be no assurance that the Commission will grant the requested exemption. Subject to the satisfaction of such conditions, the Company will acquire Harris Williams in exchange for 950,000 shares of the Company's Common Stock, which amount shall be adjusted in the event the average bid price of the Common Stock, as quoted on the Nasdaq National Market, for the 15 trading days preceding the acquisition is less than $21.00 or greater than $26.00. The shares to be issued by the Company will not be registered under the Securities Act and therefore will not be immediately transferable. In connection with the consummation of the acquisition, the two principals of Harris Williams will each enter into a four-year employment agreement that will contain non-competition provisions. After the acquisition, the Harris Williams professionals will be eligible to participate in the Company's stock incentive plans. The acquisition is currently expected to be effected through (i) the merger of a wholly-owned subsidiary of the Company ("Acquisition Sub") with Harris Williams & Co., a Virginia corporation ("HW Corp") that has elected to be treated as an S corporation under the Code, and the general partner and holder of 80% of the partnership interest of Harris Williams and (ii) an acquisition by Acquisition Sub of the 20% limited partnership interests in Harris Williams owned by Sirrom, Ltd., a Tennessee limited partnership, an affiliate of John A. Morris, Jr., M.D., Chairman of the Company. PRO FORMA FINANCIAL INFORMATION HW Corp was formed in 1991 and Harris Williams was later formed in August 1994, upon investment of Sirrom Ltd. (the "Minority Interest"). At that time, HW Corp began conducting all of its operations through Harris Williams. HW Corp's operations after August 1994 consist solely of its investment in Harris Williams. The pro forma statement of operations data for the three months ended March 31, 1996, has been prepared based on unaudited statements of operations of each of the respective companies. The pro forma statement of operations data for the years ended December 31, 1995 and 1994 have been prepared based on audited statements of operations of the Company and HW Corp, which are presented elsewhere in this Prospectus. The minority interest deduction included in the HW Corp financial statements is eliminated in the pro forma presentation because the Company is acquiring the Minority Interest. The pro forma statement of operations data may not be indicative of future results of operations or of the actual results of operations had the acquisition described above been effective on January 1 of each respective year. 29 32 SIRROM CAPITAL CORPORATION PRO FORMA STATEMENT OF OPERATIONS DATA
THREE MONTHS ENDED MARCH 31, 1996 ------------------------------------------------------------------ SIRROM CAPITAL MINORITY CORPORATION HW CORP INTEREST ADJUSTMENTS PRO FORMA ----------- ---------- ---------- ----------- ----------- OPERATING INCOME: Interest on investments.......... $ 4,862,463 $ -- $ -- $ -- $ 4,862,463 Advisory fees.................... -- 1,391,500 -- -- 1,391,500 Loan processing fees............. 921,250 -- -- -- 921,250 Other income..................... -- 17,142 -- -- 17,142 ----------- ---------- ---------- ----------- ----------- Total operating income... 5,783,713 1,408,642 -- -- 7,192,355 OPERATING EXPENSES: Interest expense................. 1,789,982 -- -- -- 1,789,982 Salaries and benefits............ 739,020 498,402 -- -- 1,237,422 Other operating expenses......... 477,064 114,822 -- -- 591,886 Amortization expense............. 188,397 -- -- -- 188,397 ----------- ---------- ---------- ----------- ----------- Total operating expenses............... 3,194,463 613,224 -- -- 3,807,687 ----------- ---------- ---------- ----------- ----------- Net operating income............... 2,589,250 795,418 -- -- 3,384,668 Realized gain on investments....... 5,756,489 -- -- -- 5,756,489 Change in unrealized appreciation of investments................... 2,240,559 -- -- -- 2,240,559 Provision for income taxes......... (2,134,960) -- -- (278,396)(1) (2,413,356) Minority interest.................. -- (159,095) 159,095 -- -- ----------- ---------- ---------- ----------- ----------- Net increase in shareholders' equity resulting from operations.................... $ 8,451,338 $ 636,323 $ 159,095 $ (278,396) $ 8,968,360 ========= ========= ========= ========= ========== Per share: Pretax operating income............ $ 0.27 $ 0.32 Net increase in shareholders' equity resulting from operations....................... 0.87 0.84 Fully diluted weighted average shares outstanding............... 9,733,000 950,000(2) 10,683,000
- --------------- (1) Reflects the provision and accrual for federal income taxes on operations of HW Corp and Minority Interest at statutory rates. (2) Reflects the impact of the shares issued in connection with the proposed acquisition. 30 33 SIRROM CAPITAL CORPORATION PRO FORMA STATEMENT OF OPERATIONS DATA
YEAR ENDED DECEMBER 31, 1995 ----------------------------------------------------------------- SIRROM CAPITAL MINORITY CORPORATION HW CORP INTEREST ADJUSTMENTS PRO FORMA ----------- ---------- -------- ----------- ----------- OPERATING INCOME: Interest on investments............ $13,451,742 $ -- $ -- $ -- $13,451,742 Advisory fees...................... -- 2,577,841 -- -- 2,577,841 Loan processing fees............... 1,899,692 -- -- -- 1,899,692 Other income....................... 223,456 78,544 -- -- 302,000 ----------- ---------- -------- ----------- ----------- Total operating income..... 15,574,890 2,656,385 -- -- 18,231,275 OPERATING EXPENSES: Interest expense................... 4,771,131 -- -- -- 4,771,131 Salaries and benefits.............. 1,081,478 1,314,723 -- -- 2,396,201 Other operating expenses........... 1,412,358 530,052 -- -- 1,942,410 State income tax on interest....... 109,035 -- -- -- 109,035 Amortization expense............... 207,792 -- -- -- 207,792 ----------- ---------- -------- ----------- ----------- Total operating expenses... 7,581,794 1,844,775 -- -- 9,426,569 ----------- ---------- -------- ----------- ----------- Net operating income................. 7,993,096 811,610 -- -- 8,804,706 Realized gain on investments......... 1,759,513 -- -- -- 1,759,513 Change in unrealized appreciation of investments........................ 4,693,544 -- -- -- 4,693,544 Provision for income taxes........... (1,020,321) -- -- (284,064)(1) (1,304,385) Minority interest.................... -- (162,361) 162,361 -- -- ----------- ---------- -------- ----------- ----------- Net increase in shareholders' equity resulting from operations...................... $13,425,832 $ 649,249 $162,361 $(284,064) $13,953,378 ========== ========= ======== ========= ========== Per share: Pretax operating income.............. $ 0.99 $ 0.98 Net increase in shareholders' equity resulting from operations.......... 1.64 1.53 Fully diluted weighted average shares outstanding........................ 8,169,000 950,000(2) 9,119,000
- --------------- (1) Reflects the provision and accrual for federal income taxes on operations of HW Corp and Minority Interest at statutory rates. (2) Reflects the impact of the shares issued in connection with the proposed acquisition. 31 34 SIRROM CAPITAL CORPORATION PRO FORMA STATEMENT OF OPERATIONS DATA
YEAR ENDED DECEMBER 31, 1994 ------------------------------------------------------------------ SIRROM CAPITAL MINORITY CORPORATION HW CORP INTEREST ADJUSTMENTS PRO FORMA ----------- ---------- -------- ----------- ---------- OPERATING INCOME: Interest on investments........... $ 7,336,816 $ -- $ -- $ -- $7,336,816 Advisory fees..................... -- 1,681,951 -- -- 1,681,951 Loan processing fees.............. 901,340 -- -- -- 901,340 Other income...................... -- 10,909 -- -- 10,909 ----------- ---------- -------- ----------- ---------- Total operating income.... 8,238,156 1,692,860 -- -- 9,931,016 OPERATING EXPENSES: Interest expense.................. 3,123,461 -- -- -- 3,123,461 Salaries and benefits............. -- 884,396 -- -- 884,396 Management fees................... 1,072,833 -- -- -- 1,072,833 Other operating expenses.......... 122,339 255,597 -- -- 377,936 State income tax on interest...... 457,035 -- -- -- 457,035 Amortization expense.............. 117,992 -- -- -- 117,992 ----------- ---------- -------- ----------- ---------- Total operating expenses................ 4,893,660 1,139,993 -- -- 6,033,653 ----------- ---------- -------- ----------- ---------- Net operating income.............. 3,344,496 552,867 -- -- 3,897,363 Realized (loss) on investments...... (538,025) -- -- -- (538,025) Change in unrealized appreciation of investments....................... 3,356,316 -- -- 3,356,316 Provision for income taxes.......... -- -- -- (193,503)(1) (193,503) Minority interest................... -- (25,468) 25,468 -- -- ----------- ---------- -------- ----------- ---------- Net increase in shareholders' equity resulting from operations..................... $ 6,162,787 $ 527,399 $ 25,468 $(193,503) $6,522,151 ----------- ---------- -------- ----------- ---------- Per share: Pretax operating income............. $ 0.88 $ 0.83 Net increase in shareholders' equity resulting from operations......... 1.43 1.24 Fully diluted weighted average shares outstanding................ 4,324,000 950,000(2) 5,274,000
- --------------- (1) Reflects the provision and accrual for federal income taxes on operations of HW Corp and Minority Interest at statutory rates. (2) Reflects the impact of the shares issued in connection with the acquisition. 32 35 SIRROM CAPITAL CORPORATION PRO FORMA BALANCE SHEET DATA
MARCH 31, 1996 ---------------------------------------------------------------------- SIRROM CAPITAL MINORITY CORPORATION HW CORP INTEREST ADJUSTMENTS PRO FORMA -------------- ---------- --------- ----------- ------------ ASSETS Investments, at fair value: Loans........................... $ 166,936,281 $ -- $ -- $ -- $166,936,281 Equity interests................ 22,548,818 -- -- -- 22,548,818 Warrants........................ 11,198,843 -- -- -- 11,198,843 -------------- ---------- --------- ----------- ------------ Total investments....... 200,683,942 -- -- -- 200,683,942 =========== ========= ========= ========= =========== Cash and cash equivalents......... 78,283 1,782,594 -- (550,075)(1) 1,310,802 Interest receivable............... 2,534,774 -- -- -- 2,534,774 Debenture costs, net.............. 2,095,634 -- -- -- 2,095,634 Furniture and equipment, net...... 214,734 67,914 -- -- 282,648 Other assets...................... 598,473 149,885 -- -- 748,358 -------------- ---------- --------- ----------- ------------ Total assets............ $ 206,205,840 $2,000,393 $ -- $(550,075) $207,656,158 =========== ========= ========= ========= =========== LIABILITIES Debentures payable to SBA......... $ 83,260,000 $ -- $ -- $ -- $ 83,260,000 Revolving credit facility......... 24,916,000 -- -- -- 24,916,000 Interest payable.................. 1,281,333 -- -- -- 1,281,333 Accrued taxes payable............. 2,310,268 -- -- 278,396(1) 2,588,664 Accounts payable and accrued expenses........................ 32,016 364,859 -- -- 396,875 -------------- ---------- --------- ----------- ------------ Total liabilities....... 111,799,617 364,859 -- 278,396 112,442,872 -------------- ---------- --------- ----------- ------------ Commitments and contingencies Minority interest................. -- 610,262 (610,262) -- Shareholders' equity: Common stock -- no par value, 50,000,000 shares authorized, 9,195,116 issued and outstanding.................. 73,919,184 60,783 -- -- 73,979,967 Notes receivable from employees.................... (1,980,000) -- -- -- (1,980,000) Undistributed net realized earnings..................... 10,413,179 964,489 610,262 (828,471)(1) 11,159,459 Unrealized appreciation of investments.................. 12,053,860 -- -- -- 12,053,860 -------------- ---------- --------- ----------- ------------ Total shareholders' equity................ 94,406,223 1,025,272 610,262 (828,471) 95,213,286 -------------- ---------- --------- ----------- ------------ Total liabilities, and shareholders' equity................ $ 206,205,840 $2,000,393 $ -- $(550,075) $207,656,158 =========== ========= ========= ========= ===========
- --------------- (1)Reflects the provision, accrual and payment of federal income taxes on operations of HW Corp and Minority Interest at statutory rates. 33 36 SIRROM CAPITAL CORPORATION PRO FORMA BALANCE SHEET DATA
DECEMBER 31, 1995 ------------------------------------------------------------------ SIRROM CAPITAL MINORITY CORPORATION HW CORP INTEREST ADJUSTMENTS PRO FORMA ------------ -------- -------- ----------- ------------ ASSETS Investments, at fair value: Loans.......................... $144,854,517 $ -- $ -- $ -- $144,854,517 Equity interests............... 15,912,467 -- -- -- 15,912,467 Warrants....................... 11,513,183 -- -- -- 11,513,183 ------------ -------- -------- ----------- ------------ Total investments...... 172,280,167 -- -- -- 172,280,167 ------------ -------- -------- ----------- ------------ Cash and cash equivalents........ 195,069 737,682 -- (266,011)(1) 666,740 Interest receivable.............. 2,119,567 -- -- -- 2,119,567 Debenture costs, net............. 2,020,030 -- -- -- 2,020,030 Furniture and equipment, net..... 203,860 72,421 -- -- 276,281 Other assets..................... 211,165 74,425 -- -- 285,590 ------------ -------- -------- ----------- ------------ Total assets........... $177,029,858 $884,528 $ -- $(266,011)(1) $177,648,375 =========== ======== ======== ========= =========== LIABILITIES Debentures payable to SBA...... $ 73,260,000 $ -- $ -- $ -- $ 73,260,000 Revolving credit facility...... 13,200,000 -- -- -- 13,200,000 Interest payable............... 936,818 -- -- -- 936,818 Accrued taxes payable.......... 1,073,525 -- -- -- 1,073,525 Accounts payable and accrued expenses.................... 213,901 44,418 -- 284,064(1) 542,383 ------------ -------- -------- ----------- ------------ Total liabilities...... 88,684,244 44,418 -- 284,064 89,012,726 ------------ -------- -------- ----------- ------------ Commitments and contingencies Minority interest................ -- 451,161 (451,161) -- -- Shareholders' equity: Common stock -- no par value, 50,000,000 shares authorized, 9,195,116 issued and outstanding............. 73,919,184 60,783 -- -- 73,979,967 Notes receivable from employees................... (1,980,000) -- -- -- (1,980,000) Undistributed net realized earnings.................... 6,593,144 328,166 451,161 (550,075)(1) 6,822,396 Unrealized appreciation of investments................. 9,813,286 -- -- -- 9,813,286 ------------ -------- -------- ----------- ------------ Total shareholders' equity............... 88,345,614 388,949 451,161 (550,075) 88,635,649 ------------ -------- -------- ----------- ------------ Total liabilities and shareholders' equity............... $177,029,858 $884,528 $ $(266,011) $177,648,375 =========== ======== ======== ========= ===========
- --------------- (1)Reflects the provision and accrual for federal income taxes on operations of HW Corp and Minority Interest at statutory rates. 34 37 INVESTMENT OBJECTIVES AND POLICIES INVESTMENT POLICIES The Company's investment objectives are to achieve both a high level of income from interest on loans and other fees and long-term growth in its shareholders' equity through the appreciation of the equity interests in its portfolio companies. Except for the fundamental policies described below, the Company's investment objectives may be changed by a majority vote of its Board of Directors. In making loans and managing its portfolio, the Company will adhere to the following fundamental policies, which may not be changed without the approval of the holders of the majority, as defined in the 1940 Act, of the Company's outstanding shares of Common Stock. The percentage restrictions set forth below, as well as those contained elsewhere in this Prospectus, apply at the time a transaction is effected, and a subsequent change in a percentage resulting from market fluctuations or any cause other than an action by the Company will not require the Company to dispose of portfolio securities or to take other action to satisfy the percentage restriction. 1. The Company will at all times conduct its business so as to retain its status as a BDC. In order to retain that status, the Company may not acquire any assets (other than non-investment assets necessary and appropriate to its operations as a business development company) if, after giving effect to such acquisition, the value of its "Qualifying Assets" amounts to less than 70% of the value of its total assets. For a summary definition of "Qualifying Assets," see "Regulation." The Company believes that the securities it has acquired and it proposes to acquire, as well as temporary investments it makes with its idle funds, will generally be Qualifying Assets. Securities of public companies, on the other hand, are generally not Qualifying Assets unless they were acquired in a distribution, in exchange for or upon the exercise of, a right relating to securities that were Qualifying Assets. 2. The Company may issue the maximum amount of SBA debentures permitted by the Small Business Investment Act of 1958, as amended (the "SBIA"), and the regulations promulgated thereunder (the "SBA Regulations"). At March 31, 1996, the Company had borrowed $83.3 million from the SBA evidenced by debentures that have a fixed rate of interest, a ten year term and may be prepaid after five years without penalty. These debentures have maturities ranging from 2002 to 2006 and interest rates varying from 6.12% to 8.20% per annum. The maximum amount which the Company may borrow from the SBA under the SBIA varies based upon the amount of the Company's leverageable capital (as defined by the SBA). The maximum amount the Company can borrow is $90.0 million provided the Company's leverageable capital is at least $45.0 million. The Company's leverageable capital was approximately $69.6 million at March 31, 1996, and accordingly the maximum amount the Company can borrow from the SBA is currently $90.0 million. However, in determining whether to approve a small business investment company's application to issue SBA debentures, the SBA considers factors in addition to the amount of its leverageable capital, such as the ratio of the applicant's outstanding indebtedness that is senior to SBA debentures to its leverageable capital. 3. The Company may borrow funds to the extent permitted by the 1940 Act. A BDC may borrow funds through the issuance of "Senior Securities" if, immediately after such issuance, the securities will have asset coverage of at least 200%. Indebtedness created by the sale of debentures to the SBA is exempt from this restriction. At March 31, 1996, the Company had in place the $50.0 million Revolving Credit Facility which is secured by all of the Company's assets. The interest rate paid on the Revolving Credit Facility was 7.43% at March 31, 1996. As of March 31, 1996, there were $24.9 million outstanding under the Revolving Credit Facility. For the risks associated with the use of leverage, see "Risk Factors -- Leverage." The Company may be deemed to have received income on debt obligations, such as those that were initially issued at a discount. The Company may borrow funds or sell temporary investments or other assets to meet its distribution requirements with regard to the interest income it will be deemed to have received on these securities. See "Tax Status." 4. The Company will not concentrate its investments in any particular industry or particular group of industries. Therefore, the Company will not acquire any securities (except upon the exercise of a right 35 38 related to previously acquired securities) if, as a result, 25% or more of the value of its total assets consists of securities of companies in the same industry. 5. The Company will not (i) act as an underwriter of securities of other issuers (except to the extent that it may be deemed an "underwriter" of securities purchased by it that subsequently must be registered under the Securities Act before they may be offered or sold to the public), (ii) purchase or sell real estate or interests in real estate or real estate investment trusts (except that the Company may purchase and sell real estate or interests in real estate in connection with the orderly liquidation of investments or the foreclosure of mortgages held by the Company), (iii) sell securities short, (iv) purchase securities on margin (except to the extent that it may purchase securities with borrowed money), (v) write or buy put or call options (except to the extent of warrants or conversion privileges obtained in connection with its loans, and rights to require the issuers of such investments or their affiliates to repurchase them under certain circumstances), (vi) engage in the purchase or sale of commodities or commodity contracts, including futures contracts (except where necessary in working out distressed loan or investment situations), or (vii) acquire the voting stock of, or invest in any securities issued by, any other investment company, except as they may be acquired as part of a merger, consolidation or acquisition of assets. 6. The Company may make loans and loans with equity features, as well as investments in equity securities of small business concerns. It is anticipated that substantially all of the Company's investments in small business concerns will continue to be secured loans with warrants or other equity features issued in connection therewith. The Company may also make loans as permitted under its Amended and Restated 1994 Stock Option Plan and its 1996 Incentive Stock Option Plan, as described in this Prospectus under "Management -- Employee Stock Options". The Company's policies with respect to the following matters are not fundamental policies and may be changed, subject to the SBIA and SBA Regulations, by the Company's Board of Directors without shareholder approval. 1. The Company may make investments in the form of loans, loans with equity features and equity securities. At March 31, 1996, 79.0% of the Company's total assets were invested in loans with related warrants, 16.4% in equity securities, 1.9% in convertible debt and 2.7% in other assets. The Company will not make loans to any single small business concern or its affiliates that exceed 25% of the Company's regulatory capital. Under the SBA Regulations, without prior SBA approval, loans to any single small business concern and its affiliates may not exceed 20% of the Company's regulatory capital. 2. The Company must invest funds that are not being used to make small business concern loans in investments permitted by the SBA Regulations. These permitted investments include direct obligations of, or obligations guaranteed as to principal and interest by, the United States with a term of 15 months or less and deposits maturing in one year or less issued by an institution insured by the FDIC. The percentage of the Company's assets so invested will depend on, among other things, loan demand, timing of equity infusions and SBA funding and availability of funds under the Company's credit facility. PORTFOLIO TURNOVER During the three months ended March 31, 1996, the Company made loans to 29 companies totaling approximately $32.3 million and received 6 repayments (either partial or full) aggregating $4.8 million. During the year ended December 31, 1995, the Company made loans to 44 companies totaling approximately $101.5 million and received ten repayments (either partial or full) aggregating $14.4 million. During the year ended December 31, 1994, the Company made loans to 34 companies totaling approximately $40.8 million and received six repayments aggregating approximately $7.6 million. During the year ended December 31, 1993, the Company made loans to 31 companies totaling approximately $31.5 million and received three repayments aggregating $2.0 million. Since inception, the Company has originated $220.7 million in total loans and $28.8 million, or 13.0%, have been repaid. The Company cannot control changes in its portfolio of investments, as borrowers have the right to prepay loans made by the Company without penalty, and the first loans made by the Company begin maturing May 1997. 36 39 INVESTMENT ADVISOR The Company has no investment advisor and is advised by its executive officers under the supervision of its Board of Directors. PORTFOLIO COMPANIES The following table sets forth certain information as of March 31, 1996, regarding each portfolio company in which the Company has an equity investment. Unless otherwise noted, the only relationship between each portfolio company and the Company is the Company's investment. As an SBIC, the Company is deemed to make available significant managerial assistance to its portfolio companies. The amount and general terms of all loans to portfolio companies is set forth on pages F-28 and F-35.
PERCENTAGE NATURE OF ITS TITLE OF SECURITIES OF CLASS NAME AND ADDRESS OF PORTFOLIO COMPANY PRINCIPAL BUSINESS HELD BY THE COMPANY HELD(1) - ------------------------------------- ---------------------- ---------------------- ---------- Affinity Corporation................. Telecommunications Warrant to purchase 8.6% 20975 Swenson Drive Common Stock Suite 150 Waukesha, WI 53186 Amscot Holdings, Inc................. Check Cashing Service Warrant to purchase 17.5 8430 North Armenia Avenue Common Stock Tampa, FL 33614 Ashe Industries, Inc................. Building Products Warrant to purchase 16.5 4505 Transport Drive Common Stock Tampa, FL 33605 Associated Response Services, Inc.... Direct Mail Warrant to purchase 34.3 9900 Brookford Street Common Stock Charlotte, NC 28273 Assured Power, Inc................... Environmental Warrant to purchase 16.0 4816 Sirus Lane Common Stock Charlotte, NC 28208 Auto Rental Systems, Inc............. Auto Leasing Warrant to purchase 8.0 25 Century Blvd. Common Stock Suite 204 Nashville, TN 37214 B&N Company, Inc..................... Software Warrant to purchase 4.0 3060 Peachtree Rd., NW, Suite 1460 Common Stock Atlanta, GA 30305 BankCard Services Corporation........ Debit Card Warrant to purchase 24.0 3400 McClure Ridge Rd. Common Stock Bldg. E, Ste. B Duluth, GA 30136 BiTec Southeast, Inc................. Specialty Gas Warrant to purchase 10.0 8405-G Benjamin Rd. Common Stock Tampa, FL 33634
- --------------- (1) Percentages shown for warrants held by the Company represent the percentage of class of security to be owned upon exercise of the warrant. 37 40
PERCENTAGE NATURE OF ITS TITLE OF SECURITIES OF CLASS NAME AND ADDRESS OF PORTFOLIO COMPANY PRINCIPAL BUSINESS HELD BY THE COMPANY HELD(1) - ------------------------------------- ---------------------- ---------------------- ---------- Caldwell/VSR Inc..................... Contract Manufacturing Warrant to purchase 15.9% 17151 Darwin Avenue Common Stock 100.0 Hesperia, CA 92345 Preferred Stock Capital Network System, Inc.......... Telecommunications Warrant to purchase 3.5 600 Congress Avenue Common Stock Suite 1400 Austin, TX 78701 Cardiac Control Systems, Inc......... Pacemaker Manufacturer Warrant to purchase 2.9 3 Commerce Blvd. Common Stock Palm Coast, FL 32164 Carter Kaplan Holdings, L.L.C........ Investment Banking Membership interest in 24.0 629 East Main Street L.L.C. Suite 1200 Richmond, VA 23219 CCS Technology Group, Inc............ Computer Systems Warrant to purchase 2.0 900 Winderly Place Design Common Stock Maitland, FL 32751 CellCall, Inc........................ Radio/Telephone Warrant to purchase 1.2 103 Jerrico Drive Communications Common Stock Suite 200 Lexington, KY 40509 CF Data Corp......................... Check Verification Warrant to purchase 20.5 9441 LBJ Freeway Common Stock Dallas, TX 75243 Champion Glove Manufacturing Co., Sports Equipment Warrant to purchase 6.9 Inc................................ Common Stock 12121 E. 51st St. #102 Tulsa, OK 74146 C.J. Spirits, Inc.................... Distilled Spirits Warrant to purchase 10.0 2903 Pointer Place Common Stock Seffner, FL 33584 Clearidge, Inc....................... Bottled Water Warrant to purchase 7.9 2710 Landers Avenue Common Stock Nashville, TN 37211 CLS Corporation...................... Management Services Warrant to purchase 4.9 4 Century Parkway Common Stock Suite 110 Blue Bell, PA 19422 Colonial Investments, Inc............ Retail Warrant to purchase 18.0 4530 Harding Rd. Common Stock Nashville, TN 37205 Concept Technologies Group, Inc...... Professional Audio Common Stock 0.1 6632 Central Avenue Pike Equipment Knoxville, TN 37912
- --------------- (1) Percentages shown for warrants held by the Company represent the percentage of class of security to be owned upon exercise of the warrant. 38 41
PERCENTAGE NATURE OF ITS TITLE OF SECURITIES OF CLASS NAME AND ADDRESS OF PORTFOLIO COMPANY PRINCIPAL BUSINESS HELD BY THE COMPANY HELD(1) - ------------------------------------- ---------------------- ---------------------- ---------- Consumat Systems, Inc................ Environmental Warrant to purchase 20.0% P.O. Box 9379 Common Stock Richmond, VA 23227 Consumer Credit Associates, Inc...... Credit Card Services Warrant to purchase 15.5 950 Thread Needle Common Stock Houston, TX 77079-2903 Continental Diamond Cutting Jewelry Replacement Warrant to purchase 12.2 Company............................ Common Stock 4427 W. Kennedy Blvd. Suite 300 Tampa, FL 33609 Corporate Flight Management, Inc..... FBO Airport Warrant to purchase 10.0 Smyrna Airport Common Stock Hangar 625 Smyrna, TN 37167 Cougar Power Products, Inc........... Lawn Equipment Warrant to purchase 22.6 361 Dabbs House Road Common Stock Richmond, VA 23223 Dalcon Technologies, Inc............. Computer Services Warrant to purchase 25.0 1321 Murfreesboro Road Common Stock 100.0 4th Floor Preferred Stock -- Nashville, TN 37217 Series B Dalt's, Inc.......................... Restaurant Warrant to purchase 25.0 250 East Wilson Bridge Rd. Common Stock Suite 190 Worthington, OH 43085 DentureCare, Inc..................... Dental Services Preferred Stock -- 2.6 3109 Poplarwood Court Series D 12.6 Suite 300 Warrant to purchase Raleigh, NC 27604-1025 Common Stock Eastern Food Group L.L.C............. Grocery Warrant to purchase 15.0 2400 S. Memorial Drive interest in L.L.C. Greenville, NC 27834 Class B Preferred 100.0 Units Educational Medical, Inc............. Technical Schools Warrant to purchase 8.0 1327 Northmeadow Parkway Common Stock Suite 132 Roswell, GA 30076 Electronic Merchant Services......... Payment Processing Warrant to purchase 12.5 1401 Main Street Common Stock Suite 850 Preferred Stock -- 100.0 Columbia, SC 29201 Series B Emerald Pointe Waterpark, L.P........ Waterpark Warrant to purchase 10.0 P.O. Box 7949 Partnership Units Greensboro, NC 27417
- --------------- (1) Percentages shown for warrants held by the Company represent the percentage of class of security to be owned upon exercise of the warrant. 39 42
PERCENTAGE NATURE OF ITS TITLE OF SECURITIES OF CLASS NAME AND ADDRESS OF PORTFOLIO COMPANY PRINCIPAL BUSINESS HELD BY THE COMPANY HELD(1) - ------------------------------------- ---------------------- ---------------------- ---------- Encore Orthopedics, Inc.............. Orthopedics Warrant to purchase 7.4% 8900 Shoal Creek Blvd., Bldg. 300 Common Stock Austin, TX 78757 Express Shipping Centers, Inc........ Shipping Warrant to purchase 3.0 P.O. Box 1599 Common Stock Fairfield, IA 52556 FCOA Acquisition Corp................ Retail Warrant to purchase 2.5 745 Birginal Drive Common Stock Bensenville, IL 60106-2104 Front Royal, Inc..................... Environmental Common Stock 1.6 2200 Gateway Blvd. Insurance Warrant to purchase 3.6 Suite 205 Common Stock Morrisville, NC 27560 Fycon Technologies, Inc.............. OEM Warrant to purchase 15.0 4100 Barringer Drive Common Stock Charlotte, NC 28217 Preferred Stock -- 100.0 Series A Gardner Wallcovering, Inc............ Wallcovering Warrant to purchase 2.0 3300 Canton Pike Common Stock Hopkinsville, KY 42240 Gates Communications, L.P............ Publishing Warrant to purchase 47.0 P.O. Box 5181 Partnership Units Richmond, VA 23220 Global Finance & Leasing, Inc........ Leasing Warrant to purchase 25.0 P.O. Box 9406 Common Stock Wyoming, MI 49509 Gold Medal Products, Inc............. Manufacturing Warrant to purchase 30.0 1500 Commerce Rd. Common Stock Richmond, VA 23214 Golf Corp. of America, Inc........... Golf Driving Ranges Common Stock 3.8 6950 Charlotte Pike Warrant to purchase 11.5 Nashville, TN 37209 Common Stock Golf Video, Inc...................... Interactive Golf Video Warrant to purchase 49.5 6950 Charlotte Pike Common Stock Nashville, TN 37209 Gulfstream International Airlines, Commuter Airline Warrant to purchase 21.0 Inc................................ Common Stock P.O. Box 777 Miami Springs, FL 33266 Horizon Medical Products, Inc........ Medical Products Warrant to purchase 8.3 4200 Northside Pkwy., NW Common Stock Atlanta, GA 30327
- --------------- (1) Percentages shown for warrants held by the Company represent the percentage of class of security to be owned upon exercise of the warrant. 40 43
PERCENTAGE NATURE OF ITS TITLE OF SECURITIES OF CLASS NAME AND ADDRESS OF PORTFOLIO COMPANY PRINCIPAL BUSINESS HELD BY THE COMPANY HELD(1) - ------------------------------------- ---------------------- ---------------------- ---------- Hoveround Corporation................ Wheelchairs Warrant to purchase 27.0% 8135 25th Court East Common Stock Sarasota, FL 34243 HSA International.................... Discount Membership Warrant to purchase 12.0 100 N. Tampa St. Suite 2610 Tampa, FL 33602 Hunt Incorporated.................... Truck Dealer Warrant to purchase 10.0 8211 Adamo Drive Common Stock Tampa, FL 33619 Hunt Leasing & Rental Corporation.... Truck Leasing Warrant to purchase 10.0 8211 Adamo Drive Common Stock Tampa, FL 33619 I. Schneid Holdings, L.L.C........... Equipment Cleaning Warrant to purchase 11.0 1429 Fairmont Ave, NW interest in L.L.C. Atlanta, GA 30318-4153 Innotech, Inc........................ Optical Products Warrant to purchase 0.7 5568 Airport Road Common Stock Roanoke, VA 24012-1311 In Store Services, Inc............... Retail Services Warrant to purchase 12.5 9332 Forsyth Park Drive Common Stock Charlotte, NC 28241 International Risk Control, Inc...... Computer Software Preferred Stock -- 0.8 636 Ramona Street Series A Palo Alto, CA 94301-2546 InterMed Healthcare Systems, Inc..... Information Services Warrant to purchase 9.4 245 Peachtree Center Ave., NE Common Stock Suite 350 Atlanta, GA 30303 Johnston County Cable L.P............ Entertainment Warrant to purchase 27.5 2444 Solomons Island Rd., Suite 202 L.P. interest 11.1 Annapolis, MD 21401 Class A interest in L.P. Juvenile Products, LLC............... Furniture Products Membership interest in 30.0 P.O. Box 2208 L.L.C. 113 Anderson Ct. Dothan, AL 36302-2208 Kentucky Kingdom, Inc................ Amusement Park Common Stock 5.2 P.O. Box 9016 Louisville, KY 40209-9016 Kryptonics, Inc...................... In-Line Skates Warrant to purchase 9.0 740 South Pierce Ave. Common Stock Louisville, CO 80027
- --------------- (1) Percentages shown for warrants held by the Company represent the percentage of class of security to be owned upon exercise of the warrant. 41 44
PERCENTAGE NATURE OF ITS TITLE OF SECURITIES OF CLASS NAME AND ADDRESS OF PORTFOLIO COMPANY PRINCIPAL BUSINESS HELD BY THE COMPANY HELD(1) - ------------------------------------- ---------------------- ---------------------- ---------- K.W.C. Management Corp............... Music Retail Warrant to purchase 24.4% 3390 Peachtree Rd., NE Common Stock Suite 1132 Atlanta, GA 30326 Lovett's Buffet, Inc................. Restaurants Warrants to purchase 3.6 5118 Park Avenue Common Stock Suite 127 Memphis, TN 38117 MBA Marketing Corporation............ Shoe Stores Warrant to purchase 4.0 6615 Dublin Center Drive Common Stock Dublin, OH 43017 Medical Associates of America, Pharmacies Preferred Stock -- 8.0 Inc................................ Series A One Bridge Plaza Suite 290 Fort Lee, NJ 07024 Midbrook Acquisitions, Inc........... Industrial Warrant to purchase 3.7 2080 Brooklyn Rd. Equip./Cleaning Common Stock Jackson, MI 49204 Midbrook Products, Inc............... Industrial Warrant to purchase 3.7 2080 Brooklyn Rd. Equip./Cleaning Common Stock Jackson, MI 49204 Money Transfer Systems, Inc.......... Credit Card Services Warrant to purchase 4.0 600 Lakeview Rd., Suite A Common Stock Clearwater, FL 34616 Moore Diversified Products, Inc...... Metal Fabrication Warrant to purchase 10.7 1441 Sunshine Lane Common Stock Lexington, KY 40505 Moovies Inc.......................... Video Stores Common Stock 0.2 201 Brookfield Pkwy., Ste. 200 Warrant to purchase 1.8 Greenville, SC 29607 Common Stock Multicom Publishing, Inc............. Software Publishing Warrant to purchase 6.0 1100 Olive Way, #125 Common Stock Seattle, WA 98101 Multimedia Learning, Inc............. Employee Training Warrant to purchase 6.0 5215 North O'Connor Common Stock Suite 760 Irving, TX 75039 National Recovery Technologies, Environmental Products Preferred Stock -- 6.0 Inc................................ Series A 566 Mainstream Drive Nashville, TN 37228-1223
- --------------- (1) Percentages shown for warrants held by the Company represent the percentage of class of security to be owned upon exercise of the warrant. 42 45
PERCENTAGE NATURE OF ITS TITLE OF SECURITIES OF CLASS NAME AND ADDRESS OF PORTFOLIO COMPANY PRINCIPAL BUSINESS HELD BY THE COMPANY HELD(1) - ------------------------------------- ---------------------- ---------------------- ---------- National Vision Associates, Ltd...... Optical Stores Common Stock 1.0% 296 South Clayton Street Lawrenceville, GA 30245 Nationwide Engine Supply, Inc........ Engine Rebuilding Warrant to purchase 16.2 609 N. Houston Common Stock Fort Worth, TX 76106 NRI Service and Supply, L.P.......... Gas Pump Services Warrant to purchase 27.5 333 Ludlow Street L.P. Interests Stamford, CT 06902 Novavision, Inc...................... Optical Products Warrant to purchase 6.1 2700-200 Gateway Center Common Stock Morrisville, NC 27560 Preferred Stock -- 100.0 Series A Orchid Manufacturing Group, Inc...... Manufacturing Warrant to purchase 4.5 100 Winners Circle Common Stock Brentwood, TN 37027 P.A. Plymouth, Inc................... Retail Warrant to purchase 15.0 100 Corporate Drive Common Stock Radford, VA 24141 Palco Telecom Services, Inc.......... Telephone Repair Warrant to purchase 5.0 2914 Green Cove Road Services Common Stock Huntsville, AL 35803 Patton Management Corporation........ Communications Warrant to purchase 10.0 P.O. Box 491539 Common Stock Atlanta, GA 30349 Pipeliner Systems, Inc............... Sewer Rehabilitation Warrant to purchase 20.6 4140 Tuller Road Common Stock 100.0 Suite 132 Preferred Stock -- Dublin, OH 43017 Series B PFIC Corporation..................... Third Party Marketing Warrant to purchase 6.0 1749 Mallory Lane, Suite 120 Common Stock Brentwood, TN 37027 Pharmaceutical Research Associates, Research Warrant to purchase 6.0 Inc................................ Common Stock 2400 Old Ivy Road Pfd. Stock Class F 38 Charlottesville, VA 22903-4826 The Potomac Group, Inc............... Healthcare Information Common Stock 2.2 P.O. Box 290037 Warrant to purchase 1.9 Nashville, TN 37229 Common Stock 83.2 Preferred Stock -- Series A
- --------------- (1) Percentages shown for warrants held by the Company represent the percentage of class of security to be owned upon exercise of the warrant. 43 46
PERCENTAGE NATURE OF ITS TITLE OF SECURITIES OF CLASS NAME AND ADDRESS OF PORTFOLIO COMPANY PRINCIPAL BUSINESS HELD BY THE COMPANY HELD(1) - ------------------------------------- ---------------------- ---------------------- ---------- Precision Fixtures & Graphics, Design/Construction Warrant to purchase 5.0% Inc................................ Common Stock 4644 Cummings Park Dr. Antioch, TN 37013 Precision Panel Products, Inc........ Cabinets Warrant to purchase 8.3 12440 73rd Court, North Common Stock Largo, FL 34643 Premiere Technologies, Inc........... Telecommunications Common Stock 1.8 3399 Peachtree Road, NE Suite 400 Atlanta, GA 30326 Pritchard Glass, Inc................. Auto Glass Warrant to purchase 25.0 140 Remount Road Common Stock Charlotte, NC 28203 Quest Group International, Inc....... Telecommunications Warrant to purchase 10.0 242 Falcon Dr. Common Stock Forest Park, GA 30050 Radio Systems Corporation............ Electrical Machinery Warrant to purchase 5.3 5008 National Drive Common Stock Knoxville, TN 37914 The Ryland Company................... Clothing Warrant to purchase 20.5 104 New Era Drive Common Stock S. Plainfield, NJ 07080 Skillsearch Corporation.............. Resume Database Common Stock 6.8 3354 Perimeter Hill Drive Warrant to purchase 7.2 Suite 235 Common Stock Nashville, TN 37211-4129 Southern Specialty Brands, Inc....... Food Distributor Warrant to purchase 10.0 c/o Price Waterhouse Common Stock 4400 Harding Road Nashville, TN 37205 The Summit Publishing Group, Inc..... Publishing Warrant to purchase 24.5 1112 E. Copeland Rd., Ste. 510 Common Stock Arlington, TX 76011 Suncoast Medical Group Inc........... Optical Products Warrant to purchase 23.0 7401 114th Avenue, North Common Stock Suite 503-A Largo, FL 34643 Suprex Corporation................... Laboratory Analytical Warrant to purchase 3.9 125 William Pitt Way Instruments Common Stock Pittsburgh, PA 15238
- --------------- (1) Percentages shown for warrants held by the Company represent the percentage of class of security to be owned upon exercise of the warrant. 44 47
PERCENTAGE NATURE OF ITS TITLE OF SECURITIES OF CLASS NAME AND ADDRESS OF PORTFOLIO COMPANY PRINCIPAL BUSINESS HELD BY THE COMPANY HELD(1) - ------------------------------------- ---------------------- ---------------------- ---------- Tower Environmental, Inc............. Environmental Services Warrant to purchase 10.1% 4830 W. Kennedy Blvd. Common Stock Suite 930 Tampa, FL 33609-2574 Trade Am International, Inc.......... Retail Warrant to purchase 6.0 6580 Jimmy Carter Blvd. Common Stock Norcross, GA 30071 Treasure Coast Pizza, Co............. Restaurant Warrant to purchase 10.0 19990 Princewood Drive Common Stock Jupiter, FL 33458 Unique Electronics, Inc.............. Defense Electronics Warrant to purchase 20.0 1320 26th Street Common Stock Orlando, FL 32805 Preferred Stock -- 100.0 Series A Universal Marketing Corporation...... Sports Drinks Warrant to purchase 10.0 1409 Highway 45 South Common Stock Columbus, MS 39701 Urethane Technologies, Inc........... Manufacturing Warrant to purchase 4.7 1202 East Wakeham Ave. Common Stock Santa Ana, CA 92705 VDI Acquisition Company, L.L.C....... Watches Warrant to purchase 21.0 600 Sylvan Avenue Membership Units Englewood Cliffs, NJ 07632 Viking Moorings Acquisition, LLC..... Yacht Charter Membership interest in 6.5 19345 U.S. Hwy. 19N, Suite 402 L.L.C. Clearwater, FL 34624-3193 Virginia Gas Company................. Gas Warrant to purchase 6.0 P.O. Box 2407 Common Stock 100.0 Abingdon, VA 24212 Preferred Stock -- Series A Voice FX Corporation................. Telecommunications Warrant to purchase 8.0 1100 E. Hector Street, Suite 416 Common Stock Conshohocken, PA 19428 Zahren Alternative Power Converted Power Warrant to purchase 9.8 Corporation........................ Common Stock 5.9 40 Tower Lane Common Stock 4.9 Avon, CT 06001 Preferred Stock
- --------------- (1) Percentages shown for warrants held by the Company represent the percentage of class of security to be owned upon exercise of the warrant. 45 48 PRINCIPAL SHAREHOLDERS Of the 50,000,000 shares of Common Stock, no par value, authorized, there are 9,130,116 shares of Common Stock outstanding and approximately 2,550 holders of the Company's Common Stock, including approximately 150 holders of record. The Company has no other class of securities outstanding. The following table sets forth certain ownership information as of May 1, 1996, with respect to the Common Stock for (i) those persons who directly or indirectly own, control or hold with the power to vote, 5% or more of the outstanding Common Stock and (ii) all officers and directors, as a group.
PERCENT OF SHARES OUTSTANDING --------------------- TYPE OF AMOUNT BEFORE AFTER NAME AND ADDRESS OWNERSHIP OWNED OFFERING OFFERING - ------------------------------------------------ ----------- ---------- -------- -------- John A. Morris, Jr., M.D........................ Beneficial 2,222,490(1) 24.2% 19.9% 243 Medical Center South 2100 Pierce Avenue Nashville, TN 37212 Sirrom Partners, L.P............................ Record 2,035,148 22.1 18.2 500 Church Street Suite 200 Nashville, TN 37219 Officers and directors, as a group (18 persons)...................................... Beneficial 2,693,363(2) 29.4 24.1
- --------------- (1) Includes 2,035,148 shares owned by Sirrom Partners, L.P., a limited partnership owned by Dr. Morris and his family, and 187,350 shares owned by Sirrom, Ltd., a limited partnership whose general partner is All Scarlet, Inc., a corporation owned 50% by Dr. Morris and 50% by his brother. Dr. Morris has shared voting power and shared investment power with respect to all of these shares. Assuming consummation of the Harris Williams acquisition through the issuance of 950,000 shares, Dr. Morris would beneficially own 2,402,990 shares, or 23.8%, of the Company's outstanding Common Stock before the Offering and 19.9% following the Offering. (2) Includes 149,000 shares owned by officers of the Company, which are subject to forfeiture, in a declining amount over time, in the event the respective officer ceases to be employed by the Company. 46 49 MANAGEMENT The business and affairs of the Company are managed under the direction of its Board of Directors. The Board of Directors has two committees, a Compensation Committee comprised of Messrs. Eberle, Pirtle, and Wilson and an Audit Committee comprised of Messrs. Duncan, McCabe and Mathias. All of the Company's directors are subject to re-election at each annual meeting of shareholders. The directors each receive $1,000 for each separate Board or committee meeting attended and are reimbursed for expenses relating thereto. The Board of Directors elects the Company's officers who serve at the pleasure of the Board of Directors. Any new officer or director is subject to approval by the SBA. BOARD OF DIRECTORS The following table sets forth certain information regarding the directors of the Company.
NAME AGE POSITION - ---------------------------- --- ----------------------------------------------------------- John A. Morris, Jr. M.D.(1)................... 49 Chairman of the Board and Director George M. Miller, II(1)..... 36 President, Chief Executive Officer and Director E. Townes Duncan............ 43 Director William D. Eberle........... 73 Director Edward J. Mathias........... 54 Director Robert A. McCabe, Jr........ 44 Director Raymond H. Pirtle, Jr.(1)... 55 Director L. Edward Wilson, P.E....... 52 Director
- --------------- (1) "Interested Person" as defined in Section 2(a) (19) of the 1940 Act. John A. Morris, Jr., M.D., co-founded the Company in August 1991. Dr. Morris currently holds appointments of Associate Professor of Surgery and Director of the Division of Trauma and Surgical Critical Care at the Vanderbilt University School of Medicine, Medical Director of the LifeFlight Air Ambulance Program at Vanderbilt University Hospital, and Associate in the Department of Health Policy and Management at the Johns Hopkins University. George M. Miller, II, co-founded the Company in August 1991. Prior to August 1991, Mr. Miller worked for two years as a vice president in the Investment Banking Group of Equitable Securities Corporation ("Equitable"). From 1987 to 1989, Mr. Miller worked as an associate in the Corporate Finance department of J.C. Bradford & Co. Prior to that time, Mr. Miller spent four and one-half years on active duty in the United States Marine Corps. Mr. Miller holds a Masters in Business Administration from the University of North Carolina at Chapel Hill and a Bachelor of Science degree from the University of Tennessee. E. Townes Duncan has been a director of Comptronix Corporation, a provider of electronics contract manufacturing services, since April 1988, and has served as its Chairman of the Board and Chief Executive Officer since November 1993. Mr. Duncan was a Vice-President of Massey Burch Investment Group, Inc., a Nashville venture capital firm, from 1985 to November 1993. Mr. Duncan is also a director of Volunteer Capital Corporation, an owner and operator of restaurants in six states, and is a non-affiliated director of ESC Strategic Funds, a mutual fund family registered under the 1940 Act for which Equitable acts as investment advisor and distributor. William D. Eberle is chairman of Manchester Associates, Ltd., a venture capital and international consulting firm, and is Of Counsel to the law firm of Kaye, Scholer, Fierman, Hays & Handler. Mr. Eberle is also Chairman of America Service Group Inc., a health care services company, and Showscan Entertainment, Inc., a movie-based software and technology company, and is a director of Ampco-Pittsburgh Corp., a steel fabrication equipment company, Fiberboard Corporation, a timber manufacturer, Mitchell Energy and Development, a gas and oil company, and Mid-States PLC, an autoparts distributor headquartered in Nashville. Mr. Eberle is also the Vice Chairman of the U.S. Council of the International Chamber of Commerce. Edward J. Mathias has been a managing director of The Carlyle Group, a Washington, D.C. based private merchant bank, since 1994. Mr. Mathias served as a managing director of T. Rowe Price Associates, Inc., an investment management firm, from 1971 to 1993. Mr. Mathias is also a director of U.S. Office Products, a supplier of office products, and PathoGenesis Corporation, a biotechnology company. 47 50 Robert A. McCabe, Jr., has been the Vice Chairman of First American Corporation, a bank holding company headquartered in Nashville, since 1993 and the President of First American Enterprises, a division of First American Corporation, since 1994. Prior to that time, Mr. McCabe served as President of the General Bank and First American National Bank, subsidiaries of First American Corporation. Mr. McCabe is also a director of First American Corporation. Raymond H. Pirtle, Jr., is a managing director and a member of the Board of Directors of Equitable, having joined the firm in February 1989. Prior to that date, Mr. Pirtle was a general partner of J.C. Bradford & Co. L. Edward Wilson, P.E., is president of Sirrom Resource Texas, Inc. ("SRF"), the general partner of Sirrom Resource Funding, L.P., a privately owned partnership that is not affiliated with the Company and provides capital to environmental service firms. Prior to joining SRF, Mr. Wilson served as president and chief executive officer of OSCO, Inc., a Nashville-based environmental services company. Prior to that, Mr. Wilson served as executive vice president of ERC Environmental & Energy Services, Inc. ("ERC"), where he was in charge of all eastern regional operations of this publicly-traded environmental services company. He joined ERC after it acquired the EDGe Group, a company he founded in 1982. OFFICERS The following table sets forth certain information regarding officers of the Company.
NAME AGE POSITION - ------------------------------------------- --- ------------------------------------------- President, Chief Executive Officer and George M. Miller, II....................... 36 Director David M. Resha............................. 49 Chief Operating Officer Peter T. Socha............................. 37 Vice President -- Workouts Jeffrey D. Armstrong....................... 38 Vice President -- Workouts Kathy Harris............................... 38 Vice President -- Lending John C. Harrison........................... 39 Vice President -- Lending John S. Scott.............................. 32 Vice President -- Lending William A. Williamson, III................. 35 Assistant Vice President -- Lending Carl W. Stratton........................... 37 Chief Financial Officer Maria-Lisa Caldwell........................ 32 Secretary Kimberly M. Stringfield.................... 26 Controller and Treasurer
David M. Resha joined the Company in July 1995 and is responsible for the day-to-day operations of the Company. His primary role is the oversight of risk management associated with the loan portfolio of the Company, including loan origination, portfolio management and workout activities. Mr. Resha is 25-year veteran commercial banker. Most recently, he was Senior Vice President at First Union National Bank of Tennessee where he managed the middle market/corporate banking group. He held a similar position with Dominion Bank before it was merged with First Union National Bank of Tennessee. Mr. Resha holds a Bachelor of Business Administration degree from Loyola University in New Orleans and a Master of International Management degree from American (Thunderbird) Graduate School in Glendale, Arizona. Peter T. Socha joined the Company in February 1994 and is responsible for all workout activities. Mr. Socha oversees several of the Company's portfolio companies, particularly those companies on the Credit Watch List. From 1992 to 1994, Mr. Socha served as president and chief operating officer of Stewart Foods, Inc., a food distributor reorganized under Chapter 11. From 1991 to 1992, Mr. Socha was an investment banker with Quest Capital Corporation, a private investment company based in Atlanta, Georgia. From 1989 to 1991, Mr. Socha served in a sales management position with Alliance America, a manufacturing company based in Atlanta, Georgia. From 1986 to 1989, Mr. Socha worked as a credit officer responsible for designing and implementing underwriting standards and procedures with Veriens-und Westbank AG. Mr. Socha holds Bachelor of Science and Master of Arts degrees from the University of Alabama. Jeffrey D. Armstrong joined the Company in April 1996 and is responsible for the workout activities of portfolio companies that are included on the Credit Watch List. Mr. Armstrong has 13 years of experience in 48 51 consulting, finance and operations from Aladdin Industries, Buccino & Associates, Inc., and the Alpert Investment Corporation. Mr. Armstrong holds a Master of Business Administration from the University of Texas at Austin and a Bachelor of Science Degree from Stanford University. Kathy Harris joined the Company in January 1996 and is responsible for marketing and loan origination efforts in Georgia and Florida. In addition to generating new loans, Ms. Harris oversees several of the Company's portfolio companies. From 1985 to January 1996, Ms. Harris was in the Corporate Finance Department at J.C. Bradford & Co. From 1980 to 1983, she was with KPMG Peat Marwick and served as a senior auditor specializing in the firm's thrift practice. Ms. Harris holds a Masters in Business Administration in Finance and Human Resources Management from the Owen Graduate School of Management at Vanderbilt University and a Bachelor of Science degree in Accounting from Murray State University. Ms. Harris is a Certified Public Accountant. John C. Harrison joined the Company in January 1994 and is responsible for marketing and loan origination efforts in North and South Carolina and Virginia. In addition to generating new loans, Mr. Harrison oversees several of the Company's portfolio companies. From 1991 to 1993, Mr. Harrison served as a vice president at First Union National Bank, and from 1987 to 1991, he worked for First Tennessee Equipment Finance Corporation as a senior credit officer. From 1980 to 1987, Mr. Harrison held several positions with First American National Bank. Mr. Harrison holds a Bachelor of Science degree from the University of Tennessee. John S. Scott joined the Company in November 1994 and is responsible for marketing and loan origination efforts in Kentucky, Ohio and Indiana. In addition to generating loans, Mr. Scott oversees several of the Company's portfolio companies. From 1991 to 1994, Mr. Scott served as a vice president in the Corporate Banking Group of Bank One. From 1985 to 1991, Mr. Scott was a commercial lender with Ameritrust Corporation, Citizens Bank and Trust and First American National Bank. Mr. Scott holds a Bachelor of Science degree from the University of Kentucky. William A. Williamson, III, joined the Company in April 1996 and is responsible for marketing and loan origination efforts in Texas. Prior to joining the Company, Mr. Williamson was vice president/partner of Bohannon Brewing Company. From 1992 to 1994, Mr. Williamson was manager of Durr-Fillauer Corporation's Nashville facility. From 1985 to 1991, Mr. Williamson was assistant vice president of development for Jim Wilson Associates. From 1982 to 1984, Mr. Williamson was an investment banking analyst with E.F. Hutton in New York. Mr. Williamson holds a Bachelor of Business Administration from Southern Methodist University. Carl W. Stratton joined the Company in October 1995 and has served as Chief Financial Officer since April 1996. From October 1995 through April 1996, Mr. Stratton held the position of Vice President - Workouts with the Company. From 1991 to 1995, Mr. Stratton was chief financial officer of International Citrus Corporation, and from 1986 to 1991, Mr. Stratton was chief financial officer of Dove Computer Corporation. From 1981 to 1985, Mr. Stratton held a variety of engineering and manufacturing positions with E.I. du Pont de Nemours & Company, Incorporated. Mr. Stratton is also a director of International Citrus Corporation. Mr. Stratton holds a Masters of Business Administration degree from the University of North Carolina at Chapel Hill and a Bachelor of Science in Chemical Engineering degree from Lafayette College. Maria-Lisa Caldwell was appointed as the Secretary of the Company in April 1996. Ms. Caldwell is presently a principal in the law firm of Caldwell & Caldwell, P.C. From 1991 to January 1996, Ms. Caldwell was an associate with the law firm of Bass, Berry & Sims PLC. Prior to that time, Ms. Caldwell was an associate with the law firm of Gibson, Dunn & Crutcher. Ms. Caldwell holds a Juris Doctorate from Duke University School of Law and a Bachelor of Arts Degree in Economics from Fairfield University. Kimberly M. Stringfield joined the Company in December 1994 and serves as the Company's Controller and Treasurer. From 1992 to 1994, Ms. Stringfield was a credit analyst and commercial lender at NationsBank of Tennessee, N.A. Ms. Stringfield holds a Bachelor of Science degree in Accounting from the University of Alabama. 49 52 COMPENSATION The following table sets forth for the fiscal year ended December 31, 1995, the compensation paid to the three most highly compensated executive officers of the Company, and all executive officers and directors as a group. No director received compensation in excess of $60,000 for fiscal 1995. The Company does not have a pension plan or other retirement benefits. No options were granted to any directors during the fiscal year ended December 31, 1995.
AGGREGATE COMPENSATION NAME OF INDIVIDUAL OR IDENTITY OF CAPACITIES IN WHICH COMPENSATION WAS ------------------ GROUP RECEIVED SALARY BONUS - ------------------------------------- ------------------------------------ -------- ------- President and Chief Executive George M. Miller, II................. Officer $175,000 $50,000 Peter T. Socha....................... Vice President -- Workouts 125,000 50,000 Carolyn W. Perrone................... Chief Financial Officer(1) 79,200 30,000 All officers and directors as a group (18 persons)....................... 583,125 240,000
- --------------- (1) Carl W. Stratton assumed the office of Chief Financial Officer in April 1996. Ms. Perrone continues to serve as a financial advisor to the Company. EMPLOYEE STOCK OPTIONS For the purpose of providing employees who have substantial responsibility for the management of the Company with additional incentives to exert their best efforts on behalf of the Company, to increase their proprietary interest in the success of the Company, to reward outstanding performance and to attract and retain executive personnel of outstanding ability, the Company has adopted the Amended and Restated 1994 Employee Stock Option Plan (the "1994 Employee Plan"), and the 1996 Incentive Stock Option Plan (the "1996 Employee Plan"). The following is a summary of certain provisions of the 1994 Employee Plan and the 1996 Employee Plan. 1994 Employee Plan. The total number of shares for which options may be granted under the 1994 Employee Plan is 500,000, and options for the purchase of 500,000 shares of Common Stock have been granted. The 1994 Employee Plan is administered by a committee of the Board of Directors, consisting of at least two members who are not eligible for grants of options or other equity securities under the 1994 Employee Plan or any other plan of the Company or any of its affiliates. The committee determines the executive and other officers of the Company who are eligible to participate in the 1994 Employee Plan and the number of shares, if any, for which options may be granted to them. Seventeen people are potentially eligible to participate in the 1994 Employee Plan. Options granted under the 1994 Employee Plan are exercisable at a price equal to the fair market value of the Common Stock on the date the option is granted. No option may be exercised more than 10 years after the date of grant. Options granted under the 1994 Employee Plan are not transferable other than by the laws of descent and distribution and during the grantee's life may be exercised only by the grantee. Rights to exercise options terminate after a grantee ceases to be an employee for any reason, other than death, three months following the date of termination of employment. If a grantee dies before expiration of the option, his legal successors may exercise the option within one year of the employee's death. Shares purchased upon exercise of options must be paid for in cash or by the surrender of unrestricted shares of Common Stock or any combination thereof. The Company may lend the grantee up to the exercise price of the option to be exercised. Any such loan would be subject to certain terms set out in the Plan and limitations imposed by the SBA. The 1994 Employee Plan will terminate when options have been granted on the total number of shares authorized by it or by action of the Board of Directors, but in no event later than November 18, 2004. 50 53 The following table sets forth certain information as of April 30, 1996 with respect to options that have been granted under the 1994 Employee Plan:
NUMBER OF SHARES SUBJECT TO EXERCISE PRICE NAME AND POSITION OPTION PER SHARE ------------------------------------------------------- ---------------- -------------- George M. Miller, II,.................................. 150,000 $11.00 President and Chief Executive Officer 56,966 18.50 20,000 18.63 Peter T. Socha,........................................ 20,000 18.50 Vice President-Workouts Carolyn W. Perrone..................................... 20,000 18.50 Executive officers, as a group (4 persons)............. 150,000 11.00 125,000 13.50 96,966 18.50 20,000 18.63 Non-executive officer/employees, as a group............ 50,000 13.50 (13 persons) 25,000 17.88 33,034 18.63
1996 Employee Plan. The 1996 Employee Plan authorizes the issuance of up to 390,000 shares of the Company's Common Stock. As of April 30, 1996, options for the purchase of 153,932 shares of the Common Stock have been granted. Awards under the 1996 Employee Plan may be made to key employees and officers. The number of people currently eligible for awards is 17. The 1996 Employee Plan is administered by a committee of at least two disinterested individuals appointed by the Board of Directors, which currently is the Compensation Committee (the "Committee"). Incentive stock options ("ISO")and non-qualified stock options may be granted as the Committee determines, subject to certain per person limitations on awards. A stock option is exercisable at the times and subject to the terms and conditions which the Committee determines. The option price for any ISO will not be less than 100% (110% in the case of certain 10% shareholders) of the fair market value of the Common Stock on the date of grant. Shares purchased upon exercise of options must be paid for in cash or by surrender of unrestricted shares of Common Stock or any combination thereof. The Board of Directors may cause the Company to lend to the grantee up to the exercise price of the option being exercised. Any such loan is subject to terms set out in the Plan, including as to collateral and interest rate, and to other limitations imposed by the SBA. Options granted under the 1996 Employee Plan cannot be assigned or transferred except by will or by the laws of descent and distribution. During the lifetime of an optionee, an option is exercisable only by the optionee. The Committee determines the term of the option, which may not exceed 10 years. An option may be exercised at any time or from time to time or only after a period of time or in installments, as the Committee determines, except that options granted to officers of the Company will not be exercisable for at least six months after the date of grant. Upon termination of an option holder's employment for Cause (as defined in the 1996 Employee Plan), that employee's stock options will terminate. If employment is involuntarily terminated without Cause, options (if exercisable) are exercisable for three months or until the end of the option period, whichever is shorter. Upon death or disability of an employee, exercisable stock options are exercisable by the deceased employee's representative within the lesser of the remainder of the option period or one year from the employee's death. In the event of certain extraordinary corporate events, such as a sale of substantially all its assets or a merger or share exchange in which the Company is not the surviving corporation, all outstanding options under the 1996 Employee Plan shall immediately become fully exercisable. The 1996 Employee Plan may be amended by the Board of Directors, except that the approval of the Company's shareholders is required to increase the total number of shares reserved for the 1996 Employee Plan or to materially increase the benefits accruing to participants under the 1996 Employee Plan. 51 54 The following table sets forth certain information with respect to options that have been granted under the 1996 Employee Plan:
NUMBER OF SHARES SUBJECT TO EXERCISE PRICE NAME AND POSITION OPTION PER SHARE - ----------------------------------------------------------------- ---------------- -------------- George M. Miller, II, President and Chief Executive Officer.......................... 36,966 $ 18.63 Executive officers, as a group (4 persons)....................... 36,966 18.63 50,000 23.25 Non-executive officer/employees, as a group (13 persons)......... 16,966 18.63 50,000 25.00
NON-EMPLOYEE DIRECTOR STOCK OPTIONS In order to retain and attract highly qualified directors, and to ensure close identification of interests between non-employee directors and the Company's shareholders, the Company adopted the 1995 Stock Option Plan for Non-Employee Directors (the "Directors' Stock Option Plan"), which provides for the automatic grant of options to directors of the Company that are not employees or officers of the Company (other than John A. Morris, Jr., M.D.). In accordance with the applicable provisions of the 1940 Act, the automatic grant of options under the Directors' Stock Option Plan occurred on April 19, 1996, the date of the approval of the plan by the Company's shareholders (the "Approval Date"). Under the Directors' Stock Option Plan, eligible non-employee directors who were directors of the Company before December 1, 1994, received options to purchase 18,000 shares of Common Stock. Non-employee directors elected after December 1, 1994, but before April 19, 1996, received options to purchase 12,000 shares of Common Stock. Any person who is initially elected a non-employee director in the future will automatically receive, on the date of election, an option to purchase 6,000 shares of Common Stock. The total number of shares for which options may be granted under the Directors' Stock Option Plan is 114,000, of which options to purchase 84,000 shares have been granted. The Directors' Stock Option Plan is administered by a committee of the Board of Directors comprised of directors who are not eligible to receive options under the Directors' Stock Option Plan. Options granted under the Directors Stock Option Plan are exercisable at a price equal to the fair market value of the Common Stock at the date of grant. No option may be exercised more than 10 years after the date of grant. Shares purchased upon exercise of options, must be paid for in cash, by surrender of unrestricted shares of Common Stock or any combination thereof. Options granted under the Directors' Stock Option Plan are not transferable other than by will or by the laws of descent and distribution and during the grantee's life may be exercised only by the grantee. If the grantee dies before expiration of the option, his legal successors may exercise the option within one year of the grantee's death. The Directors' Stock Option Plan may be terminated at any time by the Board of Directors, and will terminate on April 19, 2006. No increase in the number of shares authorized under the plan or material increase in the benefits to participants under the plan may be made without shareholders' approval. CERTAIN TRANSACTIONS Raymond H. Pirtle, Jr., a director and shareholder of the Company, is a managing director and a member of the board of directors of Equitable. Equitable is one of the underwriters of this Offering and in connection therewith is entitled to the compensation set forth under the heading "Underwriting." Prior to the Conversion in February 1995, Messrs. Harrison and Socha, Ms. Perrone, Jennifer K. Waugh and Kristen L. Garrison, employees of the Company, were granted ownership interests in the Company. In connection therewith, each such employee executed a promissory note for the purchase price of such interest that bears interest at 7.25% per annum, payable annually, matures November 1, 2001, and is secured by a pledge of the Common Stock owned by each such employee. As of the date hereof, the outstanding principal balance of such promissory notes is as follows: Mr. Harrison, $440,142.16; Mr. Socha, $513,072.72; Ms. Perrone, $440,142.16; Ms. Waugh, $102,678.51; and Ms. Garrison $43,822.29. 52 55 The Robinson-Humphrey Company, Inc. ("Robinson-Humphrey"), one of the representatives of the underwriters in this offering, has been engaged by the Company as its exclusive placing agent in connection with the obtaining and placement of a senior debt facility for the Company. The engagement letter provides that Robinson-Humphrey will receive a fee equal to 0.5% of the aggregate debt commitment, of which one-half will be paid at closing and one-half will be paid upon the earlier of the first initial draw under the debt facility or June 30, 1997. In the event the Special Purpose Facility is obtained, Robinson-Humphrey will be compensated under the terms of this engagement. In addition, Sirrom agreed to indemnify Robinson-Humphrey with respect to certain matters. Sirrom, Ltd., a family-owned limited partnership, owns 20% of Harris Williams that it purchased in 1994 for $500,000. The general partner of Sirrom, Ltd. is All Scarlet, Inc., a corporation owned equally by John A. Morris, Jr., M.D., Chairman of the Company, and Mr. Morris' brother. If the acquisition of Harris Williams is consummated at the base purchase price of 950,000 Company shares, Sirrom, Ltd. would receive approximately 180,500 shares of the Company's stock as part of the acquisition. See "Business -- Pending Acquisition." DETERMINATION OF NET ASSET VALUE The net asset value per share of Common Stock will be determined 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 as of which the determination is made. In making its valuation determination, the Board of Directors generally adheres to a valuation policy approved by the SBA and adopted by the Board of Directors. The Company's investments in stocks of public companies that it is not permitted to sell in the public market as a result of securities laws restrictions, lock-up agreements and other similar restrictions are valued at 70% of market value at the balance sheet date. All other publicly traded stocks are valued at 90% of market value at the balance sheet date. All other investments are valued at fair value as determined in good faith by the Board of Directors. In making such determination, the Board of Directors will value 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, at which time unrealized depreciation would be recognized. 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 in cases where the valuation policy provides that the Board of Directors may determine fair value on the basis of (i) financings by unaffiliated investors, (ii) a history of positive cash flow from operations for two years using a conservative financial measure such as earnings ratios or cash flow multiples, (iii) the market value of comparable publicly traded companies (discounted for illiquidity) and (iv) other pertinent factors. The Board of Directors, at management's request, also has considered recent operating results of a portfolio company or offers to purchase the portfolio company's securities when valuing a warrant. A substantial portion of the Company's assets will consist of securities carried at fair values determined by its Board of Directors. The Company's independent public accountants will review and express an opinion on the reasonableness of the basis used by the Board of Directors in determining the valuation of investments, the adequacy of the procedures applied by the directors in valuing such securities and the appropriateness of the underlying documentation. However, determination of fair values involves subjective judgment not susceptible to substantiation by auditing procedures. Accordingly, under current standards, the accountants' opinion on the Company's financial statements in its annual report refers to the uncertainty with respect to the possible effect on the financial statements of such valuations. 53 56 REINVESTMENT PLAN Pursuant to the Reinvestment Plan a shareholder whose shares are registered in his own name can have all distributions reinvested in additional shares of Common Stock by the Reinvestment Plan Administrator if the shareholder enrolls in the Reinvestment Plan by delivering an Authorization Form to the Reinvestment Plan Administrator prior to the corresponding dividend declaration date. All distributions to shareholders who do not participate in the Reinvestment Plan will be paid by check mailed directly to the record holder by or under the direction of the Reinvestment Plan Administrator. A shareholder may terminate participation in the Reinvestment Plan by delivering a written letter to the Reinvestment Plan Administrator before the record date of the next dividend or distribution. When the Company declares a dividend or distribution, shareholders who are participants in the Reinvestment Plan will receive the equivalent of the amount of the dividend or distribution in shares of the Company's Common Stock. The Reinvestment Plan Administrator will buy shares in the open market, on the Nasdaq National Market or elsewhere. The Reinvestment Plan Administrator will apply all cash received on account of a dividend or distribution as soon as practicable, but in no event later than 30 days, after the payment date of the dividend or distribution except to the extent necessary to comply with applicable provisions of the federal securities laws. The number of shares to be received by the Reinvestment Plan participants on account of the dividend or distribution will be calculated on the basis of the average price of all shares purchased for that period, including brokerage commissions, and will be credited to their accounts as of the payment date of the dividend or distribution. The Reinvestment Plan Administrator will maintain all shareholder accounts in the Reinvestment Plan and will furnish written confirmations of all transactions in the account, including information needed by shareholders for personal and tax records. Shares in the account of each Reinvestment Plan participant will be held by the Reinvestment Plan Administrator in non-certificated form in the name of the participant, and each shareholder's proxy will include shares purchased pursuant to the Reinvestment Plan. There is no charge to participants for reinvesting dividends and capital gains distributions. The fees of the Reinvestment Plan Administrator for handling the reinvestment of dividends and capital gains distributions will be included in the fee to be paid by the Company to its transfer agent. However, each participant will bear a pro rata share of brokerage commissions incurred with respect to the Reinvestment Plan Administrator's open market purchases in connection with the reinvestment of dividends and distributions. THE REINVESTMENT OF DISTRIBUTIONS WILL NOT RELIEVE PARTICIPANTS OF ANY INCOME TAX THAT MAY BE PAYABLE ON DISTRIBUTIONS. SEE "TAX STATUS." The Company reserves the right to amend or terminate the Reinvestment Plan as applied to any distribution paid subsequent to written notice of the change sent to participants in the Reinvestment Plan. The Plan also may be amended or terminated by the Reinvestment Plan Administrator with the Company's prior written consent, on at least 90 days' written notice to participants in the Reinvestment Plan. All correspondence concerning the Reinvestment Plan should be directed to the Reinvestment Plan Administrator by mail at 230 South Tryon Street, Charlotte, North Carolina 28288-1153 or by phone at 1-800-829-8432. 54 57 TAX STATUS THE FOLLOWING DISCUSSION IS A GENERAL SUMMARY OF THE MATERIAL FEDERAL TAX CONSIDERATIONS APPLICABLE TO THE COMPANY AND TO AN INVESTMENT IN THE COMMON STOCK AND DOES NOT PURPORT TO BE A COMPLETE DESCRIPTION OF THE TAX CONSIDERATIONS APPLICABLE TO SUCH AN INVESTMENT. PROSPECTIVE SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX CONSIDERATIONS WHICH PERTAIN TO THEIR PURCHASE OF THE COMMON STOCK. THIS SUMMARY DOES NOT DISCUSS ALL ASPECTS OF FEDERAL INCOME TAXATION RELEVANT TO HOLDERS OF THE COMPANY'S COMMON STOCK IN LIGHT OF THEIR PERSONAL CIRCUMSTANCES, OR TO CERTAIN TYPES OF HOLDERS SUBJECT TO SPECIAL TREATMENT UNDER FEDERAL INCOME TAX LAWS, INCLUDING FOREIGN TAXPAYERS. THIS SUMMARY DOES NOT DISCUSS ANY ASPECTS OF FOREIGN, STATE, OR LOCAL TAX LAWS. The Company has qualified for and elected to be treated as a RIC under Subchapter M of the Code. If the Company continues to qualify as a RIC and distributes to shareholders each year in a timely manner at least 90% of its "investment company taxable income," as defined in the Code (in general, taxable income excluding long-term capital gains), it will not be subject to federal income tax on the portion of its taxable income and gains it distributes to shareholders. In addition, if the Company distributes in a timely manner (or treats as "deemed distributed" as described below) 98% of its capital gain net income for each one year period ending on October 31 (or December 31, if so elected by the Company), and distributes 98% of its ordinary income for each calendar year (as well as any income not distributed in prior years), it will not be subject to the 4% nondeductible federal excise tax on certain undistributed income of RICs. In order to continue to qualify as a RIC for federal income tax purposes, the Company must, among other things, (a) derive in each taxable year at least 90% of its gross income from dividends, interest, payments with respect to securities, loans, gains from the sale or other disposition of stock or securities and other narrowly defined types of other income derived with respect to its business of investing in such stock or securities; (b) derive in each taxable year less than 30% of its gross income from the sale of stock or securities held for less than three months; (c) diversify its holdings so that at the end of each quarter of the taxable year (i) at least 50% of the value of the Company's assets consists of cash, cash items, government securities, the securities of other RICs and other securities if such other securities of any one issuer do not represent more than 5% of the Company's total assets and 10% of the outstanding voting securities of the issuer and (ii) no more than 25% of the value of the Company's total assets are invested in the securities of one issuer (other than U.S. government securities or the securities of other regulated investment companies), or of two or more issuers that are controlled by the Company and are engaged in the same or similar or related trades or businesses; and (d) distribute at least 90% of its investment company taxable income each taxable year. There is no requirement that all of the corporations in a controlled group that includes a RIC must qualify as RICs. As a general rule in the application of the tests to qualify as a RIC, the parent corporation and each of its subsidiaries are tested separately and cannot be consolidated. There is a significant exception to this rule with regard to the 25% diversification test described in the preceding paragraph. Solely for that test, the investments of a subsidiary are deemed to be owned by the parent in proportion to the ratio of the value of the subsidiary's stock to the value of all investments of the parent, provided that the subsidiary and parent are in the same controlled group (defined with reference to a chain of corporations with a 20% ownership threshold). These rules regarding subsidiaries will be important upon the creation of new subsidiaries for the acquisition of Harris Williams and the corporate reorganization of the Company. See "Prospectus Summary." It is possible that the existence and operation of these subsidiaries will cause the Company or any of its subsidiaries that are intended to qualify as RICs not to so qualify. Certain types of income which are earned by the Company, such as processing fees, do not qualify for purposes of satisfying the 90% of gross income test mentioned above. For taxable year 1995, this test was satisfied by a small margin. A failure to satisfy the 90% test cannot be corrected after the end of the taxable year. In addition, each of the new subsidiaries that is intended to qualify as a RIC, as well as the Company, must satisfy this 90% test on a stand alone basis. Thus, even if the 90% test is satisfied on a consolidated basis, it is possible that one or more of the subsidiaries, or the Company, may fail to satisfy this test and lose its status as a RIC. 55 58 If the Company or any subsidiary were to fail to qualify as a RIC, it would not be entitled to a deduction for dividends paid. In this event, the corporate income tax could be substantial and there would be a substantial reduction in the Company's or subsidiary's net assets. Moreover, future distributions to the Company's shareholders would be reduced because of the loss of any tax deduction for payment of such dividends. For any period during which the Company qualifies as a RIC for tax purposes, dividends to shareholders of the Company's ordinary income (including dividends, interest and original issue discount) and any distributions of net short-term capital gains generally will be taxable as ordinary income to shareholders to the extent of the Company's current or accumulated earnings and profits. Corporate shareholders should consult their own tax advisers. In addition, the Company may elect to relate back a dividend to the prior taxable year for the purposes of (i) determining whether the 90% distribution requirement is satisfied, (ii) computing investment company taxable income and (iii) determining the amount of capital gain dividends paid during the prior taxable year. Any such election will not alter the general rule that a shareholder will be treated as receiving a dividend in the taxable year in which the distribution is made. Any dividend declared by the Company in October, November or December of any calendar year, payable to shareholders of record on a specified date in such a month and actually paid during January of the following year, will be treated as if it were paid by the Company and received by the shareholders on December 31 of the previous year. Shareholders should be careful to consider the tax implications of buying shares just prior to the record date for a distribution. Even if the price of the shares includes the amount of the forthcoming distribution the shareholder will be taxed upon receipt of the distribution and will not be entitled to offset the distribution against tax basis in the shares. To the extent that the Company retains any net long-term capital gains, it may designate them as "deemed distributions" and pay a tax thereon for the benefit of its shareholders. In that event, the shareholders report their share of retained realized capital gains on their individual tax returns as if it had been received, and report a credit for the tax paid thereon by the Company. The amount of the deemed distribution net of such tax is then added to the shareholder's cost basis for his shares. Since the Company expects to pay tax on long-term capital gains at the regular corporate tax rate of 34% and the maximum rate payable by individuals on such gains is 28%, the amount of credit that individual shareholders may report will exceed the amount of tax that they would be required to pay on capital gains. Shareholders who are not subject to federal income tax or tax on capital gains should be able to file a return on the appropriate form or a claim for refund that allows them to recover the tax paid on their behalf. Distributions of the Company's net long-term capital gains (designated by the Company as capital gain dividends) will be taxable to shareholders as long-term capital gains regardless of the shareholder's holding period in his shares. The Budget Reconciliation Act of 1993 added Section 1202 of the Code, which permits the exclusion, for federal income tax purposes, of 50% of any gain (subject to certain limitations) realized upon the sale or exchange of "qualified small business stock" held for more than five years. Generally, qualified small business stock is stock of a small business corporation acquired directly from the issuing corporation which must at the time of issuance and immediately thereafter have assets of not more than $50.0 million and be actively engaged in the conduct of a trade or business not excluded by law. The amount of gain eligible for the 50 percent exclusion limit is limited, on a per investor and per investment basis, to the greater of (i) ten times the taxpayer's cost in the stock or (ii) $10.0 million. It is possible that in some cases investments made by the Company will be in qualified small business stock, that the Company will hold such stock for more than five years and that the Company will ultimately dispose of such stock at a profit. If that were to occur, each shareholder who held his shares at the time the Company purchased the qualified small business stock and at all times thereafter until the disposition of such stock by the Company would be entitled to exclude from his taxable income 50% of such shareholders' share of such gain, whether distributed or deemed distributed. One half of any amount so excluded would be treated as a preference item for alternative minimum tax purposes. A shareholder may recognize taxable gain or loss if the shareholder sells or exchanges his shares. Any gain arising from (or, in the case of distributions in excess of earnings and profits, treated as arising from) the 56 59 sale or exchange of shares generally will be a capital gain or loss except in the case of a dealer or a financial institution. This capital gain or loss will be treated as a long-term capital gain or loss if the shareholder has held his shares for more than one year. However, any capital loss arising from the sale or exchange of shares sold for six months or less will be treated as a long-term capital loss to the extent of the amount of capital gain dividends received with respect to such shares; for this purpose, the special rules of Sections 246(c) (3) and (4) of the Code generally apply in determining the holding period of shares. Under current law applicable to individual taxpayers, capital gains are taxed at the same rate as ordinary income, subject to a 28% cap for long-term capital gains, but the deduction of capital losses is subject to limitations. The Company may be required to withhold U.S. federal income tax at the rate of 31% of all taxable dividends and distributions payable to shareholders who fail to provide the Company with their correct taxpayer identification number or to make required certifications or regarding whom the Company has been notified by the Internal Revenue Service that they are subject to backup withholding. Backup withholding is not an additional tax and any amounts withheld may be credited against a shareholder's U.S. federal income tax liability. Federal withholding taxes at a 30% rate (or a lesser treaty rate) may apply to distributions to shareholders that are nonresident aliens or foreign partnerships, trusts or corporations. Foreign shareholders should consult their tax advisors with respect to the possible U.S. federal, state and local and foreign tax consequences of an investment in the Company. The Company will mail to each shareholder, as promptly as possible after the end of each fiscal year, a notice detailing, on a per share and per distribution basis, the amounts includable in such shareholder's taxable income for such year as net investment income, as net realized capital gains (if applicable), as "deemed" distributions of capital gains and as taxes paid by the Company with respect thereto. In addition, the federal tax status of each year's distributions will be reported to the Internal Revenue Service. Distributions may also be subject to additional state, local and foreign taxes depending on each shareholder's particular situation. Shareholders are advised to consult their own tax advisers with respect to the particular tax consequences to them of an investment in the Company. Following the creation of new subsidiaries in connection with the acquisition of Harris Williams, the corporate reorganization of the Company and the Special Purpose Facility, it is possible that the Company and any of its subsidiaries that intend to elect RIC status may not continue to meet the tests for qualification as a RIC. Harris Williams will not qualify or be taxed as a RIC and, therefore, will pay tax at the subsidiary level. DESCRIPTION OF CAPITAL STOCK The Company is authorized to issue 50,000,000 shares of Common Stock. Of the shares of Common Stock authorized for issuance, 9,130,116 are outstanding, 500,000 are reserved for issuance under the 1994 Employee Plan, 114,000 shares are reserved for issuance under the Directors' Stock Option Plan and 390,000 shares are reserved under the 1996 Employee Plan. COMMON STOCK The holders of Common Stock are entitled to one vote per share on all matters to be voted on by shareholders and are not entitled to cumulative voting in the election of directors, which means that the holders of a majority of the shares voting for the election of director can elect all of the directors then standing for election by the holders of Common Stock. The holders of Common Stock are entitled to share ratably in such dividends, if any, as may be declared from time to time by the Board of Directors in its discretion out of funds legally available therefor. The holders of Common Stock are entitled to share ratably in any assets remaining after satisfaction of all prior claims upon liquidation of the Company. The Company's Charter gives holders of Common Stock no preemptive or other subscription or conversion rights, and there are no redemption provisions with respect to such shares. All outstanding shares of Common Stock are, and the shares offered hereby will be, when issued and paid for, fully paid and nonassessable. 57 60 REGISTRATION RIGHTS In connection with the Company's private placement of securities in November 1994, the holders of 391,805 shares of Common Stock obtained piggy-back registration rights, subject to certain limitations, in the event the Company proposes to register the sale of shares of Common Stock for its own account or for the account of its shareholders. These registration rights expire on November 1, 1996. In addition, each shareholder of the Company receiving Common Stock in the Conversion has piggyback registration rights, subject to certain limitations and conditions, in the event that the Company proposes to register the sale of shares of Common Stock for its own account or the account of another. These registration rights expire February 1, 1997. ANTI-TAKEOVER LEGISLATION In addition to the restrictions on changes of control of an SBIC under the SBIA and the SBA Regulations described under "Regulation," the Company is subject to the Tennessee Business Combination Act (the "Combination Act"). The Combination Act provides that any corporation to which it applies, including the Company, shall not engage in any "business combination" with an "interested shareholder" for a period of five years following the date that such shareholder became an interested shareholder unless prior to such date the board of directors of the corporation approved either the business combination or the transaction which resulted in the shareholder becoming an interested shareholder. The Combination Act defines "business combination," generally, to mean any (i) merger or consolidation; (ii) share exchange; (iii) sale, lease, exchange, pledge, mortgage or other transfer (in one transaction or a serial of transactions) of uses representing 10% or more of (A) the market value of consolidated assets, (B) the market value of the corporation's outstanding shares or (C) the corporation's consolidated net income; (iv) issuance or transfer of shares from the corporation to the interested shareholder, (v) plan of liquidation; (vi) transaction in which the interested shareholder's proportionate share of the outstanding shares of any clues of securities is increased; or (vii) financing arrangements pursuant to which the interested shareholder, directly or indirectly, receives a benefit except proportionately as a shareholder. The Combination Act defines "interested shareholder," generally, to mean any person who is the beneficial owner, directly or indirectly, of 10% or more of any class or series of the outstanding voting stock, or any affiliate or associate of the corporation who has been the beneficial owner, directly or indirectly, of 10% or more of the voting power of any class or series of the corporation's stock at any time within the five year period preceding the date in question. Consummation of a business combination that is subject to the five-year moratorium is permitted after such period if the transaction (i) complies with all applicable charter and bylaw requirements and applicable Tennessee and (ii) is approved by at least two-thirds of the outstanding voting stock not beneficially owned by the interested shareholder, or when the transaction meets certain fair price criteria. The fair price criteria include, among others, the requirement that the per share consideration received in any such business combination by each of the shareholders is equal to the highest of (i) the highest per share price paid by the interested shareholder during the preceding five year period for shares of the same class or series plus interest thereon from such date at a treasury bill rate less the aggregate amount of any cash dividends paid and the market value of any dividends paid other than in cash since such earliest date, up to the amount of such interest, (ii) the highest preferential amount, if any, such class or series is entitled to receive on liquidation, or (iii) the market value of the shares on either the date the business combination is announced or the date when the interested shareholder reaches the 10% threshold, whichever is higher, plus interest thereon less dividends as noted above. The Tennessee Greenmail Act (the "Greenmail Act") prohibits the Company from purchasing or agreeing to purchase any of its securities, at a price in excess of fair market value, from a holder of 3% or more of any class of such securities who has beneficiary owned the securities for less than two years, unless such purchase has been approved by a majority of the outstanding shares of each class of voting stock issued by the Company or the Company makes an offer of at least equal value per share to all holders of shares of such class. 58 61 The effects of this legislation may be to render more difficult a change of control of the Company by delaying, deferring or preventing a tender offer or takeover attempt that a shareholder might consider to be in such shareholder's best interest, including those attempts that might result in the payment of a premium over the market price for the shares held by such shareholder, and may promote the continuity of the Company's management by making it more difficult for shareholders to remove or change the incumbent members of the Board of Directors. REGULATION The Company is presently an SBIC and a BDC and as such is regulated under the SBIA, the SBA Regulations and the 1940 Act. In the event the proposed reorganization of the Company is consummated, the Company will continue to be a BDC regulated under the 1940 Act, and its wholly-owned subsidiary will be an SBIC and an investment company regulated under the SBIA, the SBA Regulations and the 1940 Act. As an SBIC, the Company may only make loans to or investments in "small business concerns," as defined by the SBIA and the SBA Regulations. A "small business concern," as defined in the SBIA and the SBA Regulations is a business concern that is independently owned and operated and which is not dominant in its field of operation. A small business concern must either (i) have a net worth, together with any affiliates, of $18.0 million or less and an average net income after federal income taxes for the preceding two years of $6.0 million or less (average net income to be computed without benefit of any carryover loss) or (ii) satisfy alternative criteria under the 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 since April 8, 1994 must be made to concerns that (i) have a net worth of not more than $6.0 million and not more than $2.0 million in average net income after federal income taxes for the preceding two years, or (ii) satisfy alternative industry-related size criteria. The SBA Regulations also prohibit an SBIC from providing funds to a small business concern for certain purposes, such as relending and investment outside the United States. The amount of annual interest payments the Company may charge its borrowers is limited by the SBA Regulations. Under these regulations, the maximum annual financing costs (including interest) of loans with equity features to small business concerns may not exceed the greater of 14% or 6 percentage points above the "Debenture Rate." As defined in the SBA Regulations, the "Debenture Rate" is the interest rate announced, from time to time, by the SBA on SBA debentures. As of March 31, 1996, the maximum annual financing costs applicable to the Company were 14.0%. The SBA Regulations also allow an SBIC to charge a processing fee of up to 3%, which fee is not included in the financing cost calculation. The SBA restricts the ability of an SBIC to repurchase its capital stock, to retire its debentures and to lend money to its officers, directors and employees or invest in affiliates thereof. The SBA also prohibits, without prior SBA approval, a "change of control" or transfers which would result in any person (or group of persons acting in concert) owning 10% or more of any class of capital stock of an SBIC. A "change of control" is any event which would result in the transfer of the power, direct or indirect, to direct the management and policies of an SBIC, whether through ownership, contractual arrangements or otherwise. The Company is a closed-end, non-diversified investment company that has elected to be treated as a BDC company and, as such, is subject to regulation under the 1940 Act. The 1940 Act contains prohibitions and restrictions relating to transactions between investment companies and their affiliates, principal underwriters and affiliates of those affiliate or underwriters and requires that a majority of the directors be persons other than "interested persons," as defined in the 1940 Act. In addition, the 1940 Act provides that the Company may not change the nature of its business so as to cease to be, or to withdraw its election as, a business development company unless so authorized by the vote of a majority, as defined in the 1940 Act, of its outstanding voting securities. The Company is permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock senior to the shares offered hereby if its asset coverage of any Senior Security is at least 200% immediately after each such issuance. Debt securities issued to the SBA are not subject to this asset coverage 59 62 test. In addition, while Senior Securities are outstanding, provisions must be made to prohibit any distribution to shareholders or the repurchase of such securities or shares unless the Company meets the applicable asset coverage ratios at the time of the distribution or repurchase. The Company may also borrow amounts up to 5.0% of the value of its total assets for temporary or emergency purposes. Under the 1940 Act, a business development company may not acquire any asset other than assets of the type listed in Section 55(a) of the 1940 Act ("Qualifying Assets") unless, at the time the acquisition is made, Qualifying Assets represent at least 70% of the company's total assets. The principal categories of Qualifying Assets relevant to the proposed business of the Company are the following: (1) Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer is an eligible portfolio company. An eligible portfolio company is defined in the 1940 Act as any issuer which: (a) is organized under the laws of, and has its principal place of business in, the United States; (b) is not an investment company other than a small business investment company wholly-owned by the business development company, and (c) does not have any class of securities with respect to which a broker or dealer may extend margin credit. (2) Securities of any eligible portfolio company which is controlled by the business development company. (3) Securities received in exchange for or distributed on or with respect to securities described in (1) or (2) above, or pursuant to the exercise of options, warrants or rights relating to such securities. (4) Cash, cash items, government securities, or high quality debt securities maturing in one year or less from the time of investment. In addition, a business development company must have been organized (and have its principal place of business) in the United States for the purpose of making investments in the types of securities described in (1) or (2) above. However, in order to count the securities as Qualifying Assets for the purpose of the 70% test, the business development company must either control the issuer of the securities or must make available to the issuer of the securities significant managerial assistance; except that, where the company purchases such securities in conjunction with one or more other persons acting together, one of the other persons in the group may make available such managerial assistance. By the making of loans to small concerns, SBICs are deemed to provide significant managerial assistance. SHARES ELIGIBLE FOR FUTURE SALE No prediction be made as to the effect, if any, that market sales of shares or the availability of shares for sale will have on the market price of the Common Stock prevailing from time to time. Nevertheless, sales of substantial amounts of Common Stock of the Company in the public market after the restrictions described below lapse could adversely affect the prevailing market price and the ability of the Company to raise equity capital in the future. Upon completion of this Offering, the Company will have outstanding 11,130,116 shares of Common Stock. Of these shares, the 2,000,000 shares of Common Stock sold in this Offering and the 5,520,000 shares sold in the Company's prior public offerings will be freely tradeable without restriction or limitation under the Securities Act, except to the extent such shares are subject to the agreement with the Representatives of the Underwriters described below, and except for any shares purchased by "affiliates," as that term is deemed under the Securities Act, of the Company. The remaining 3,610,116 shares are "restricted securities" within the meaning of Rule 144 adopted under the Securities Act (the "Restricted Shares"). The Restricted Shares were issued by the Company in the Conversion in reliance upon an exemption from registration under the Securities Act. 60 63 UNDERWRITING The Underwriters named below, for whom The Robinson-Humphrey Company, Inc., J.C. Bradford & Co., and Equitable Securities Corporation are acting as representatives (the "Representatives"), have severally agreed, subject to the terms and conditions set forth in the Underwriting Agreement entered into between the Company and the Underwriters, to purchase from the Company, and the Company has agreed to sell to the Underwriters, the respective number of shares of Common Stock set forth opposite their respective names below.
NUMBER OF UNDERWRITER SHARES - ---------------------------------------------------------------------------------- --------- The Robinson-Humphrey Company, Inc................................................ J.C. Bradford & Co................................................................ Equitable Securities Corporation.................................................. --------- Total................................................................... 2,000,000 ========
The Underwriting Agreement provides that the obligations of the several Underwriters thereunder are subject to approval of certain legal matters by counsel and to various other conditions. The nature of the Underwriters' obligations is such that they are committed to purchase all shares of the Common Stock offered hereby if any are purchased. The Underwriters propose to offer the shares of Common Stock directly to the public at the offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share in sales to certain other dealers. The Company has granted the Underwriters a 30-day option to purchase up to an additional 300,000 shares of Common Stock at the offering price set forth on the cover page of the Prospectus less the underwriting discounts and commissions set forth on the cover page of this Prospectus to cover overallotments, if any. If the Underwriters exercise their over-allotment option, the Underwriters have severally agreed, subject to certain conditions, to purchase approximately the same percentage thereof that the number of shares of Common Stock to be purchased by each of them as shown in the table above bears to the 2,000,000 shares of Common Stock offered hereby. The Underwriters may exercise such option only to cover over-allotments in connection with the sale of the shares of Common Stock offered hereby. The Underwriters do not intend to confirm sales of shares of Common Stock to any account over which they exercise discretionary authority. The Company, its officers and directors have agreed not to offer, sell or otherwise dispose of any shares of Common Stock of the Company for a period of 90 days from the date of this Prospectus without the prior written consent of the Representatives. The Company has agreed to indemnify the Underwriters against, and to contribute to losses arising out of, certain liabilities, including liabilities under the Securities Act. The rules of the Commission generally prohibit the Underwriters from making a market in the Common Stock during the two business day period prior to commencement of sales in this Offering (the "Cooling Off Period"). The Commission has, however, adopted Rule 10b-6A ("Rule 10b-6A") which provides an exemption from such prohibition for certain passive market making transactions. Such passive market making transactions must comply with applicable price and volume limits and must be identified as passive market making transactions. In general, pursuant to Rule 10b-6A, a passive market maker may display its bid for a security at a price not in excess of the highest independent bid for the security. If an independent bids are lowered below the passive market maker's bid, however, such bid must then be lowered when certain purchase limits are exceeded. Further, net purchases by a passive market maker on each day are generally limited to a specified percentage of the passive market maker's average daily trading volume in a security during a specified prior period and must be discontinued when such limit is reached. Pursuant to the exemption provided by Rule 10b-6A, certain of the Underwriters and selling group members may engage in passive 61 64 market making in the Common Stock during the Cooling Off Period. 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. Raymond H. Pirtle, Jr., a director of the Company, is also a managing director and member of the Board of Directors of Equitable. The principal business address of each of the Representatives is as follows: The Robinson-Humphrey Company, Inc., 3333 Peachtree Road, N.E., Atlanta, Georgia 30326; J.C. Bradford & Co., 330 Commerce Street, Nashville, Tennessee 37201; and Equitable Securities Corporation, 800 Nashville City Center, 511 Union Street, Nashville, Tennessee 37219-1743. LEGAL MATTERS Certain legal matters with respect to the validity of the shares of Common Stock offered hereby will be passed upon for the Company by Bass, Berry & Sims PLC, Nashville, Tennessee. Certain legal matters related to the Offering will be passed upon for the Underwriters by Sherrard & Roe, PLC, Nashville, Tennessee. CUSTODIAN, TRANSFER AND DIVIDEND PAYING AGENT AND REGISTRAR The Company's securities are held under a Custodial Services Agreement with First American National Bank (Trust Department). The address of the custodian is First American Center, Nashville, Tennessee 37237. The Company's assets are held under bank custodianship in compliance with the 1940 Act. The Custodial Services Agreement with First American Trust Company provides for an annual fee, payable quarterly, equal to approximately 0.035% of the assets held pursuant to the Custodial Services Agreement. First Union National Bank will act as the Company's transfer and dividend paying agent and registrar. The principal business address of First Union National Bank is 230 South Tryon Street, Charlotte, North Carolina 28288-1153. REPORTS TO SHAREHOLDERS The Company will furnish unaudited quarterly and audited annual reports to the holders of its securities. The annual report will include a list of investments held by the Company. INDEPENDENT PUBLIC ACCOUNTANTS The audited financial statements included in this Prospectus and elsewhere in the Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. The principal business address of Arthur Andersen LLP is 424 Church Street, Nashville, Tennessee 37219. 62 65 INDEX TO FINANCIAL STATEMENTS
PAGE ---- SIRROM CAPITAL CORPORATION Report of Independent Public Accountants.............................................. F-2 Balance Sheets as of December 31, 1994 and 1995 and March 31, 1996 (unaudited)........ F-3 Statements of Operations for the Years Ended December 31, 1993, 1994 and 1995 and for the Three Months Ended March 31, 1995 and 1996 (unaudited).......................... F-4 Statements of Changes in Partners' Capital and Shareholders' Equity for the Years Ended December 31, 1993, 1994 and 1995 and the Three Months Ended March 31, 1996 (unaudited)......................................................................... F-5 Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and 1995 and the Three Months Ended March 31, 1995 and 1996 (unaudited).............................. F-6 Financial Highlights Per Share Data for the Year Ended December 31, 1995 and the Three Months Ended March 31, 1996 (unaudited)............................................................. F-7 Ratios/Supplemental Data for the Years Ended December 31, 1993, 1994 and 1995 and the Three Months Ended March 31, 1996 (unaudited)................................ F-7 Notes to Financial Statements......................................................... F-8 Quarterly Financial Information for the Years 1994 and 1995 (unaudited)............... F-14 Portfolio of Investments As of December 31, 1994............................................................. F-15 As of December 31, 1995............................................................. F-20 As of March 31, 1996 (unaudited).................................................... F-28 HARRIS WILLIAMS & CO. AND SUBSIDIARY Report of Independent Public Accountants.............................................. F-36 Consolidated Balance Sheets as of December 31, 1994 and 1995 and March 31, 1996 (unaudited)......................................................................... F-37 Consolidated Statements of Income for the Years Ended December 31, 1993, 1994 and 1995 and for the Three Months Ended March 31, 1995 and 1996 (unaudited).................. F-38 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1993, 1994 and 1995 and the Three Months Ended March 31, 1996 (unaudited)......................................................................... F-39 Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and 1995 and the Three Months Ended March 31, 1995 and 1996 (unaudited)................. F-40 Notes to Consolidated Financial Statements............................................ F-41
F-1 66 SIRROM CAPITAL CORPORATION REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Sirrom Capital Corporation: We have audited the accompanying balance sheets, including the portfolio of investments of SIRROM CAPITAL CORPORATION (see Note 1) as of December 31, 1994 and 1995, and the related statements of operations, changes in Partners' capital and shareholders' equity and cash flows for each of the years in the three year period ended December 31, 1995 and financial highlights for the periods indicated thereon. 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. 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 Sirrom Capital Corporation at December 31, 1994 and 1995 and the results of its operations, the changes in Partners' capital and shareholders' equity and its cash flows for each of the three years in the period ended December 31, 1995 and financial highlights for the periods indicated thereon, in conformity with generally accepted accounting principles. As explained in Note 2, the financial statements include investments valued at $86,383,594 (95% of total assets) and $170,210,719 (96% of total assets) as of December 31, 1994 and 1995, respectively, whose values have been estimated by the Board of Directors in the absence of readily ascertainable market values. We have reviewed the procedures used by the Board of Directors in arriving at its estimate of value of such investments and have inspected underlying documentation, and, in the circumstances, we believe the procedures are reasonable and the documentation appropriate. However, the 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. ARTHUR ANDERSEN LLP Nashville, Tennessee January 26, 1996 F-2 67 SIRROM CAPITAL CORPORATION BALANCE SHEETS
DECEMBER 31, --------------------------- MARCH 31, 1994 1995 1996 ------------ ------------ ------------ (UNAUDITED) ASSETS Investments, at fair value: Loans.............................................. $ 72,336,480 $144,854,517 $166,936,281 Equity interests................................... 7,576,613 15,912,467 22,548,818 Warrants........................................... 7,548,851 11,513,183 11,198,843 ------------ ------------ ------------ Total investments (cost of $82,342,194, $162,466,881, and $188,430,081, respectively)............................ 87,461,944 172,280,167 200,683,942 Cash and cash equivalents............................ 137,247 195,069 78,283 Interest receivable.................................. 1,302,662 2,119,567 2,534,774 Debenture costs (less accumulated amortization of $175,487, $383,279, and $570,175, respectively).... 1,049,408 2,020,030 2,095,634 Restricted investment................................ 1,000,000 -- -- Furniture and equipment (less accumulated depreciation of $18,565 and $29,273, respectively)...................................... -- 203,860 214,734 Other assets......................................... 18,000 211,165 598,473 ------------ ------------ ------------ Total assets............................... $ 90,969,261 $177,029,858 $206,205,840 =========== =========== =========== LIABILITIES, PARTNERS' CAPITAL AND SHAREHOLDERS' EQUITY Liabilities: Debentures payable to Small Business Administration.................................. $ 51,000,000 $ 73,260,000 $ 83,260,000 Revolving credit facility.......................... 6,389,251 13,200,000 24,916,000 Interest payable................................... 681,008 936,818 1,281,333 Accrued taxes payable.............................. 487,794 1,073,525 2,310,268 Accounts payable and accrued expenses.............. 28,376 213,901 32,016 ------------ ------------ ------------ Total liabilities.......................... 58,586,429 88,684,244 111,799,617 ------------ ------------ ------------ Commitments and contingencies Partners' capital and shareholders' equity (Note 1): Partners' capital.................................. 24,837,736 -- -- Common stock -- No par value, 50,000,000 shares authorized, 9,195,116 issued and outstanding.... -- 73,919,184 73,919,184 Notes receivable from employees.................... (1,980,000) (1,980,000) (1,980,000) Undistributed net realized earnings................ 4,405,354 6,593,144 10,413,193 Unrealized appreciation of investments............. 5,119,742 9,813,286 12,053,846 ------------ ------------ ------------ Total partners' capital and shareholders' equity................................... 32,382,832 88,345,614 94,406,223 ------------ ------------ ------------ Total liabilities, partners' capital and shareholders' equity..................... $ 90,969,261 $177,029,858 $206,205,840 =========== =========== ===========
The accompanying notes are an integral part of these statements. F-3 68 SIRROM CAPITAL CORPORATION STATEMENTS OF OPERATIONS
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------------- ------------------------- 1993 1994 1995 1995 1996 ---------- ---------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) OPERATING INCOME: Interest on Investments........... $3,514,564 $7,336,816 $13,451,742 $ 2,424,130 $ 4,862,463 Loan processing fees.............. 699,000 901,340 1,899,692 540,992 921,250 Other income...................... -- -- 223,456 -- -- ---------- ---------- ----------- ----------- ----------- Total operating income.... 4,213,564 8,238,156 15,574,890 2,965,122 5,783,713 ---------- ---------- ----------- ----------- ----------- OPERATING EXPENSES: Interest expense.................. 1,427,386 3,123,461 4,771,131 998,871 1,789,982 Salaries and benefits............. -- -- 1,081,478 451,643 739,020 Management fees................... 708,999 1,072,833 -- -- -- Other operating expenses.......... 165,811 122,339 1,412,358 221,620 477,064 State income tax on interest...... 230,743 457,035 109,035 51,661 -- Amortization expense.............. 53,725 117,992 207,792 30,009 188,397 ---------- ---------- ----------- ----------- ----------- Total operating expenses................ 2,586,664 4,893,660 7,581,794 1,753,804 3,194,463 ---------- ---------- ----------- ----------- ----------- Net operating income................ 1,626,900 3,344,496 7,993,096 1,211,318 2,589,250 Realized gain (loss) on investments....................... (799,353) (538,025) 1,759,513 49,795 5,756,489 Change in unrealized appreciation (depreciation) of investments..... (49,611) 3,356,316 4,693,544 1,602,920 2,240,560 Provision for income taxes.......... -- -- (1,020,321) -- (2,134,960) ---------- ---------- ----------- ----------- ----------- Net increase in partners' capital and shareholders' equity resulting from operations................... $ 777,936 $6,162,787 $13,425,832 $ 2,864,033 $ 8,451,339 ========= ========= ========== ========= =========
The accompanying notes are an integral part of these statements. F-4 69 SIRROM CAPITAL CORPORATION STATEMENTS OF CHANGES IN PARTNERS' CAPITAL AND SHAREHOLDERS' EQUITY
UNREALIZED APPRECIATION COMMON STOCK UNDISTRIBUTED (DEPRECIATION) PARTNERS' ---------------------- NOTES RECEIVABLE NET REALIZED OF CAPITAL SHARES AMOUNT FROM EMPLOYEES EARNINGS INVESTMENTS TOTAL ---------------- --------- ----------- ---------------- ------------- ------------ ----------- SIRROM CAPITAL, L.P.: BALANCE, DECEMBER 31, 1992...................... $ 12,117,544 -- $ -- $ -- $ 771,336 $ 1,813,037 $14,701,917 Capital contributions..... 3,936,968 -- -- -- -- -- 3,936,968 Capital distributions..... (765,861) -- -- -- -- -- (765,861) Net increase in partners' capital resulting from operations.............. -- -- -- -- 827,547 (49,611) 777,936 ---------------- --------- ----------- ---------------- ------------- ------------ ----------- BALANCE, DECEMBER 31, 1993...................... 15,288,651 -- -- -- 1,598,883 1,763,426 18,650,960 Capital contributions..... 8,162,178 -- -- -- -- -- 8,162,178 Purchase of ownership in partnership............. 1,980,000 -- -- (1,980,000) -- -- -- Capital distributions..... (593,093) -- -- -- -- -- (593,093) Net increase in partners' capital resulting from operations.............. -- -- -- -- 2,806,471 3,356,316 6,162,787 ---------------- --------- ----------- ---------------- ------------- ------------ ----------- BALANCE, DECEMBER 31, 1994...................... 24,837,736 -- -- (1,980,000) 4,405,354 5,119,742 32,382,832 SIRROM CAPITAL CORPORATION: Effect of reorganization (Note 1)................ (24,837,736) 5,050,116 24,837,736 -- -- -- -- Issuance of common stock................... -- 4,145,000 47,712,029 -- -- -- 47,712,029 Net increase in shareholders' equity resulting from operations.............. -- -- -- -- 8,732,288 4,693,544 13,425,832 Payment of dividends...... -- -- -- -- (3,974,079) -- (3,974,079) Distribution of Capital Gains................... -- -- -- -- (1,201,000) -- (1,201,000) Designation of undistributed capital gains, net of tax (Note 13)..................... -- -- 1,369,419 -- (1,369,419) -- -- ---------------- --------- ----------- ---------------- ------------- ------------ ----------- BALANCE, DECEMBER 31, 1995...................... -- 9,195,116 73,919,184 (1,980,000) 6,593,144 9,813,286 88,345,614 Payment of dividends (unaudited)............. -- -- -- -- (2,390,730) (2,390,730) Net increase in shareholders' equity resulting from operations (unaudited)............. -- -- -- 6,210,779 2,240,560 8,451,339 ---------------- --------- ----------- ---------------- ------------- ------------ ----------- BALANCE, MARCH 31, 1996 (unaudited)............... $ -- 9,195,116 $73,919,184 $ (1,980,000) $10,413,193 $ 12,053,846 $94,406,223 ============= ======== ========== ============= =========== ========== ==========
The accompanying notes are an integral part of these statements. F-5 70 SIRROM CAPITAL CORPORATION STATEMENTS OF CASH FLOWS
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ------------------------------------------- --------------------------- 1993 1994 1995 1995 1996 ------------- ------------ ------------ ------------ ------------ (UNAUDITED) (UNAUDITED) OPERATING ACTIVITIES: Net increase in partners' capital and shareholders' equity resulting from operations.................................. $ 777,936 $ 6,162,787 $ 13,425,832 $ 2,864,033 $ 8,451,339 Adjustments to reconcile net increase to net cash provided by operating activities: Net unrealized (appreciation) depreciation of investments............................ 49,611 (3,356,316) (4,693,544) (1,602,920) (2,240,560) Realized loss (gain) on investments......... 799,353 538,025 (1,759,513) (49,795) (5,756,489) Amortization of debenture costs............. 53,725 117,992 207,792 28,509 186,897 Increase in interest receivable............. (608,947) (508,321) (816,905) (169,440) (415,185) Decrease in prepaid management fee.......... 33,000 -- -- -- -- (Increase) decrease in accounts receivable................................ (587,400) -- Increase (decrease) in accounts payable and accrued expenses.......................... (36,654) 28,376 185,525 119,135 (181,886) Amortization of organization costs.......... 6,000 6,000 6,000 1,500 1,500 Depreciation of fixed assets................ -- -- 18,565 1,622 10,709 Increase (decrease) in prepaid interest..... 12,350 (12,350) -- -- -- Increase in accrued taxes payable........... 205,515 282,279 585,731 (441,804) 1,236,743 Increase in interest payable................ 308,501 261,158 255,810 121,831 344,515 ------------- ------------ ------------ ------------ ------------ Net cash provided by operating activities............................ 1,600,390 3,519,630 7,415,293 285,271 1,637,583 ------------- ------------ ------------ ------------ ------------ INVESTING ACTIVITIES: Proceeds from sale of investments............. 2,355,147 9,769,378 27,303,888 4,162,187 12,506,905 Investments originated or acquired............ (33,632,035) (44,162,021) (105,669,054) (28,619,362) (32,714,000) Purchase of fixed assets...................... -- -- (222,425) (45,976) (21,237) (Increase) decrease in restricted investments................................. -- (1,000,000) 1,000,000 -- -- Increase in other assets...................... -- -- (199,165) -- (588,808) ------------- ------------ ------------ ------------ ------------ Net cash used in investing activities... (31,276,888) (35,392,643) (77,786,756) (24,503,151) (20,817,140) ------------- ------------ ------------ ------------ ------------ FINANCING ACTIVITIES: Proceeds from debentures payable to Small Business Administration..................... 24,000,000 17,000,000 22,260,000 -- 10,000,000 Proceeds from revolving credit facilities..... 8,323,500 42,978,109 62,638,595 8,475,596 29,703,000 Repayment of line of credit borrowings........ (8,323,500) (36,588,858) (55,827,846) (10,820,847) (17,987,000) Increase in debenture costs................... (462,900) (580,995) (1,178,414) 110,351 (262,500) Proceeds from capital contributions........... 3,936,968 8,162,178 -- -- -- Distribution of capital....................... (765,861) (593,093) -- -- -- Issuance of common stock...................... -- -- 47,712,029 26,508,058 -- Payment of dividends.......................... -- -- (3,974,079) -- (2,390,730) Distribution of Capital Gains................. -- -- (1,201,000) -- -- ------------- ------------ ------------ ------------ ------------ Net cash provided by financing activities............................ 26,708,207 30,377,341 70,429,285 24,273,158 19,062,770 ------------- ------------ ------------ ------------ ------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................... (2,968,291) (1,495,672) 57,822 55,278 (116,786) CASH AND CASH EQUIVALENTS, beginning of year.... 4,601,210 1,632,919 137,247 137,247 195,069 ------------- ------------ ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, end of year.......... $ 1,632,919 $ 137,247 $ 195,069 $ 192,525 $ 78,283 ============ =========== =========== =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid................................. $ 1,131,235 $ 2,707,488 $ 4,525,701 $ 877,041 $ 1,398,134 ============ =========== =========== =========== =========== Taxes paid.................................... $ 25,228 $ 174,756 $ 493,465 $ 591,322 $ 951,116 ============ =========== =========== =========== ===========
The accompanying notes are an integral part of these statements. F-6 71 SIRROM CAPITAL CORPORATION FINANCIAL HIGHLIGHTS
THREE MONTHS YEAR ENDED ENDED MARCH PER SHARE DATA(1) DECEMBER 31, 1995 31, 1996 - ---------------------------------------------------------------- ----------------- -------------- (UNAUDITED) Net asset value, beginning of year.............................. $ 6.41(2) $ 9.61 ----------- ---------- Net operating income............................................ 0.87 0.28 Net realized and unrealized gains or losses on investments...... 3.19(3) 0.64 ----------- ---------- Total from investment operations................................ 4.06 0.92 ----------- ---------- Less: Dividends on net investment income........................ 0.49 0.26 Distributions on realized capital gains................... 0.37(4) 0.00 ----------- ---------- Total Distributions................................... 0.86 0.26 ----------- ---------- Net asset value, end of period.................................. $ 9.61 $ 10.27 =========== ========== Per share market value, end of period........................... $ 18.875 $ 22.88 =========== ========== Shares outstanding, end of period............................... 9,195,116 9,195,116 =========== ==========
DECEMBER 31, --------------------------- RATIOS/SUPPLEMENTAL DATA 1993 1994 1995 MARCH 31, 1996 - --------------------------------------------------- ------- ------- ------- -------------- (UNAUDITED) Net assets, end of period (in thousands)........... $18,651 $32,383 $88,346 $ 94,406 Ratio of operating expenses to average net assets........................................... 15.5% 19.2% 12.6% 13.9%(5) Ratio of net operating income to average net assets........................................... 9.7% 13.1% 13.2% 11.3%(5)
- --------------- (1) Prior to 1995 the Company operated as a partnership, therefore no per share information is available. (2) Net asset value at beginning of the period is calculated based on partners' capital of $32,382,832 at December 31, 1994 and 5,050,116 shares of common stock issued at conversion of the Partnership to the Company at February 1, 1995. (3) Per share net realized and unrealized gains or losses includes the effect of stock issuances at per share prices in excess of the Company's per share net asset value. (4) The per share amount includes distributions paid and realized capital gains designated as distributed but retained by the Company. See Note 13. (5) Represents annualized ratios based on the three months ended March 31, 1996. The accompanying notes are an integral part of these statements. F-7 72 SIRROM CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION Sirrom Capital Corporation (the "Company"), a Tennessee Corporation, was formed in November 1994 and Sirrom Capital, L.P. (the "Partnership") became a partnership under the laws of the State of Tennessee in November 1991. The accompanying financial statements have been prepared on a basis appropriate for investment companies as enumerated in the American Institute of Certified Public Accountants' Audit and Accounting Guide on Audits of Investment Companies. The Company is a non-diversified, closed-end investment company, which has elected to be treated as a business development company under the Investment Company Act of 1940. The Company is also a small business investment company ("SBIC") licensed under the Small Business Investment Act of 1958 (the "1958 Act"). The Company was licensed by the U.S. Small Business Administration (the "SBA") on May 14, 1992. Under applicable SBA regulations, the Company is restricted to investing only in qualified small business concerns in the manner contemplated by the 1958 Act, as amended. Additionally, beginning in February 1995, the Company elected to be taxed as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. The Company's objectives are to achieve both a high level of current income from interest on loans and fees and long-term growth in the value of its net assets through equity interests primarily in small, privately owned companies. The Company targets small businesses that the Company believes meet certain criteria, including the potential for significant growth, adequate collateral coverage, experienced management teams, sophisticated outside equity investors and profitable operations. Effective February 1, 1995, the partners of the Partnership transferred, in a tax free conversion, their partnership interests to the Company in exchange for the issuance of 5,050,116 shares of common stock of the Company. The common stock was received by each partner in proportion to the partner's percentage interest in the Partnership. As a result of this exchange, the Partnership was dissolved and liquidated, with all of the assets and liabilities of the Partnership (including the SBIC license which was obtained by the Partnership in May 1992) being thereby assigned and transferred to the Company. This transaction was accounted for as a reorganization of entities under common control, in a manner similar to a pooling of interests. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Valuation of Investments Portfolio investments are stated at fair value as determined by the Board of Directors. Under the Company's valuation policy, the fair values of loans to small business concerns are based on the Board of Director's evaluation of the financial condition of the borrowers and/or the underlying collateral. The values assigned are considered to be amounts which could be realized in the normal course of business which anticipates the Company holding the loan to maturity and realizing the face value of the loan. Fair value normally corresponds to cost unless the borrower's condition or external factors lead to a determination of fair value at a higher or a lower amount. Equity interests and warrants for which there is not a public market are valued based on factors such as significant equity financing by sophisticated, unrelated new investors, history of positive cash flow from operations, the market value of comparable publicly traded companies (discounted for illiquidity) and other pertinent factors. The Board of Directors also considers recent offers to purchase a portfolio company's securities when valuing warrants. The Company's investments in stocks of public companies that it is not permitted to sell in the public market as a result of securities laws restrictions, lock-up agreements and other similar restrictions are valued at 70% of market value at the balance sheet date. All other publicly traded stocks are valued at 90% of market value at the balance sheet date. F-8 73 SIRROM CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) At December 31, 1994 and 1995, the investment portfolio included investments totaling $86,383,594 and $170,210,719, respectively, whose values had been estimated by the Board of Directors in the absence of readily ascertainable market values. At March 31, 1996, the investment portfolio included investments whose values have been estimated by the Board of Directors totaling $192,409,978 (unaudited). Because of the inherent uncertainty of the valuations, the estimated fair 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. Realized and Unrealized Gain or Loss on Investments Realized gains or losses are recorded upon disposition of investments and are calculated based upon the difference between the proceeds and the cost basis determined using the specific identification method. All other changes in the valuation of portfolio investments are included as changes in the unrealized appreciation or depreciation of investments in the statement of operations. Description of Loans Terms The loans to small business concerns included in investments bear interest at rates ranging from 6.50% to 14.00%. Typically, interest is payable in monthly or quarterly installments over five years with the entire principal amount typically due at maturity. These loans are generally collateralized by the assets of the borrower, certain of which are subject to prior liens, and/or guarantees. Loan Processing Fees The Company recognizes loan processing fees as income when received. Cash and Cash Equivalents The Company defines cash and cash equivalents as cash on hand, cash in interest bearing and non-interest bearing operating bank accounts and highly liquid investments such as time deposits with an original maturity of three months or less. Debenture Costs Debenture costs are amortized over ten years which represents the term of the ten (11 at March 31, 1996, unaudited) SBA debentures, as discussed in Note 5. Income Taxes The financial statements for 1993 and 1994 do not include a provision for federal income taxes because the partners are taxed based on their respective share of partnership earnings. During these years, the Company was subject to state income taxes on interest. Beginning in February 1995, the Company elected to be taxed as a regulated investment company ("RIC") under Subchapter M of the Internal Revenue Code (the "Code"). If the Company, as a RIC, satisfies certain requirements relating to the source of its income, the diversification of its assets and the distribution of its net income, the Company is generally taxed as a pass through entity which acts as a partial conduit of income to its shareholders. In order to maintain its RIC status, the Company must in general: a) derive at least 90% of its gross income from dividends, interest and gains from the sale or disposition of securities b) derive less than 30% of its gross income from the sale or disposition of securities held for less than three months, c) meet investment diversification requirements defined by the Code and d) distribute to shareholders 90% of its net income (other than long-term capital gains). F-9 74 SIRROM CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The Company currently intends to meet the RIC qualifications in future years. Therefore, the Company has not provided for federal income taxes on the unrealized appreciation of investments. Partners' Capital/Shareholders' Equity During 1993 and 1994, net operating income (loss), realized gains (losses) and unrealized gains (losses) were allocated one percent (1%) and ninety-nine percent (99%) to the General Partner and Limited Partners, respectively. During November 1994, six employees were granted ownership interests in the partnership at a purchase price equal to the approximate fair value of each ownership interest. In connection therewith, each employee executed a promissory note for the purchase price of such interest. The promissory notes bear interest at 7.25% per annum with interest payable annually. All notes mature on November 1, 2001. As discussed in Note 1, the interests in the partnership were subsequently exchanged for the Company's common stock. The stock must be resold to the Company if the employee is no longer employed by the Company for a period of not less than three years from the date of purchase. The notes receivable from employees were shown as a reduction in partners' capital and a reduction to common stock in the amount of $1,980,000 at December 31, 1994 and 1995 and March 31, 1996 (unaudited). 3. 1995 WARRANT VALUATIONS During 1995, the Company's Board of Directors approved warrant and stock valuations totaling approximately $6,000,000 (the investments in Premiere Technologies, Inc. attributed to 84% of this amount) that did not conform to the valuation guidelines of the SBA. SBA guidelines state that increases to investment valuations can be made after a significant equity financing occurs by an unrelated, new investor, but not prior to such a transaction. The valuations in question were based on impending public offerings, purchase offers and private placements. 4. RESTRICTED INVESTMENT The restricted investment of $1,000,000 at December 31, 1994 represented a certificate of deposit that the Company pledged to a bank as collateral on behalf of one of the Company's portfolio investments. The Company sold this investment during 1995 and no longer pledges the collateral. 5. DEBENTURES PAYABLE TO SMALL BUSINESS ADMINISTRATION As of December 31, 1995, the Company had ten debentures totaling $73,260,000 payable to the SBA with semiannual interest only payments based upon rates ranging from 6.12% to 8.20% per annum, with scheduled maturity dates as follows:
DATE AMOUNT ------------------------------------------------------------------------ ----------- 2002.................................................................... $10,000,000 2003.................................................................... 24,000,000 2004.................................................................... 17,000,000 2005.................................................................... 22,260,000 ----------- $73,260,000 ==========
As of March 31, 1996, the Company had 11 debentures payable to the SBA totaling $83,260,000 (unaudited). The debentures are subject to a prepayment penalty if paid prior to five years from maturity. Interest expense related to these debentures for the periods ended December 31, 1993, 1994 and 1995 totaled F-10 75 SIRROM CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) $1,385,896, $2,857,398 and $4,243,851, respectively. Interest expense on the debentures for the three months ended March 31, 1996 totaled $1,317,446 (unaudited). 6. REVOLVING CREDIT FACILITY During 1994 and 1995, the Company maintained a line of credit agreement with a bank, whereby it could borrow up to $15,000,000 at the annual rate of one-half percent per annum in excess of the bank's prime rate. As of December 31, 1994, $6,389,251 was outstanding. During December 1995, the Company entered into a new revolving credit facility with a bank, whereby it may borrow up to $50,000,000 at LIBOR plus 1.75% (7.5% at December 31, 1995). As of December 31, 1995, $13,200,000 were outstanding. This agreement expires on December 27, 1998. As of March 31, 1996, $24,916,000 (unaudited) was outstanding. Interest expense related to lines of credit for the period ended December 31, 1993, 1994 and 1995 was $41,490, $266,063 and $527,280, respectively. Interest expense related to the Revolving Credit Facility for the period ended March 31, 1996 was $472,536 (unaudited). The Company entered into an interest rate swap agreement that effectively converts the variable rate on $30,000,000 of borrowings on the revolving credit facility to a fixed rate of 8.15%. Under the agreement, the Company will exchange the interest rate difference between the fixed and variable rates on incremental amounts of $3,000,000 a month beginning in April 1996. 7. INCOME TAXES For the years ended December 31, 1993, 1994 and 1995, the statements of operations include a provision for state income taxes on interest totaling $230,743 and $457,035 and $109,035, respectively. There is no provision for state income taxes on interest for the three months ended March 31, 1996 (unaudited). For the year ended December 31, 1995 the Company provided for federal income tax at a 35% rate and excise taxes at a 4% rate on taxable net investment income as defined by the Code and realized gains not distributed to shareholders. The provision for income taxes includes $737,380 of tax provided on the retained deemed distribution as discussed in Note 13. For the three months ended March 31, 1996, the Company provided for taxes totaling $2,134,960 (unaudited). 8. MANAGEMENT FEES AND OPERATING EXPENSES During 1993 and 1994, the Company agreed to pay an annual management fee to the General Partner of the partnership equal to the actual expenses incurred by the General Partner of the partnership not to exceed two percent of the gross value of the partnership's assets. The amount of the fee for the periods ended December 31, 1993 and 1994 totaled $708,999 and $1,072,833, respectively. In connection with the reorganization discussed in Note 1, the agreement with the General Partner was terminated effective February 1, 1995 at which time the Company began incurring expense for salaries and benefits and direct operating expenses. 9. EMPLOYEE STOCK OPTION PLAN During 1994, the Company adopted the Amended and Restated 1994 Employee Stock Option Plan which permits the issuance of options to purchase the Company's common stock to selected employees. The Plan reserves 500,000 shares of common stock for grant and provides that the terms of each award be determined by a committee of the Board of Directors. Under the terms of the Plan, the options' exercise price may not be less than the fair market value of a share of common stock on the date of the grant. During 1994, no stock options were granted. During February 1995, the Company granted George M. Miller, II, President and Chief Executive Officer, an option to purchase 150,000 shares at $11 per share. This option becomes exercisable 25% in August 1997, 25% in August 1998 and 50% in August 1999. In addition, in July 1995, the Company granted to David M. Resha, the Company's Chief Operating Officer, an option to purchase 125,000 shares at $13.50 per share, and granted John S. Scott, a Vice President of the Company, an option to purchase 50,000 shares at F-11 76 SIRROM CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) $13.50 per share. The options granted to Resha and Scott each vest as to 20% of the shares each year commencing upon their respective dates of employment by the Company. In October 1995, the Company granted to Kimberly M. Stringfield, the Company's Controller, an option to purchase 25,000 shares at $17.88 per share. Additionally, in December 1995, the Company granted the following options: an option to purchase 56,966 shares to George M. Miller, II; an option to purchase 20,000 shares to Carolyn W. Perrone, the Company's Chief Financial Officer; an option to purchase 20,000 shares to Robert G. Shuler, a Vice President of the Company; and an option to purchase 20,000 shares to Peter T. Socha, a Vice President of the Company. All of the options granted in December 1995 are to purchase shares at $18.50 per share. The options granted to Stringfield, Miller, Perrone, Shuler and Socha each vest as to 20% of the shares each year from the date granted. In February 1996, the Company adopted the 1996 Employee Stock Incentive Plan (the "1996 Plan") that permits the issuance of options to purchase shares of the Company's Common Stock to selected employees. The 1996 Plan reserves 390,000 shares of Common Stock for grant and provides that the terms of each award be determined by a committee of the Board of Directors. Under the terms of the 1996 Plan, the option exercise price may not be less than the fair market value of a share of Common Stock on the date of grant. In February 1996, the Company granted to Mr. Miller and to Kathy Harris, a Vice President of the Company, options to purchase 56,966 and 50,000 shares, respectively, at $18.625 a share (unaudited). The options vest 20% each year from the date granted (unaudited). All of the above options are expressly conditioned upon shareholder approval and the exercise price approximates the fair market value of a share of common stock on the date of grant. 10. DIRECTORS STOCK OPTION PLAN During 1995, the Company adopted a 1995 Stock Option Plan for Non Employee Directors which permits the issuance of options to purchase the Company's common stock to non employee directors. The Plan reserves 114,000 shares of common stock for automatic grant. Upon shareholder approval of the plan, directors elected prior to December 1, 1994 will receive options to purchase 18,000 shares and directors elected after December 1, 1994 will receive options to purchase 12,000 shares. Upon the initial election of a future non employee director, an option to acquire 6,000 shares of common stock will be issued to the director. Under the terms of the Plan, the options' exercise price may not be less than the fair market value of a share of common stock on date of grant. 11. PRIVATE PLACEMENT During November 1994, the Company completed a private placement that resulted in proceeds of approximately $3.6 million. In connection with the conversion of partnership interests to common stock as discussed in Note 1, the Company exchanged 441,921 shares of common stock for the partnership interests of the private placement investors. 12. PUBLIC OFFERINGS Initial Public Offering In February 1995, the Company completed an initial public offering of 2,645,000 shares of common stock at a price of $11.00 per share. The net proceeds of the offering, after underwriting commissions and expenses, were approximately $26,498,029. F-12 77 SIRROM CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Secondary Offering In August 1995, the Company completed a public offering of 2,500,000 shares of common stock at a price of $15.25 per share of which 1,500,000 shares were sold by the Company. The net proceeds to the Company of the offering, after underwriting commissions and expenses, were approximately $21,214,000. 13. DIVIDENDS AND DISTRIBUTIONS During 1995, the Company paid dividends of $5,175,079 of which $3,974,079 and $1,201,000 were derived from net operating income and realized capital gains, respectively. The Company also elected to designate $2,106,799 of the undistributed realized capital gains as a "deemed" distribution to shareholders on record as of the end of the year. Accordingly, $1,369,419, net of taxes of $737,380, of this designated distribution has been retained and reclassified from undistributed net realized earnings to common stock. During the three months ending March 31, 1996, the Company paid dividends of $2,390,730 (unaudited). 14. COMMITMENTS AND CONTINGENCIES The Company leases office space under a five year operating lease that commenced August 1, 1995. Annual rent for 1996 totals $151,000, decreasing to $132,000 for the years 1997 through 1999. 15. RECLASSIFICATIONS Certain reclassifications have been made to the 1993 and 1994 financial statements to conform to the 1995 presentation. F-13 78 SIRROM CAPITAL CORPORATION QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
1994 ------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- Total operating income........................................ $ 1,701 $ 1,935 $ 2,096 $ 2,506 Pre-tax operating income...................................... 744 970 954 1,132 Net increase in partners' capital resulting from operations... 383 3,564 (392) 2,608 Per share: Pretax operating income..................................... $ 0.19 $ 0.24 $ 0.22 $ 0.24 Net increase in partners' capital resulting from operations............................................... 0.10 0.87 (0.09) 0.55 Dividends................................................... -- -- -- --
1995 1996 ------------------------------------- ------- FIRST SECOND THIRD FOURTH FIRST QUARTER QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- ------- Total operating income................................ $ 2,965 $ 3,544 $ 4,081 $ 4,984 5,784 Pretax operating income............................... 1,263 1,900 2,224 2,715 2,589 Net increase in partners' capital and shareholders' equity resulting from operations.................... 2,864 2,492 4,243 3,826 8,451 Per share: Pre-tax operating income............................ $ 0.19 $ 0.24 $ 0.26 $ 0.28 $ 0.27 Net increase in partners' capital and shareholders' equity resulting from operations................. 0.43 0.32 0.49 0.40 0.87 Dividends........................................... 0.14 0.255 0.23 0.26 0.24 Market price of common stock:* High................................................ $ 12 $13 3/4 $18 3/4 $ 20 $23 3/4 Low................................................. 10 3/4 10 3/4 13 1/4 16 3/4 18 5/8
- --------------- * No public market for the stock prior to February 6, 1995. F-14 79 SIRROM CAPITAL CORPORATION PORTFOLIO OF INVESTMENTS AS OF DECEMBER 31, 1994
LOAN COUPON MATURITY INTEREST LOANS DATE RATE COST FAIR VALUE - -------------------------------------------------- -------- ------- ----------- ----------- Affinity Fund, Inc................................ 06/29/98 12.50% $ 1,485,000 $ 1,490,930 Affinity Fund, Inc................................ 12/28/98 12.50 495,000 495,085 Alpha West Partners I, L.P........................ 12/31/97 12.50 771,308 774,558 Ashe Industries, Inc.............................. 12/28/97 12.50 990,000 994,174 Ashe Industries, Inc.............................. 03/25/99 12.50 445,500 446,250 Ashe Industries, Inc.............................. 05/18/99 12.50 544,500 545,236 Associated Response Services, Inc................. 06/20/99 12.50 1,386,000 1,387,631 Auto Rental Systems, Inc.......................... 10/31/97 12.50 742,500 745,875 Auto Rental Systems, Inc.......................... 06/30/98 13.50 200,000 200,000 BankCard Services Corporation..................... 01/21/98 13.00 297,000 298,200 Behavioral Healthcare Corporation................. 06/30/00 10.50 1,270,000 1,270,000 BiTec Southeast, Inc.............................. 11/03/97 12.50 445,500 447,450 BiTec Southeast, Inc.............................. 11/30/98 12.50 1,188,000 1,190,600 BiTec Southeast, Inc.............................. 11/03/97 12.50 445,500 446,400 BiTec Southeast, Inc.............................. 08/01/99 13.50 800,000 800,000 BiTec Southeast, Inc.............................. 08/01/99 13.50 171,321 171,321 C.J. Spirits, Inc................................. 05/01/97 13.50 742,500 446,375 Capital Network System, Inc....................... 11/30/98 12.50 990,000 992,338 Capital Network System, Inc....................... 01/31/99 12.50 990,000 992,004 CCS Technology Group, Inc......................... 05/01/97 13.00 990,000 995,284 CellCall, Inc..................................... 11/04/97 12.75 990,000 994,341 Central Tennessee Broadcasting, Inc............... 06/27/98 13.00 1,485,000 1,488,950 Central Tennessee Broadcasting, Inc............... 04/30/99 13.00 792,000 793,198 Central Tennessee Broadcasting, Inc............... 08/24/99 13.00 1,089,000 1,089,915 Clearidge, Inc.................................... 09/29/99 13.00 2,000,000 2,000,000 Continental Diamond Cutting Co.................... 10/28/99 13.00 1,500,000 1,500,000 Continental Diamond Cutting Co.................... 12/28/99 13.00 200,000 200,000 Corporate Flight Mgmt., Inc....................... 12/04/97 12.50 346,500 347,949 Cougar Power Products, Inc........................ 11/30/99 13.00 495,000 495,083 Dalcon International, Inc......................... 12/31/94 13.00 25,000 25,000 Dalcon International, Inc......................... 12/31/94 13.00 115,000 115,000 DentureCare, Inc.................................. 07/31/99 11.50 990,000 991,002 Earth Friendly Company............................ 07/29/99 13.00 990,000 990,834 Emerald Pointe Waterpark L.P...................... 05/03/99 12.50 594,000 594,800 Freshnut Food, Inc................................ 02/20/99 12.00 495,000 495,913 Freshnut Food, Inc................................ 11/20/99 13.00 199,000 199,034 Front Royal, Inc.................................. 10/01/99 13.00 1,550,000 1,550,000 Front Royal, Inc.................................. 12/27/99 13.00 675,000 675,000 Fycon Technologies, Inc........................... 03/14/98 13.00 1,010,000 815,500 Fycon Technologies, Inc........................... 09/30/94 13.00 17,500 17,500 Gates Communications, L.P......................... 12/31/98 12.50 990,000 992,171 Golf Corporation of America, Inc.................. 09/16/99 11.00 300,000 300,000 Gulfstream International Airlines Inc............. 07/29/99 13.00 1,490,000 1,492,505 Hoveround Corporation............................. 06/11/98 13.00 495,000 496,372 Hoveround Corporation............................. 11/08/99 13.50 250,000 250,000 Innotech, Inc..................................... 03/23/99 13.00 1,980,000 1,983,330
F-15 80 SIRROM CAPITAL CORPORATION PORTFOLIO OF INVESTMENTS -- (CONTINUED) AS OF DECEMBER 31, 1994
LOAN COUPON MATURITY INTEREST LOANS DATE RATE COST FAIR VALUE - -------------------------------------------------- -------- ------- ----------- ----------- Innotech, Inc..................................... 08/30/99 13.00% $ 660,330 $ 660,885 Intermed Healthcare Systems, Inc.................. 06/29/99 12.00 742,500 743,375 International Manufacturing and Trade, Inc........ 04/27/99 13.00 495,000 495,747 International Manufacturing and Trade, Inc........ 12/01/99 13.00 400,000 400,000 Kentucky Kingdom, Inc............................. 04/05/99 8.50 250,000 250,000 Kentucky Kingdom, Inc............................. 01/05/98 12.50 1,980,000 1,987,993 Kentucky Kingdom, Inc. (Convertible Debt)......... 09/23/99 10.50 1,200,000 1,200,000 Kentucky Kingdom, Inc............................. 02/11/95 10.00 720,000 720,000 MBA Marketing Corporation......................... 02/04/99 12.50 1,782,000 1,785,300 Medical Associates of America, Inc................ 11/01/97 12.50 1,485,000 891,000 Nationwide Engine Supply, Inc..................... 01/12/99 12.00 2,475,000 2,480,004 OcuTec Corporation................................ 12/31/97 13.50 990,000 794,197 OcuTec Corporation (Convertible Debt)............. 05/19/98 13.00 250,000 250,000 OcuTec Corporation................................ 01/14/99 13.00 354,816 355,536 OcuTec Corporation................................ 09/30/94 13.00 142,000 142,000 OcuTec Corporation................................ 01/31/95 13.00 306,580 306,580 One Stop Acquisitions, Inc........................ 04/01/99 13.00 1,584,000 1,586,403 One Stop Acquisitions, Inc........................ 05/18/99 13.00 198,000 198,264 Palco Telecom Service, Inc........................ 11/22/99 12.00 1,800,000 1,800,000 Pipeliner Systems, Inc............................ 09/30/98 13.00 980,000 985,328 Potomac Group, Inc................................ 02/11/98 12.00 1,500,000 1,500,000 Premiere Technologies, Inc........................ 05/01/97 12.50 990,000 995,341 Premiere Technologies, Inc........................ 12/23/98 12.00 990,000 992,171 Quality Care Networks............................. 05/19/98 13.00 1,485,000 889,958 Radio Systems Corporation......................... 12/27/99 13.00 905,725 907,296 Retail Marketing Concepts, Inc.................... 08/01/98 12.50 990,000 993,173 SkillSearch Corporation........................... 02/05/98 13.00 496,000 497,741 Stewart Foods, Inc................................ 05/01/97 12.50 22,665 25,000 Summit Publishing Group, Inc...................... 03/17/99 12.00 1,485,000 1,487,500 Suncoast Medical Group, Inc....................... 09/14/99 13.50 485,000 486,000 TCOM Systems, Inc................................. 02/05/98 13.00 673,136 673,761 TermNet MerchantServices, Inc..................... 04/01/99 13.00 1,237,500 1,239,372 Tower Environmental, Inc.......................... 11/30/98 10.00 2,440,000 2,448,993 Treasure Coast Pizza Company...................... 07/29/98 12.00 841,500 844,056 Truckload ManagementServices, Inc................. 03/14/98 13.00 495,000 496,826 Unique Electronics, Inc........................... 11/29/99 10.70 600,000 600,000 WWR Technology, Inc............................... 11/01/97 13.00 524,700 527,072 Zahren Alternative Power Corp..................... 11/27/99 13.00 1,980,000 1,980,666 Zortec Holdings, Inc.............................. 05/01/97 8.00 495,000 397,659 Zortec Holdings, Inc.............................. 12/31/97 8.00 148,500 149,125 Zortec Holdings, Inc.............................. 03/31/98 8.00 148,500 149,050 ----------- ----------- Total loans..................................... $74,181,081 $72,336,480 ========== ==========
The accompanying notes are an integral part of this schedule. F-16 81 SIRROM CAPITAL CORPORATION PORTFOLIO OF INVESTMENTS -- (CONTINUED) AS OF DECEMBER 31, 1994
NUMBER OF SHARES/PERCENTAGE COST OR EQUITY INTERESTS OWNERSHIP CONTRIBUTED VALUE FAIR VALUE - ---------------------------------------------------- ---------------- ----------------- ---------- PUBLICLY TRADED INVESTMENTS National Vision Associates, Ltd. Common Stock -- restricted........................ 208,698 $ 1,771,149 $ 547,832 Republic Automotive Parts, Inc. Common Stock -- restricted........................ 25,500 -- 239,859 Concept Technologies Group, Inc. Common Stock -- restricted........................ 20,808 5,300 49,159 PMT Services, Inc. Common Stock -- restricted........................ 40,000 186,200 241,500 ----------------- ---------- Subtotal.................................. 1,962,649 1,078,350 ----------------- ---------- EQUITY INVESTMENTS IN PRIVATE COMPANIES National Recovery Technologies, Inc. Preferred Stock -- Series A....................... 20,000 -- -- Premiere Technologies, Inc. Common Stock...................................... 8,000 100,400 168,000 American Retirement Corporation Common Stock...................................... 35,076 77,000 128,923 Medical Associates of America, Inc. Preferred Stock -- Series A....................... 67,667 500,000 250,000 Skillsearch Corporation Common Stock...................................... 2,241 250,035 250,035 Potomac Group, Inc. Preferred Stock -- Series A....................... 800,000 1,000,000 1,000,000 Kentucky Kingdom, Inc. Common Stock...................................... 11,288 220,000 1,501,305 Behavioral Healthcare Corporation Preferred Stock -- Series B....................... 25,000 175,000 175,000 Zortec Technologies, Inc. Preferred Stock -- Series B....................... 5,000,000 -- -- Golf Corporation of America, Inc. Common Stock...................................... 100,000 100,000 100,000 International Risk Control, Inc. Preferred Stock -- Series A....................... 200,000 50,000 50,000 DentureCare, Inc. Preferred Stock -- Series D....................... 49,342 300,000 300,000 Tower Environmental, Inc. Common Stock...................................... 9,858 20,000 300,000 Unique Electronics, Inc. Preferred Stock -- Series A....................... 1,000,000 1,000,000 1,000,000 Pipeliner Systems, Inc. Preferred Stock -- Series D....................... 5,000 1,000,000 1,000,000 Front Royal, Inc. Common Stock...................................... 110,000 275,000 275,000 ----------------- ---------- Subtotal.................................. 5,067,435 6,498,263 ----------------- ---------- Total Equity Interests.................... $ 7,030,084 $7,576,613 ============= =========
The accompanying notes are an integral part of this schedule. F-17 82 SIRROM CAPITAL CORPORATION PORTFOLIO OF INVESTMENTS -- (CONTINUED) AS OF DECEMBER 31, 1994
NUMBER OF SHARES/ COST OR OWNERSHIP CONTRIBUTED WARRANTS PERCENTAGE VALUE FAIR VALUE - ------------------------------------------------------ ------------ ----------- ----------- Affinity Fund, Inc.................................... 1,106 $ 20,000 $ 375,000 Alpha West Partners I, LP............................. 4 LP units 7,500 7,500 Ashe Industries, Inc.................................. 178 20,000 20,000 Associated Response Services, Inc..................... 316 14,000 400,000 Auto Rental Systems, Inc.............................. 128,772 7,500 285,000 BankCard Services Corporation......................... 115,000 3,000 3,000 Behavioral Healthcare Corporation..................... 67,730 -- -- BiTec Southeast, Inc.................................. 3,752 21,000 500,000 C.J. Spirits, Inc..................................... 180,000 7,500 -- Capital Network System, Inc........................... 168,874 20,000 20,000 CCS Technology Group.................................. 30,000 10,000 10,000 CellCall, Inc......................................... 26,500 10,000 500,000 Central Tennessee Broadcasting, Inc................... 272,433 34,000 400,000 CLS Corporation....................................... 126,997 -- 350,000 Clearidge, Inc........................................ 207,620 -- -- Continental Diamond Cutting Co........................ 112 -- -- Corporate Flight Management, Inc...................... 66,315 3,500 100,000 Cougar Power Products, Inc............................ 216 5,000 5,000 DentureCare, Inc...................................... 114,646 10,000 400,000 Earth Friendly Company................................ 19 10,000 10,000 Emerald Pointe Waterpark L.P.......................... 6% of LP 6,000 6,000 Freshnut Food, Inc.................................... 148,555 6,000 6,000 Front Royal, Inc...................................... 240,458 -- -- Fycon Technologies, Inc............................... 251,813 15,000 15,000 Gates Communication, L.P.............................. 47% of LP 10,000 10,000 Golf Corporation of America, Inc...................... 300,000 -- -- Gulfstream International Airlines, Inc................ 200 10,000 200,000 Healthfield, Inc...................................... 29,000 125,000 -- Hoveround Corporation................................. 1,512 5,000 200,000 Innotech, Inc......................................... 521,220 26,670 26,670 Intermed Healthcare Systems, Inc...................... 7,823 7,500 7,500 International Manufacturing and Trade, Inc............ 263 5,000 450,000 MBA Marketing Corporation............................. 25 18,000 300,000 Medical Associates of America, Inc.................... 40,000 15,000 -- Nationwide Engine Supply, Inc......................... 882,353 25,000 400,000 OCuTec Corp........................................... 3,881,711 13,584 13,584 One Stop Acquisitions, Inc............................ 742 18,000 500,000 Palco Telcom Service, Inc............................. 157,895 -- -- Pipeliner Systems, Inc................................ 1,920,000 20,000 20,000 Potomac Group, Inc.................................... 479,115 125,000 500,000 Premiere Technologies, Inc............................ 23,863 20,000 501,123 Quality Care Networks................................. 672,000 15,000 15,000 Radio Systems, Inc.................................... 48,650 94,275 94,275 Retail Marketing Concepts, Inc........................ 83 10,000 10,000 SkillSearch Corporation............................... 2,381 254,000 316,699
F-18 83 SIRROM CAPITAL CORPORATION PORTFOLIO OF INVESTMENTS -- (CONTINUED) AS OF DECEMBER 31, 1994
NUMBER OF SHARES/ COST OR OWNERSHIP CONTRIBUTED WARRANTS PERCENTAGE VALUE FAIR VALUE - ------------------------------------------------------ ------------ ----------- ----------- Summit Publishing Group, Inc.......................... 4,508 $ 15,000 $ 350,000 Suncoast Medical Group, Inc........................... 210,780 15,000 15,000 Suprex Corporation.................................... 1,058,179 -- 7,500 TCOM Systems, Inc..................................... 1,147,059 -- -- TermNet Merchant Services, Inc........................ 214 12,500 12,500 Treasure Coast Pizza Company.......................... 40 8,500 8,500 Truckload Management Services, Inc.................... 1,500 5,000 150,000 Unique Electronics, Inc............................... 20% -- -- Zahren Alternative Power Corporation.................. 610 20,000 20,000 Zortec Holdings, Inc.................................. 436,000 8,000 8,000 ----------- ----------- Total Warrants.............................. 1,131,029 7,548,851 ----------- ----------- Total Investments........................... $82,342,194 $87,461,944 ========== ==========
The accompanying notes are an integral part of this schedule. F-19 84 SIRROM CAPITAL CORPORATION PORTFOLIO OF INVESTMENTS AS OF DECEMBER 31, 1995
LOAN COUPON MATURITY INTEREST LOANS DATE RATE COST FAIR VALUE - ------------------------------------------------ -------- -------- ------------ ------------ Affinity Fund, Inc.............................. 06/29/98 12.50% $ 1,485,000 $ 1,494,932 Affinity Fund, Inc.............................. 03/10/00 14.00 1,000,000 1,000,000 Affinity Fund, Inc.............................. 12/28/98 12.50 495,000 495,083 Alpha West Partners I, L.P...................... 12/31/97 12.50 771,308 675,058 American Remedial Tech., Inc.................... 03/26/00 13.50 1,485,000 1,487,500 American Remedial Tech., Inc.................... 07/11/00 14.00 495,000 495,498 Amscot Holdings, Inc............................ 05/26/00 14.00 800,000 800,000 Amscot Holdings, Inc............................ 09/20/00 14.00 200,000 200,000 Ashe Industries, Inc............................ 12/28/97 12.50 990,000 646,178 Ashe Industries, Inc............................ 03/25/99 12.50 445,500 447,150 Ashe Industries, Inc............................ 05/18/99 12.50 544,500 546,340 Ashe Industries, Inc............................ 06/12/96 14.00 750,000 750,000 Ashe Industries, Inc............................ 06/12/96 14.00 285,546 285,546 Associated Response Services, Inc............... 06/20/99 12.50 1,386,000 1,390,427 Associated Response Services, Inc............... 02/15/00 12.50 335,000 335,000 Associated Response Services, Inc............... 01/06/00 12.50 300,000 300,000 Assured Power, Inc.............................. 10/01/00 13.50 700,000 700,000 B & N Company, Inc.............................. 08/08/00 12.50 2,970,000 2,972,500 BankCard Services Corporation................... 01/21/98 13.00 297,000 298,800 BiTec Southeast, Inc............................ 11/03/97 12.50 445,500 448,350 BiTec Southeast, Inc............................ 11/30/98 12.50 1,188,000 1,193,000 BiTec Southeast, Inc............................ 11/03/97 12.50 445,500 447,300 BiTec Southeast, Inc............................ 08/01/99 13.50 521,321 521,321 C.J. Spirits, Inc............................... 05/01/97 13.50 750,171 455,546 Capital Network System, Inc..................... 11/30/98 12.50 990,000 994,342 Capital Network System, Inc..................... 01/18/99 12.50 990,000 994,008 Cardiac Control Systems, Inc.................... 03/31/00 13.50 1,500,000 1,500,000 Carter Kaplan Holdings, L.L.C................... 06/22/00 14.00 594,000 594,300 CCS Technology Group, Inc....................... 05/01/97 13.00 990,000 997,288 CellCall, Inc................................... 11/04/97 12.75 990,000 996,345 CF Data Corp.................................... 03/16/00 13.75 1,732,500 1,735,420 Champion Glove Mfg. Co., Inc.................... 07/27/00 13.50 1,250,000 1,250,000 Clearidge, Inc.................................. 09/29/99 13.00 2,000,000 2,000,000 Clearidge, Inc.................................. 12/28/00 13.50 500,000 500,000 Colonial Investments, Inc....................... 10/16/00 13.75 800,000 800,000 Consumat Systems, Inc........................... 11/01/00 14.00 500,000 500,000 Consumer Credit Associates, Inc................. 12/06/00 13.50 2,000,000 2,000,000 Continental Diamond Cutting Co.................. 10/28/99 13.00 1,500,000 1,500,000 Continental Diamond Cutting Co.................. 12/28/99 13.00 200,000 200,000 Continental Diamond Cutting Co.................. 05/31/96 14.00 300,000 300,000 Corporate Flight Mgmt., Inc..................... 12/04/97 12.50 346,500 348,645 Cougar Power Products, Inc...................... 10/05/96 13.00 495,000 495,083 Cougar Power Products, Inc...................... 10/05/96 13.00 495,000 497,003 Cougar Power Products, Inc...................... 10/05/96 14.00 325,000 325,000 Dalcon International, Inc....................... 01/31/02 13.00 150,000 150,000 Dalcon International, Inc....................... 01/31/00 13.00 200,000 200,000
F-20 85 SIRROM CAPITAL CORPORATION PORTFOLIO OF INVESTMENTS -- (CONTINUED) AS OF DECEMBER 31, 1995
LOAN COUPON MATURITY INTEREST LOANS DATE RATE COST FAIR VALUE - ------------------------------------------------ -------- -------- ------------ ------------ Dalt's, Inc..................................... 04/28/01 13.50% $ 2,000,000 $ 2,000,000 DentureCare, Inc................................ 07/29/99 11.50 990,000 993,006 DentureCare, Inc................................ 11/03/00 14.00 111,150 111,150 DentureCare, Inc................................ 08/31/00 14.00 800,000 800,000 Eastern Food Group LLC.......................... 08/30/00 8.00 500,000 500,000 Eastern Food Group LLC.......................... 12/20/00 8.00 200,000 200,000 Educational Medical, Inc........................ 03/31/00 14.00 2,200,000 2,200,000 Electronic Merchant Services.................... 02/27/00 13.50 1,237,500 1,239,788 Electronic Merchant Services.................... 12/31/95 14.00 242,450 242,450 Emerald Pointe Waterpark L.P.................... 04/29/99 12.50 594,000 596,000 Emerald Pointe Waterpark L.P.................... 03/09/00 13.50 400,000 400,000 Encore Orthopedics, Inc......................... 07/31/00 13.50 2,620,985 2,658,887 Express Shipping Centers, Inc................... 09/25/00 13.25 1,697,619 1,734,426 Factory Card Outlet of America Ltd.............. 11/15/00 12.50 3,670,917 3,682,317 Front Royal, Inc................................ 10/01/99 13.00 1,550,000 1,550,000 Front Royal, Inc................................ 12/27/99 13.00 675,000 675,000 Fycon Technologies, Inc......................... 05/16/00 10.00 350,000 350,000 Fycon Technologies, Inc......................... 08/30/00 14.00 1,000,000 1,000,000 Fycon Technologies, Inc......................... 12/17/00 14.00 100,000 100,000 Gates Communications, L.P....................... 12/31/98 12.50 990,000 994,175 Gitman and Company.............................. 12/31/00 14.00 1,700,000 1,700,000 Global Finance and Leasing, Inc................. 01/03/00 13.00 1,500,000 1,500,000 Gold Medal Products, Inc........................ 11/19/00 13.50 1,250,000 1,250,000 Golf Corporation of America, Inc................ 09/16/99 11.00 300,000 300,000 Golf Corporation of America, Inc................ 12/28/00 14.00 200,000 200,000 Golf Corporation of America, Inc................ 12/29/00 10.00 455,589 455,589 Gulfstream International Airlines Inc........... 07/29/99 13.00 1,490,000 1,494,509 Gulfstream International Airlines Inc........... 09/25/00 14.00 1,000,000 1,000,000 Horizon Medical Products, Inc................... 09/22/00 13.75 1,500,000 1,500,000 Hoveround Corporation........................... 06/11/98 13.00 495,000 497,368 Hoveround Corporation........................... 11/08/99 13.50 250,000 250,000 Hoveround Corporation........................... 03/08/00 14.00 250,000 250,000 Hunt Incorporated............................... 03/31/00 14.00 3,300,000 3,300,000 In-Store Services, Inc.......................... 04/19/00 14.00 1,188,000 1,189,800 Innotech, Inc................................... 03/22/99 13.00 1,980,000 1,987,326 Intermed Healthcare Systems, Inc................ 06/29/99 12.00 742,500 744,875 Intermed Healthcare Systems, Inc................ 02/10/00 14.00 375,000 375,000 International Manufacturing and Trade, Inc...... 04/27/99 13.00 495,000 496,743 International Manufacturing and Trade, Inc...... 12/01/99 13.00 400,000 400,000 International Manufacturing and Trade, Inc...... 06/09/00 14.00 500,000 500,000 International Manufacturing and Trade, Inc...... 07/25/00 14.00 250,000 250,000 International Manufacturing and Trade, Inc...... 11/10/00 14.00 100,000 100,000 Johnston County Cable L.P....................... 08/31/00 14.00 1,990,000 1,990,668 Kentucky Kingdom, Inc........................... 04/04/99 8.50 250,000 250,000 Kentucky Kingdom, Inc........................... 01/05/98 12.50 1,980,000 1,991,989 Kentucky Kingdom, Inc........................... 09/26/99 10.50 1,200,000 1,200,000
F-21 86 SIRROM CAPITAL CORPORATION PORTFOLIO OF INVESTMENTS -- (CONTINUED) AS OF DECEMBER 31, 1995
LOAN COUPON MATURITY INTEREST LOANS DATE RATE COST FAIR VALUE - ------------------------------------------------ -------- -------- ------------ ------------ Kentucky Kingdom, Inc........................... 03/01/00 14.00% $ 835,000 $ 835,000 Kentucky Kingdom, Inc........................... 11/06/00 12.50 1,500,000 1,500,000 Kryptonics, Inc................................. 12/14/00 12.90 2,500,000 2,500,000 Lovett's Buffet, Inc............................ 04/01/00 13.00 2,250,000 2,250,000 MBA Marketing Corporation....................... 02/04/99 12.50 1,782,000 1,788,900 Medical Associates of America, Inc.............. 11/01/97 12.50 1,485,000 392,000 Money Transfer Systems, Inc..................... 07/24/00 14.00 247,500 247,752 Money Transfer Systems, Inc..................... 12/20/00 14.00 148,500 148,525 Moore Diversified Products, Inc................. 06/16/00 13.50 800,000 800,000 Moovies, Inc.................................... 04/18/00 13.50 1,485,000 1,487,250 Multimedia Learning, Inc........................ 05/08/00 14.00 1,500,000 1,500,000 Nationwide Engine Supply, Inc................... 01/12/99 12.00 2,475,000 2,485,008 Nelson Juvenile Products L.L.C.................. 10/31/00 14.00 2,000,000 2,000,000 NRI Service and Supply L.P...................... 02/13/00 14.00 2,475,000 2,479,587 OcuTec Corporation.............................. 06/21/99 10.00 1,000,000 1,000,000 OcuTec Corporation.............................. 06/21/00 10.00 350,000 350,000 OcuTec Corporation.............................. 10/16/00 10.00 100,000 100,000 OcuTec Corporation.............................. 12/04/01 10.00 351,500 351,500 Orchid Manufacturing Group, Inc................. 09/14/00 13.00 2,960,000 2,960,667 Orchid Manufacturing Group, Inc................. 12/28/00 13.50 1,000,000 1,000,000 Palco Telecom Service, Inc...................... 11/22/99 12.00 1,800,000 1,800,000 Patton Management Corporation................... 05/26/00 13.50 1,900,000 1,900,000 Pharmaceutical Research Assoc., Inc............. 08/10/00 13.50 1,980,000 1,981,665 Pipeliner Systems, Inc.......................... 09/30/98 13.00 980,000 989,324 Plymouth, Inc................................... 09/28/00 13.00 1,000,000 1,000,000 Precision Fixtures & Graphics, Inc.............. 07/31/10 6.50 1,100,000 889,976 Precision Fixtures & Graphics, Inc.............. 05/26/00 6.50 250,000 202,267 Precision Fixtures & Graphics, Inc.............. 11/07/00 6.50 200,000 161,814 Precision Fixtures & Graphics, Inc.............. 12/27/00 6.50 100,000 80,907 Precision Fixtures & Graphics, Inc.............. 07/10/00 6.50 135,000 109,224 Precision Fixtures & Graphics, Inc.............. 08/28/00 6.50 110,000 88,998 Precision Fixtures & Graphics, Inc.............. 12/12/00 6.50 200,000 161,814 Precision Panel Products, Inc................... 01/11/00 12.75 1,485,000 1,488,000 Premiere Technologies, Inc...................... 05/01/97 12.50 990,000 997,345 Premiere Technologies, Inc...................... 12/23/98 12.00 990,000 994,175 Pritchard Paint & Glass Co...................... 03/21/00 14.00 250,000 250,000 Quest Group International, Inc.................. 11/15/00 13.25 1,125,000 1,129,166 Radio Systems Corporation....................... 12/27/99 13.00 905,725 926,148 SkillSearch Corporation......................... 02/05/98 13.00 496,000 498,545 Summit Publishing Group, Inc.................... 03/17/99 12.00 1,485,000 1,490,500 Suncoast Medical Group, Inc..................... 09/14/99 13.50 485,000 489,498 Suncoast Medical Group, Inc..................... 06/07/00 14.00 495,000 495,083 TCOM Systems, Inc............................... 02/05/98 13.00 571,969 571,969 Tower Environmental, Inc........................ 11/30/98 10.00 2,440,000 2,201,990
F-22 87 SIRROM CAPITAL CORPORATION PORTFOLIO OF INVESTMENTS -- (CONTINUED) AS OF DECEMBER 31, 1995
LOAN COUPON MATURITY INTEREST LOANS DATE RATE COST FAIR VALUE - ------------------------------------------------ -------- -------- ------------ ------------ Tower Environmental, Inc........................ 05/30/95 12.50% $ 150,000 $ 150,000 Trade Am International, Inc..................... 09/30/00 12.75 4,000,000 4,000,000 Treasure Coast Pizza Co......................... 07/29/98 12.00 841,500 845,760 Truckload Management Services, Inc.............. 03/14/98 13.00 150,000 150,000 Unique Electronics, Inc......................... 11/30/99 10.70 600,000 600,000 Universal Marketing Corporation................. 01/31/00 13.50 500,000 500,000 Valdawn, L.L.C.................................. 04/13/00 13.50 2,399,974 2,400,000 Viking Moorings Acquisition, L.L.C.............. 12/15/00 13.00 1,655,500 1,661,242 WWR Technology, Inc............................. 11/01/97 13.00 524,700 528,128 Zahren Alternative Power Corp................... 01/30/00 13.00 495,000 495,083 Zahren Alternative PowerCorp.................... 11/27/99 13.00 1,980,000 1,985,679 ------------ ------------ Total Loans................................... $147,018,924 $144,854,517 =========== ===========
The accompanying notes are an integral part of this schedule. F-23 88 SIRROM CAPITAL CORPORATION PORTFOLIO OF INVESTMENTS -- (CONTINUED) AS OF DECEMBER 31, 1995
NUMBER OF COST OR SHARES/PERCENTAGE CONTRIBUTED EQUITY INTERESTS OWNERSHIP VALUE FAIR VALUE - ----------------------------------------------------- ----------------- ----------- ----------- PUBLICLY TRADED INVESTMENTS National Vision Associates, Ltd. Common Stock....................................... 208,698 $ 1,771,149 $ 563,485 Concept Technologies Group, Inc. Common Stock -- restricted......................................... 23,408 5,300 30,723 Moovies Inc. Common Stock....................................... 156,110 16,561 1,475,240 ----------- ----------- Subtotal................................... 1,793,010 2,069,448 ----------- ----------- EQUITY INVESTMENTS IN PRIVATE COMPANIES National Recovery Technologies, Inc. Preferred Stock -- Series A........................ 20,000 -- -- Premiere Technologies, Inc. Common Stock....................................... 8,000 100,400 1,280,000 Medical Associates of America, Inc. Preferred Stock -- Series A........................ 66,667 -- -- Viking Moorings Acquisition, L.L.C. Membership interest in L.L.C....................... 6.50% 344,500 344,500 Nelson Juvenile Products, L.L.C. Membership interest in L.L.C....................... 30.00% -- -- Skillsearch Corporation Common Stock....................................... 2,241 250,035 250,035 Potomac Group, Inc. Preferred Stock -- Series A........................ 800,000 1,000,000 1,232,966 Potomac Group, Inc. Common Stock....................................... 240,000 60,000 370,504 Kentucky Kingdom, Inc. Common Stock....................................... 11,671 258,300 1,539,603 Golf Corporation of America, Inc. Common Stock....................................... 100,000 100,000 100,000 International Risk Control, Inc. Preferred Stock -- Series A........................ 200,000 50,000 50,000 DentureCare, Inc. Preferred Stock -- Series D........................ 49,342 300,000 300,000 Unique Electronics, Inc. Preferred Stock -- Series A........................ 1,000,000 1,000,000 1,000,000 Pipeliner Systems, Inc. Preferred Stock -- Series D........................ 5,000 1,000,000 1,000,000 Front Royal, Inc. Common Stock....................................... 110,000 275,000 275,000 Ocutec Acquisition Corporation Preferred Stock -- Series A........................ 1,539,867 1,539,867 1,539,867 Fycon Technologies, Inc. Preferred Stock -- Series A........................ 800,000 800,000 800,000 Carter Kaplan Holdings, L.L.C. Membership interest in LLC......................... 24.00% 6,100 6,100
F-24 89 SIRROM CAPITAL CORPORATION PORTFOLIO OF INVESTMENTS -- (CONTINUED) AS OF DECEMBER 31, 1995
NUMBER OF COST OR SHARES/PERCENTAGE CONTRIBUTED EQUITY INTERESTS OWNERSHIP VALUE FAIR VALUE - ----------------------------------------------------- ----------------- ----------- ----------- Virginia Gas Company Preferred Stock -- Series A........................ 2,000 $ 2,000,000 $ 2,000,000 Johnston County Cable, L.P. Class A Interest in L.P............................ 11.11 100,000 100,000 Eastern Food Group, L.L.C. Class B Preferred Stock............................ 7,500 754,444 754,444 Dalcon International, Inc. Series B Preferred Stock........................... 850,000 850,000 490,000 Zahren Alternative Power Corporation Common Stock....................................... 700 210,000 210,000 Zahren Alternative Power Corporation Preferred Stock.................................... 200 200,000 200,000 ----------- ----------- Subtotal................................... 11,198,646 13,843,020 ----------- ----------- Total Equity Interests..................... $12,991,656 $15,912,467 ========== ==========
The accompanying notes are an integral part of this schedule. F-25 90 SIRROM CAPITAL CORPORATION PORTFOLIO OF INVESTMENTS -- (CONTINUED) AS OF DECEMBER 31, 1995
COST OR NUMBER OF PERCENTAGE CONTRIBUTED WARRANTS SHARES/UNITS OWNERSHIP VALUE FAIR VALUE - ------------------------------------------ ------------- --------- ------------ ------------ Affinity Fund, Inc........................ 1,725 8.62% $ 20,000 $ 600,000 Alpha West Partners I, L.P................ 2 units 20.00 7,500 -- American Remedial Tech., Inc.............. 244,168 17.05 20,000 230,000 Amscot Holdings, Inc...................... 1,121 18.10 -- -- Ashe Industries, Inc...................... 216 16.52 20,000 -- Associated Responses Services, Inc........ 343 24.27 14,000 400,000 Assured Power, Inc........................ 234 11.94 -- -- Auto Rental Systems, Inc.................. 144,869 8.00 -- 285,000 B & N Company, Inc........................ 18 2.14 30,000 30,000 BankCard Services Corporation............. 138,000 24.00 3,000 -- BiTec Southeast, Inc...................... 938 10.00 21,000 100,000 C.J. Spirits, Inc......................... 180,000 10.00 7,500 -- CF Data Corp.............................. 257 20.45 17,500 17,500 Capital Network System, Inc............... 173,409 3.50 20,000 -- Cardiac Control Systems, Inc.............. 100,000 3.51 -- 153,127 CCS Technology Group, Inc................. 30,000 2.68 10,000 10,000 CellCall, Inc............................. 31,836 1.25 10,000 125,000 Champion Glove Mfg. Co., Inc.............. 538,614 5.87 -- -- CLS Corporation........................... 126,997 4.22 -- -- Clearidge, Inc............................ 367,026 7.91 -- -- Colonial Investments, Inc................. 194 18.00 -- -- Consumer Credit Associates, Inc........... 3,669 15.78 -- -- Continental Diamond Cutting Co............ 112 10.00 -- -- Corporate Flight Mgmt., Inc............... 66,315 10.00 3,500 100,000 Cougar Power Products, Inc................ 336 16.29 10,000 -- Dalcon International, Inc................. 250,000 20.00 -- -- Dalt's, Inc............................... 125 25.00 -- -- DentureCare, Inc.......................... 396,724 11.30 10,000 375,000 Electronic Merchant Services.............. 430 12.50 12,500 12,500 Eastern Food Group LLC.................... 17,647 15.00 -- -- Educational Medical, Inc.................. 85,000 8.00 -- -- Emerald Pointe Waterpark L.P.............. 10 units 10.00 6,000 250,000 Encore Orthopedics, Inc................... 291,550 4.92 379,015 379,015 Express Shipping Centers, Inc............. 73,752 5.10 552,402 552,402 Factory Card Outlet of America Ltd........ 23,658 2.50 329,083 329,083 Front Royal, Inc.......................... 240,458 3.58 -- 420,000 Fycon Technologies, Inc................... 58,677 15.00 -- -- Gates Communication, L.P.................. 47% of LP 47.00 10,000 10,000 Gitman Bros............................... 1,518 20.50 -- -- Global Finance and Leasing, Inc........... 5,000 25.00 -- -- Gold Medal Products, Inc.................. 90,000 30.00 -- -- Golf Corporation of America, Inc.......... 390,000 11.48 -- -- Gulfstream International Airlines Inc..... 260 21.00 10,000 -- Horizon Medical Products, Inc............. 9,486 8.25 -- -- Hoveround Corporation..................... 1,963 27.00 5,000 325,000 Hunt Incorporated......................... 309 11.09 -- 200,000
F-26 91 SIRROM CAPITAL CORPORATION PORTFOLIO OF INVESTMENTS -- (CONTINUED) AS OF DECEMBER 31, 1995
COST OR NUMBER OF PERCENTAGE CONTRIBUTED WARRANTS SHARES/UNITS OWNERSHIP VALUE FAIR VALUE - ------------------------------------------ ------------- --------- ------------ ------------ Innotech, Inc............................. 521,220 4.00% $20,000 $300,000 In-Store Service, Inc..................... 429 12.50 12,000 12,000 Intermed Healthcare Systems, Inc.......... 11,884 10.50 7,500 -- International Manufacturing and Trade, Inc..................................... 482 29.94 5,000 -- Johnston County Cable, L.P................ 27.5% of LP 27.50 10,000 10,000 Kryptonics, Inc........................... 1,255 9.00 -- -- Lovett's Buffet, Inc...................... 204,219 5.00 -- -- MBA Marketing Corporation................. 26 4.00 18,000 -- Money Transfer Systems, Inc............... 45 4.31 4,000 4,000 Moore Diversified Products, Inc........... 12 10.68 -- -- Multimedia Learning, Inc.................. 202 6.09 -- -- Nationwide Engine Supply, Inc............. 882,353 15.00 25,000 25,000 NRI Service and Supply, L.P............... 27.5% of LP 27.50 25,000 25,000 OcuTec Corp............................... 222,222 6.13 -- -- One Stop Acquisitions, Inc................ 794 24.40 -- 500,000 Orchid Manufacturing Group, Inc........... 1,719,047 4.50 40,000 540,000 Palco Telecom Services, Inc............... 157,895 5.00 -- -- Patton Management Corporation............. 12 10.00 -- 300,000 Pharmaceutical Research Assoc., Inc....... 150,114 7.82 20,000 20,000 Pipeliner Systems, Inc.................... 2,080,000 20.38 20,000 20,000 Plymouth, Inc............................. 92,647 15.00 -- -- Potomac Group, Inc........................ 239,115 1.85 125,000 368,530 Precision Fixtures & Graphics, Inc........ 132 5.00 -- -- Precision Panel Products, Inc............. 122 8.25 15,000 15,000 Premiere Technologies, Inc................ 23,863 2.08 20,000 3,820,000 Quest Group International, Inc............ 44,444 10.00 125,000 125,000 Radio Systems Corporation................. 129,734 7.27 94,275 330,000 SkillSearch Corporation................... 2,381 7.59 254,000 119,000 Summit Publishing Group, Inc.............. 6,296 24.50 15,000 15,000 Suncoast Medical Group, Inc............... 330,245 13.82 20,000 20,000 Suprex Corporation........................ 1,058,179 3.45 -- 7,500 Tower Environmental, Inc.................. 82 10.07 20,000 -- Trade Am International, Inc............... 335,106 6.00 -- -- Treasure Coast Pizza Company.............. 51 10.00 8,500 8,500 Valdawn, L.L.C............................ 2,658 21.00 26 26 Unique Electronics, Inc................... 55,732 20.00 -- -- Universal Marketing Corporation........... 111 10.00 -- -- Virginia Gas Company...................... 525 6.00 -- -- Zahren Alternative Power Corp............. 1,108 5.00 25,000 25,000 ------------ ------------ Total Warrants.................. 2,456,301 11,513,183 ------------ ------------ Total Investments............... $162,466,881 $172,280,167 =========== ===========
The accompanying notes are an integral part of this schedule. F-27 92 SIRROM CAPITAL CORPORATION PORTFOLIO OF INVESTMENTS AS OF MARCH 31, 1996 (UNAUDITED)
LOAN COUPON MATURITY INTEREST LOANS DATE RATE COST FAIR VALUE - ------------------------------------------- -------- -------- ------------ ------------ Affinity Fund, Inc......................... 06/29/98 12.50% $ 1,485,000 $ 1,495,682 Affinity Fund, Inc......................... 03/10/00 14.00 1,000,000 1,000,000 Affinity Fund, Inc......................... 12/28/98 12.50 495,000 495,332 Amscot Holdings, Inc....................... 05/26/00 14.00 800,000 800,000 Amscot Holdings, Inc....................... 09/20/00 14.00 200,000 200,000 Ashe Industries, Inc....................... 12/28/97 12.50 990,000 146,512 Ashe Industries, Inc....................... 03/25/99 12.50 445,500 197,300 Ashe Industries, Inc....................... 05/18/99 12.50 544,500 196,524 Ashe Industries, Inc....................... 06/12/96 14.00 750,000 100,000 Ashe Industries, Inc....................... 06/12/96 14.00 285,546 285,546 Associated Response Services, Inc.......... 06/20/99 12.50 1,386,000 1,391,126 Associated Response Services, Inc.......... 02/15/00 12.50 335,000 335,000 Associated Response Services, Inc.......... 01/06/00 12.50 300,000 300,000 Assured Power, Inc......................... 10/01/00 13.50 700,000 700,000 B & N Company, Inc......................... 08/08/00 12.50 2,970,000 2,974,000 B & N Company, Inc......................... 03/28/01 13.00 990,000 990,167 BankCard Services Corporation.............. 01/21/98 13.00 297,000 298,950 BiTec Southeast, Inc....................... 10/31/97 12.50 445,500 448,575 BiTec Southeast, Inc....................... 11/30/98 12.50 1,188,000 1,193,600 BiTec Southeast, Inc....................... 10/31/97 12.50 445,500 447,525 BiTec Southeast, Inc....................... 08/01/99 13.50 521,321 521,321 C.J. Spirits, Inc.......................... 05/01/97 13.50 750,171 455,796 Caldwell/VSR Inc........................... 02/28/01 4.00 1,500,000 1,500,000 Capital Network System, Inc................ 11/30/98 12.50 990,000 994,843 Capital Network System, Inc................ 01/18/99 12.50 990,000 994,509 Cardiac Control Systems, Inc............... 03/31/00 13.50 1,500,000 1,500,000 Carter Kaplan Holdings, L.L.C.............. 06/22/00 14.00 594,000 594,600 CCS Technology Group, Inc.................. 05/01/97 13.00 990,000 997,789 Cell Call, Inc............................. 11/04/97 12.75 990,000 996,846 CF Data Corp............................... 03/16/00 13.75 1,732,500 1,736,296 Champion Glove Manufacturing Co., Inc...... 07/27/00 13.50 1,250,000 1,250,000 Clearidge, Inc............................. 09/29/99 13.00 2,000,000 2,000,000 Clearidge, Inc............................. 12/28/00 13.50 500,000 500,000 Colonial Investments, Inc.................. 10/16/00 13.75 800,000 800,000 Consumat Systems, Inc...................... 11/01/00 14.00 500,000 500,000 Consumat Systems, Inc...................... 01/01/01 14.00 500,000 500,000 Consumat Systems, Inc...................... 03/11/01 14.00 500,000 500,000 Consumer Credit Associates, Inc............ 12/06/00 13.50 2,000,000 2,000,000 Consumer Credit Associates, Inc............ 03/28/01 13.50 1,000,000 1,000,000 Continental Diamond Cutting Co............. 10/28/99 13.00 1,500,000 1,500,000 Continental Diamond Cutting Co............. 12/28/99 13.00 200,000 200,000 Continental Diamond Cutting Co............. 05/31/96 14.00 200,000 200,000 Corporate Flight Mgmt, Inc................. 12/04/97 12.50 346,500 348,819 Cougar Power Products, Inc................. 10/05/96 13.00 495,000 372,169 Cougar Power Products, Inc................. 10/05/96 13.00 495,000 370,249 Cougar Power Products, Inc................. 10/05/96 14.00 325,000 325,000 Dalcon International, Inc.................. 01/31/02 13.00 150,000 150,000 Dalcon International, Inc.................. 01/31/00 13.00 200,000 200,000 Dalcon International, Inc.................. 05/15/96 13.00 45,000 45,000
F-28 93 SIRROM CAPITAL CORPORATION PORTFOLIO OF INVESTMENTS -- (CONTINUED) AS OF MARCH 31, 1996 (UNAUDITED)
LOAN COUPON MATURITY INTEREST LOANS DATE RATE COST FAIR VALUE - ------------------------------------------- -------- -------- ------------ ------------ Dalt's, Inc................................ 04/28/01 13.50% $ 2,000,000 $ 2,000,000 DentureCare, Inc........................... 07/29/99 11.50 990,000 993,507 DentureCare, Inc........................... 11/03/00 14.00 111,150 111,150 DentureCare, Inc........................... 08/31/00 14.00 800,000 800,000 DentureCare, Inc........................... 01/11/01 12.50 550,000 550,000 Eastern Food Group L.L.C................... 08/30/00 8.00 500,000 500,000 Eastern Food Group L.L.C................... 12/20/00 8.00 200,000 200,000 Eastern Food Group L.L.C................... 01/21/01 8.00 200,000 200,000 Eastern Food Group L.L.C................... 02/14/01 8.00 265,000 265,000 Educational Medical Inc.................... 03/31/00 14.00 2,200,000 2,200,000 Electronic Merchant Services............... 02/27/00 13.50 1,237,500 1,040,204 Electronic Merchant Services............... 02/29/96 14.00 272,450 272,450 Electronic Merchant Services............... 02/29/96 14.00 134,000 134,000 Emerald Pointe Waterpark, L.P.............. 04/29/99 12.50 594,000 596,300 Emerald Pointe Waterpark, L.P.............. 03/09/00 13.50 400,000 400,000 Encore Orthopedics, Inc.................... 07/31/00 13.50 2,620,985 2,677,838 Encore Orthopedics, Inc.................... 02/28/01 13.00 1,667,680 1,678,758 Express Shipping Centers, Inc.............. 09/22/00 13.25 1,697,598 1,762,047 Factory Card Outlet of America Ltd......... 11/15/00 12.50 3,670,917 3,698,772 Front Royal, Inc........................... 10/01/99 13.00 1,550,000 1,550,000 Front Royal, Inc........................... 12/27/99 13.00 675,000 675,000 Fycon Technologies, Inc.................... 05/16/00 10.00 450,000 450,000 Fycon Technologies, Inc.................... 08/30/00 14.00 1,000,000 800,000 Fycon Technologies, Inc.................... 12/17/00 14.00 100,000 100,000 Gardner Wallcovering, Inc.................. 03/28/01 13.50 1,485,000 1,485,250 Gates Communications, L.P.................. 12/31/98 12.50 990,000 994,676 Gitman and Company......................... 12/31/00 14.00 1,700,000 1,700,000 Global Finance and Leasing, Inc............ 01/03/00 13.00 1,500,000 1,500,000 Gold Medal Products, Inc................... 11/19/00 13.50 1,250,000 1,250,000 Gold Medal Products, Inc................... 02/15/01 13.00 25,000 25,000 Golf Corporation of America, Inc........... 09/16/99 11.00 300,000 300,000 Golf Corporation of America, Inc........... 12/28/00 14.00 200,000 200,000 Golf Corporation of America, Inc........... 12/29/00 10.00 455,589 455,589 Golf Video, Inc............................ 03/27/01 14.00 250,000 250,000 Gulfstream International Airlines, Inc..... 07/29/99 13.00 1,490,000 1,495,010 Gulfstream International Airlines, Inc..... 09/25/00 14.00 1,000,000 1,000,000 Horizon Medical Products, Inc.............. 09/22/00 13.75 1,500,000 1,500,000 Hoveround Corporation...................... 06/11/98 13.00 495,000 497,617 Hoveround Corporation...................... 11/08/99 13.50 250,000 250,000 Hoveround Corporation...................... 03/08/00 14.00 250,000 250,000 HSA International.......................... 01/04/01 14.00 1,485,000 1,485,750 Hunt Incorporated.......................... 03/31/00 14.00 3,300,000 3,300,000 I.S. Acquisition, LLC...................... 04/01/01 14.00 2,000,000 2,000,000 In Store Services, Inc..................... 04/19/00 14.00 1,188,000 1,190,400 Innotech, Inc.............................. 03/22/99 13.00 1,980,000 1,988,325 Intermed Healthcare Systems, Inc........... 06/29/99 12.00 742,500 745,250 Intermed Healthcare Systems, Inc........... 02/10/00 14.00 375,000 375,000 Johnston County Cable L.P.................. 08/31/00 14.00 1,990,000 1,991,169 Kentucky Kingdom, Inc...................... 04/04/99 8.75 250,000 250,000
F-29 94 SIRROM CAPITAL CORPORATION PORTFOLIO OF INVESTMENTS -- (CONTINUED) AS OF MARCH 31, 1996 (UNAUDITED)
LOAN COUPON MATURITY INTEREST LOANS DATE RATE COST FAIR VALUE - ------------------------------------------- -------- -------- ------------ ------------ Kentucky Kingdom, Inc...................... 01/05/98 12.50% $ 1,980,000 $ 1,992,988 Kentucky Kingdom, Inc...................... 09/26/99 10.50 1,200,000 1,200,000 Kentucky Kingdom, Inc...................... 03/01/00 14.00 835,000 835,000 Kentucky Kingdom, Inc...................... 11/06/00 12.50 1,500,000 1,500,000 Kentucky Kingdom, Inc...................... 09/15/96 14.00 2,000,000 2,000,000 Kryptonics, Inc............................ 12/14/00 12.90 2,500,000 2,500,000 Lovett's Buffet, Inc....................... 04/01/00 13.00 2,250,000 2,250,000 MBA Marketing Corporation.................. 02/04/99 12.50 1,782,000 1,789,800 Medical Associates of America, Inc......... 11/01/97 12.50 385,000 392,000 Midbrook Group, Inc........................ 02/28/01 13.50 3,600,000 3,613,334 Money Transfer Systems, Inc................ 07/24/00 14.00 247,500 247,878 Money Transfer Systems, Inc................ 12/20/00 14.00 148,500 148,600 Money Transfer Systems, Inc................ 03/01/01 14.00 148,500 148,525 Moore Diversified Products, Inc............ 06/16/00 13.50 800,000 800,000 Moovies Inc................................ 04/18/00 13.50 1,485,000 1,488,000 Moovies Inc................................ 01/04/01 13.00 1,980,000 1,980,999 Multicom Publishing, Inc................... 03/29/01 13.00 2,200,000 2,213,333 Multimedia Learning, Inc................... 05/08/00 14.00 1,500,000 1,500,000 Nationwide Engine Supply L.P............... 01/12/99 12.00 2,475,000 2,486,259 Nelson Juvenile Products L.L.C............. 10/31/00 14.00 2,000,000 2,000,000 Novavision Inc............................. 06/21/99 10.00 1,000,000 1,000,000 Novavision Inc............................. 06/21/00 10.00 350,000 350,000 Novavision Inc............................. 10/16/00 10.00 100,000 100,000 Novavision Inc............................. 12/04/01 10.00 386,500 386,500 NRI Service and Supply L.P................. 02/13/00 14.00 2,475,000 2,480,838 Orchid Manufacturing Group, Inc............ 09/14/00 13.00 2,960,000 2,962,668 Orchid Manufacturing Group, Inc............ 12/28/00 13.50 1,000,000 1,000,000 PFIC Corporation........................... 02/28/01 13.00 1,000,000 1,000,000 Palco Telecom Service, Inc................. 11/22/99 12.00 1,300,000 1,300,000 Patton Management Corporation.............. 05/26/00 13.50 1,900,000 1,900,000 Pharmaceutical Research Assoc., Inc........ 08/10/00 13.50 1,980,000 1,982,664 Pipeliner Systems, Inc..................... 09/30/98 13.00 980,000 990,323 P. A. Plymouth Inc......................... 09/28/00 13.00 1,000,000 1,000,000 Precision Fixtures & Graphics, Inc......... 07/31/10 7.76 1,100,000 700,000 Precision Fixtures & Graphics, Inc......... 05/26/00 7.76 250,000 250,000 Precision Fixtures & Graphics, Inc......... 11/07/00 7.76 200,000 200,000 Precision Fixtures & Graphics, Inc......... 12/27/00 7.76 100,000 100,000 Precision Fixtures & Graphics, Inc......... 07/10/00 7.76 135,000 135,000 Precision Fixtures & Graphics, Inc......... 08/28/00 7.76 110,000 110,000 Precision Fixtures & Graphics, Inc......... 12/12/00 7.76 200,000 200,000 Precision Fixtures & Graphics, Inc......... 01/28/01 7.76 200,000 200,000 Precision Fixtures & Graphics, Inc......... 02/15/01 7.76 100,000 100,000 Precision Fixtures & Graphics, Inc......... 02/19/01 7.76 100,000 100,000 Precision Fixtures & Graphics, Inc......... 03/07/01 7.76 100,000 100,000 Precision Panel Products, Inc.............. 01/11/00 12.75 1,485,000 1,488,750 Pritchard Paint & Glass Co................. 02/14/01 14.00 1,100,000 1,100,000 Quest Group International, Inc............. 11/15/00 13.25 1,125,000 1,135,415 Radio Systems Corporation.................. 12/27/99 13.00 905,725 930,861 SkillSearch Corporation.................... 02/05/98 13.00 496,000 498,746
F-30 95 SIRROM CAPITAL CORPORATION PORTFOLIO OF INVESTMENTS -- (CONTINUED) AS OF MARCH 31, 1996 (UNAUDITED)
LOAN COUPON MATURITY INTEREST LOANS DATE RATE COST FAIR VALUE - ------------------------------------------- -------- -------- ------------ ------------ Southern Specialty Group................... 06/30/01 14.00% $ 1,732,500 $ 1,733,376 Summit Publishing Group, Inc............... 03/17/99 12.00 1,485,000 1,491,250 Suncoast Medical Group, Inc................ 09/14/99 13.50 485,000 490,248 Suncoast Medical Group, Inc................ 06/07/00 14.00 495,000 495,332 Suncoast Medical Group, Inc................ 02/23/01 14.00 495,000 495,166 TCOM Systems, Inc.......................... 02/05/98 13.00 546,853 546,853 Tower Environmental, Inc................... 11/30/98 10.00 2,440,000 2,451,990 Tower Environmental, Inc................... 05/30/95 12.50 150,000 150,000 Trade Am International, Inc................ 09/30/00 12.75 4,000,000 4,000,000 Treasury Coast Pizza Company............... 07/29/98 12.00 841,500 846,186 Urethane Technologies, Inc................. 03/16/01 13.50 1,636,520 1,642,578 Unique Electronics, Inc.................... 11/30/99 10.70 600,000 600,000 Universal Marketing Corporation............ 01/31/00 13.50 500,000 500,000 Valdawn L.L.C.............................. 04/13/00 13.50 2,399,974 2,400,000 Viking Moorings Acquisition, LLC........... 12/15/00 13.00 1,655,500 1,678,468 Voice FX................................... 01/23/01 13.50 2,324,000 2,332,799 WWR Technology, Inc........................ 11/01/97 13.50 524,700 528,392 Zahren Alternative Power Corp.............. 01/30/00 13.00 495,000 495,328 Zahren Alternative Power Corp.............. 11/27/99 13.00 1,980,000 1,986,696 ------------ ------------ Total Loans.............................. $169,895,679 $166,936,281 =========== ===========
F-31 96 SIRROM CAPITAL CORPORATION PORTFOLIO OF INVESTMENTS -- (CONTINUED) AS OF MARCH 31, 1996 (UNAUDITED)
NUMBER OF SHARES/ COST OR PERCENTAGE CONTRIBUTED EQUITY INTERESTS OWNERSHIP VALUE FAIR VALUE - ------------------------------------------------------ --------------- ----------- ----------- PUBLICLY TRADED INVESTMENTS National Vision Associates, Ltd. Common Stock........................................ 208,698 $ 1,771,149 $ 563,485 Concept Technologies Group, Inc. Common Stock -- restricted.......................... 23,408 5,300 22,792 Moovies Inc. Common Stock........................................ 156,110 16,561 1,529,878 Premiere Technologies, Inc. Common Stock........................................ 378,360 0 6,157,809 ----------- ----------- Subtotal............................................ 1,793,010 8,273,964 ----------- ----------- EQUITY INVESTMENTS IN PRIVATE COMPANIES National Recovery Technologies, Inc. Preferred Stock -- Series A......................... 20,000 0 0 Medical Associates of America Preferred Stock -- Series A................................... 66,667 0 0 Skillsearch Corporation Common Stock.................. 2,241 250,035 250,035 Potomac Group Preferred Stock -- Series A............. 800,000 1,000,000 2,000,000 Potomac Group Common Stock............................ 254,115 63,529 635,288 Kentucky Kingdom Inc. Common Stock.................... 13,260 258,316 1,539,620 Golf Corporation of America Common Stock.............. 100,000 100,000 100,000 International Risk Control, Inc. Preferred Stock -- Series A................................... 200,000 50,000 50,000 DentureCare Inc. Preferred Stock -- Series D.......... 49,342 300,000 300,000 Unique Electronics, Inc. Preferred Stock -- Series A................................................... 1,000,000 1,000,000 1,000,000 Pipeliners Systems, Inc. Preferred Stock -- Series D................................................... 5,000 1,000,000 1,000,000 Front Royal Inc. Common Stock......................... 110,000 275,000 275,000 Ocutec Aquisition Corporation Preferred Stock -- Series A................................... 1,539,867 1,539,867 1,539,867 Fycon Technologies Inc. Preferred Stock -- Series A... 800,000 800,000 500,000 Carter Kaplan Holdings L.L.C. Membership interest in LLC................................................. 24.00% 6,100 6,100 Virginia Gas Company Preferred Stock- Series A........ 2,000 2,000,000 2,000,000 Johnston County Cable L.P. Class A Interest in L.P.... 11.11% of L.P. 100,000 100,000 Eastern Food Group L.L.C. Class B Preferred Units..... 7,500 754,444 654,444 Dalcon International Inc. Series B Preferred Stock.... 850,000 850,000 490,000 Zahren Alternative Power Corporation Common Stock..... 700 210,000 210,000 Zahren Alternative Power Corporation Preferred Stock............................................... 200 200,000 200,000 Viking Moorings Acquisition, L.L.C. Membership interest in LLC..................................... 6.50% 344,500 344,500 Electronic Merchant Services Series B Preferred Stock............................................... 163 0 0 Nelson Juvenile Products L.L.C. Membership interest in LP.................................................. 30.00% 0 0 Pharmaceutical Research Associates Inc. Class F Preferred Stock..................................... 29,195 190,000 190,000 Caldwell/VSR Inc. Preferred Stock..................... 890 890,000 890,000 ----------- ----------- Subtotal............................................ 12,181,791 14,274,854 ----------- ----------- Total Equity Interests.............................. $13,974,801 $22,548,818 ========== ==========
F-32 97 SIRROM CAPITAL CORPORATION PORTFOLIO OF INVESTMENTS -- (CONTINUED) AS OF MARCH 31, 1996 (UNAUDITED)
COST OR NUMBER OF PERCENTAGE CONTRIBUTED WARRANTS SHARES/UNITS OWNERSHIP VALUE FAIR VALUE - ------------------------------------------ ------------ --------- ------------ ------------ Affinity Fund, Inc........................ 1,725 8.62% $ 20,000 $ 600,000 Amscot Holdings, Inc...................... 1,121 17.50 0 0 Ashe Industries, Inc...................... 216 16.52 20,000 0 Associated Response Services, Inc......... 343 34.30 14,000 1,000,000 Assured Power, Inc........................ 374 16.00 0 0 Auto Rental Systems, Inc.................. 144,869 8.00 0 285,000 B & N Company, Inc........................ 33 4.00 40,000 40,000 BankCard Services Corporation............. 149,261 28.00 3,000 0 BiTec Southeast, Inc...................... 938 10.00 21,000 100,000 C.J. Spirits, Inc......................... 180,000 10.00 7,500 0 CF Data Corp.............................. 257 20.50 17,500 17,500 Caldwell/VSR Inc.......................... 159 15.93 0 0 Capital Network System Inc................ 173,409 3.50 20,000 250,000 Cardiac Control Systems, Inc.............. 100,000 2.90 0 150,000 CCS Technology Group, Inc................. 30,000 2.00 10,000 10,000 CellCall, Inc............................. 332 1.23 10,000 125,000 Champion Glove Mfg. Co., Inc.............. 538,614 6.88 0 0 CLS Corporation........................... 126,997 4.90 0 0 Clearidge, Inc............................ 449,039 7.90 0 0 Colonial Investments...................... 194 18.00 0 0 Consumat Systems, Inc..................... 250,000 20.00 0 0 Consumer Credit Associates, Inc........... 3,669 15.50 0 0 Continental Diamond Cutting Co............ 112 12.22 0 0 Corporate Flight Mgmt., Inc............... 66,315 10.00 3,500 100,000 Cougar Power Products, Inc................ 336 22.61 10,000 0 Dalcon International, Inc................. 250,000 20.00 0 0 Dalt's, Inc............................... 125 25.00 0 0 DentureCare, Inc.......................... 546,545 12.65 10,000 375,000 Electronic Merchant Services.............. 430 12.50 12,500 12,500 Eastern Food Group L.L.C.................. 17,647 15.00 0 0 Educational Medical, Inc.................. 85,000 8.00 0 400,000 Emerald Pointe Waterpark L.P.............. 10% of LP 10.00 6,000 250,000 Encore Orthopedics, Inc................... 466,455 7.36 711,335 711,335 Express Shipping Centers, Inc............. 73,752 3.00 552,402 552,402 Factory Card Outlet of America Ltd........ 23,658 2.50 329,083 500,000 Front Royal, Inc.......................... 240,458 3.59 0 420,000 Fycon Technologies, Inc................... 58,677 15.00 0 0 FX Direct................................. 233,112 8.00 176,000 176,000 Gardner Wallcovering, Inc................. 2 2.00 15,000 15,000 Gates Communication, L.P.................. 47% of LP 47.00 10,000 10,000 Global Finance and Leasing, Inc........... 5,000 25.00 0 0 Gold Medal Products, Inc.................. 90,000 30.00 0 0 Golf Corporation of America, Inc.......... 300,000 31.50 0 0 Golf Video, Inc........................... 98 49.50 0 0 Gulfstream International Airlines, Inc.... 271 21.00 10,000 0
F-33 98 SIRROM CAPITAL CORPORATION PORTFOLIO OF INVESTMENTS -- (CONTINUED) AS OF MARCH 31, 1996 (UNAUDITED)
COST OR NUMBER OF PERCENTAGE CONTRIBUTED WARRANTS SHARES/UNITS OWNERSHIP VALUE FAIR VALUE - ------------------------------------------ ------------ --------- ------------ ------------ Horizon Medical Products, Inc............. 9,486 8.25% $ 0 $ 0 Hoveround Corporation..................... 1,963 27.00 5,000 325,000 HSA International......................... 100,999 12.00 15,000 15,000 Hunt Incorporated......................... 309 10.00 0 200,000 I. Schneid Holdings LLC................... 11% of LLC 11.00 0 0 Innotech, Inc............................. 65,995 3.79 20,000 268,100 In Store Services, Inc.................... 429 12.50 12,000 12,000 Intermed Healthcare Systems, Inc.......... 11,884 10.25 7,500 0 Johnston County Cable, L.P................ 27.5% of LP 27.50 10,000 10,000 Kryptonics, Inc........................... 1,255 9.00 0 0 Lovett's Buffet, Inc...................... 204,219 5.00 0 0 MBA Marketing Corporation................. 28 4.29 18,000 0 Midbrook Group Inc........................ 7.40% 7.40 400,000 400,000 Money Transfer Systems, Inc............... 45 4.00 5,500 5,500 Moore Diversified Products, Inc........... 12 11.00 0 0 Moovies, Inc.............................. 20,000 0.20 20,000 20,000 Multicom Publishing, Inc.................. 335,423 6.00 800,000 800,000 Multimedia Learning, Inc.................. 202 6.00 0 0 Nationwide Engine Supply, Inc............. 952,381 16.19 25,000 25,000 NRI Service and Supply L.P................ 27.5% of LP 27.50 25,000 25,000 Novavision, Inc........................... 222,222 10.00 0 0 One Stop Acquisitions, Inc................ 794 24.40 0 500,000 Orchid Manufacturing Group, Inc........... 1,719,047 4.50 40,000 540,000 PFIC Corporation.......................... 5,917 6.00 0 0 Palco Telecom Services, Inc............... 157,895 5.00 0 0 Patton Management Corporation............. 426 10.00 0 300,000 Pharmaceutical Research Associates, Inc..................................... 259,848 6.00 20,000 20,000 Pipeliner Systems, Inc.................... 2,080,000 20.55 20,000 20,000 Plymouth.................................. 92,647 15.00 0 0 Potomac Group, Inc........................ 225,000 1.90 125,000 562,500 Precision Fixtures & Graphics Inc......... 132 5.00 0 0 Precision Panel Products, Inc............. 122 8.25 15,000 15,000 Pritchard Paint & Glass................... 12,500 25.00 0 0 Quest Group International, Inc............ 44,444 10.00 125,000 125,000 Radio Systems Corporation................. 129,734 7.27 94,275 330,000 SkillSearch Corporation................... 2,381 7.20 254,000 119,000 Southern Specialty Brands, Inc............ 10,000 10.00 17,500 17,500 Summit Publishing Group, Inc.............. 6,296 24.50 15,000 15,000 Suncoast Medical Group, Inc............... 580,159 23.00 25,000 25,000 Suprex Corporation........................ 1,058,179 3.45 0 7,500 The Ryland Co............................. 1,518 20.50 0 0 Tower Environmental, Inc.................. 82 10.07 20,000 0 Trade Am International, Inc............... 335,106 6.00 0 0 Treasure Coast Pizza Company.............. 51 10.00 8,500 8,500 Valdawn L.L.C............................. 2,658 21.00 26 26
F-34 99 SIRROM CAPITAL CORPORATION PORTFOLIO OF INVESTMENTS -- (CONTINUED) AS OF MARCH 31, 1996 (UNAUDITED)
COST OR NUMBER OF PERCENTAGE CONTRIBUTED WARRANTS SHARES/UNITS OWNERSHIP VALUE FAIR VALUE - ------------------------------------------ ------------ --------- ------------ ------------ Unique Electronics, Inc................... 80.00% 20.00% $ 0 $ 0 Universal Marketing Corporation........... 111 10.00 0 0 Urethane Technologies, Inc................ 484,640 4.66 363,480 363,480 Virginia Gas Company...................... 525 6.00 0 0 Zahren Alternative Power Corp............. 1,168 9.80 25,000 25,000 Total Warrants.......................... 4,559,601 11,198,843 ------------ ------------ Total Investments......................... $188,430,081 $200,683,942 =========== ===========
F-35 100 HARRIS WILLIAMS & CO. AND SUBSIDIARY REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of Harris Williams & Co. and Subsidiary: We have audited the accompanying consolidated balance sheets of HARRIS WILLIAMS & CO. AND SUBSIDIARY (a Virginia "S" corporation) as of December 31, 1994 and 1995, and the related consolidated statements of income, changes in stockholders' equity and cash flows for the years ended December 31, 1993, 1994 and 1995. 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. 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 Harris Williams & Co. and subsidiary as of December 31, 1994 and 1995, and the results of their operations and cash flows for the years ended December 31, 1993, 1994 and 1995 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Nashville, Tennessee May 10, 1996 F-36 101 HARRIS WILLIAMS & CO. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------- MARCH 31, 1994 1995 1996 -------- -------- ---------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents................................... $738,851 $737,682 $1,782,594 Accounts receivable......................................... 20,352 61,023 137,423 Prepaid expenses............................................ 7,735 11,287 10,347 -------- -------- ---------- Total current assets................................ 766,938 809,992 1,930,364 -------- -------- ---------- FURNITURE AND EQUIPMENT, at cost.............................. 88,742 108,637 109,611 Less accumulated depreciation............................... (16,283) (36,216) (41,697) -------- -------- ---------- Net furniture and equipment......................... 72,459 72,421 67,914 -------- -------- ---------- OTHER ASSETS.................................................. 6,025 2,115 2,115 -------- -------- ---------- $845,422 $884,528 $2,000,393 ======== ======== ========= LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued liabilities.................... $ 10,920 $ 44,418 $ 364,859 -------- -------- ---------- Total current liabilities........................... 10,920 44,418 364,859 -------- -------- ---------- MINORITY INTEREST............................................. 488,801 451,161 610,262 -------- -------- ---------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, no par, 5,000 shares authorized, 100 shares issued and outstanding................................... 60,783 60,783 60,783 Retained earnings........................................... 284,918 328,166 964,489 -------- -------- ---------- 345,701 388,949 1,025,272 -------- -------- ---------- $845,422 $884,528 $2,000,393 ======== ======== =========
The accompanying notes are an integral part of these balance sheets. F-37 102 HARRIS WILLIAMS & CO. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS FOR THE YEARS ENDED DECEMBER 31, ENDED MARCH 31, ---------------------------------- ------------------------- 1993 1994 1995 1995 1996 -------- ---------- ---------- ----------- ----------- (UNAUDITED) (UNAUDITED) REVENUES: Fee income........................... $498,543 $1,553,862 $2,257,496 $ 523,315 $ 1,277,597 Expense reimbursements............... 70,683 128,089 320,345 121,923 113,903 -------- ---------- ---------- ----------- ----------- 569,226 1,681,951 2,577,841 645,238 1,391,500 -------- ---------- ---------- ----------- ----------- EXPENSES: Salaries and benefits................ 206,607 884,396 1,314,723 318,526 498,402 Operating expenses................... 156,383 255,597 530,052 137,262 114,822 -------- ---------- ---------- ----------- ----------- 362,990 1,139,993 1,844,775 455,788 613,224 -------- ---------- ---------- ----------- ----------- Operating income............. 206,236 541,958 733,066 189,450 778,276 -------- ---------- ---------- ----------- ----------- INTEREST INCOME AND OTHER.............. 931 10,909 78,544 4,385 17,142 -------- ---------- ---------- ----------- ----------- INCOME BEFORE MINORITY INTEREST........ 207,167 552,867 811,610 193,835 795,418 MINORITY INTEREST...................... -- (25,468) (162,361) (38,767) (159,095) -------- ---------- ---------- ----------- ----------- NET INCOME............................. $207,167 $ 527,399 $ 649,249 $ 155,068 $ 636,323 ======== ========= ========= ========= =========
The accompanying notes are an integral part of these statements. F-38 103 HARRIS WILLIAMS & CO. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK ---------------- RETAINED SHARES AMOUNT EARNINGS TOTAL ------ ------- --------- ---------- BALANCE, JANUARY 1, 1993............................... 100 $60,783 $ 43,102 $ 103,885 Net income........................................... -- -- 207,167 207,167 Distributions to stockholders........................ -- -- (175,350) (175,350) ------ ------- --------- ---------- BALANCE, DECEMBER 31, 1993............................. 100 60,783 74,919 135,702 Net income........................................... -- -- 527,399 527,399 Distributions to stockholders........................ -- -- (317,400) (317,400) ------ ------- --------- ---------- BALANCE, DECEMBER 31, 1994............................. 100 60,783 284,918 345,701 Net income........................................... -- -- 649,249 649,249 Distributions to stockholders........................ -- -- (606,001) (606,001) ------ ------- --------- ---------- BALANCE, DECEMBER 31, 1995............................. 100 60,783 328,166 388,949 Net income, (unaudited).............................. -- -- 636,323 636,323 ------ ------- --------- ---------- BALANCE, MARCH 31, 1996, (unaudited)................... 100 $60,783 $ 964,489 $1,025,272 ===== ======= ========= =========
The accompanying notes are an integral part of these statements. F-39 104 HARRIS WILLIAMS & CO. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE FOR THE YEARS ENDED MONTHS ENDED DECEMBER 31, MARCH 31, --------------------------------- ------------------------- 1993 1994 1995 1995 1996 --------- --------- --------- ----------- ----------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Consolidated net income....................... $ 207,167 $ 527,399 $ 649,249 $ 155,068 $ 636,323 Adjustments to reconcile consolidated net income to net cash provided (used) by operating activities: Depreciation................................ 3,194 9,671 20,613 4,983 5,440 Minority interest in net income of consolidated subsidiary................................ -- 25,468 162,361 38,767 159,095 Increase in accounts receivable............. -- (4,989) (40,671) (508,124) (76,400) (Increase) decrease in prepaid expenses..... (6,653) (5,785) (3,552) 567 940 (Increase) decrease in other assets......... (501) (5,287) 3,230 -- -- Increase (decrease) in accounts payable and accrued liabilities....................... (760) 9,162 33,499 265,050 320,489 --------- --------- --------- ----------- ----------- Net cash provided (used) by operating activities........................... 202,447 555,639 824,729 (43,689) 1,045,887 --------- --------- --------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of furniture and equipment........... (8,452) (67,255) (19,898) (1,326) (975) --------- --------- --------- ----------- ----------- Net cash used by investing activities........................... (8,452) (67,255) (19,898) (1,326) (975) --------- --------- --------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Contribution from minority interest........... -- 500,000 -- -- -- Distributions to stockholders and minority interest.................................... (175,350) (354,087) (806,000) -- -- --------- --------- --------- ----------- ----------- Net cash provided (used) by financing activities........................... (175,350) 145,913 (806,000) -- -- --------- --------- --------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................... 18,645 634,297 (1,169) (45,015) 1,044,912 CASH AND CASH EQUIVALENTS, at beginning of year.......................................... 85,909 104,554 738,851 738,851 737,682 --------- --------- --------- ----------- ----------- CASH AND CASH EQUIVALENTS, at end of year....... $ 104,554 $ 738,851 $ 737,682 $ 693,836 $1,782,594 ========== ========== ========== =========== ===========
The accompanying notes are an integral part of these statements. F-40 105 HARRIS WILLIAMS & CO. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION Harris Williams & Co. (the "Company") was incorporated in 1991 under the laws of Virginia as a Subchapter S corporation and has a majority-owned subsidiary, Harris Williams & Co., L.P. (a Virginia limited partnership), (the "Partnership"), which was formed in August 1994. The Partnership was formed in August 1994 at which time the Company began conducting all operations through the Partnership and its activity was limited to the investment in the Partnership. (See Note 3). The Company provides merger and acquisition advisory services primarily to small businesses. Engagement contracts provide for a monthly retainer, reimbursement of direct expenses and a success fee upon closing of a transaction. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The Partnership's assets, liabilities and earnings are consolidated with those of the Company and the limited partner's interest in the Partnership is included in the Company's financial statements as minority interest. Income from the Partnership has been allocated to the partners in proportion to their ownership interests. Cash and Cash Equivalents All highly liquid investments with a maturity of three months or less are classified as cash equivalents. Fair Value of Financial Instruments In accordance with the requirements of Statement of Financial Accounting Standards No. 107 "Disclosures About Fair Value of Financial Instruments," the Partnership calculates the fair value of financial instruments using quoted or estimated market prices. At December 31, 1995, there were no material differences in the book values of the Partnership's financial instruments and their related fair values. Furniture and Equipment Furniture and equipment are carried at cost. Depreciation is provided using a straight line method over the estimated useful lives of the related assets which approximate five years. Revenue Recognition Advisory services are typically provided by the Company in accordance with engagement contracts that stipulate a monthly retainer, reimbursement of direct expenses and transaction closing fees. Retainer fees are recognized ratably over the retainer period, expense reimbursements are billed and recognized monthly and success fees are recognized at the time of transaction closing. Income Taxes The Company has elected, under Subchapter S of the Internal Revenue Code, to have its income taxed directly to the stockholders. Under this election, each stockholder is responsible for including their share of the taxable income of the Company in their individual federal income tax returns. Management Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-41 106 HARRIS WILLIAMS & CO. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. INVESTMENT IN PARTNERSHIP In August 1994, the Company contributed approximately $285,000 in cash and assets to the Partnership in exchange for an 80% general partner interest in the Partnership. A third party investor contributed $500,000 in cash to the Partnership in exchange for a 20% limited partnership interest. The Company began conducting all business activity through the Partnership immediately upon receiving its general partnership interest. Income for tax purposes and distributions are made to each partner at amounts defined in the Partnership agreements. 4. CONCENTRATION OF CREDIT The Company's financial instruments subject to credit risk are primarily cash and cash equivalents and accounts receivable. As of December 31, 1995, the Partnership had $300,741 invested in one money market mutual fund and $300,000 in commercial paper. Generally, the Company does not require collateral or other security to support customer receivables. As of December 31, 1995, the Company had no significant concentrations of credit risk with respect to accounts receivable. 5. COMMITMENTS AND CONTINGENCIES Lease Agreement The Company has a lease agreement for office space. Rental commitments payable by the Company for this noncancelable operating lease are as follows: 1996 -- $51,183; 1997 -- $53,854; and 1998 -- $18,185. Total rental expense approximated $11,000, $17,000 and $42,000 for the years ended December 31, 1993, 1994 and 1995, respectively. Engagement Contracts Under the terms of most client contracts, there are both fixed and contingent fees. The fees include a retainer and reimbursement for certain out-of-pocket expenses; however, success fees are usually contingent upon completing a transaction. 6. STOCK OPTION PLAN During 1993, the Company adopted a stock option plan which permits the issuance of options to purchase the Company's common stock to selected employees. The Plan reserves 11 shares of common stock for grant. Under the terms of the Plan, the options' exercise price may not be less than the fair market value of a share of common stock on the date of the grant. During December 1993 and 1994, the Company granted options to two, non-owner employees which become exercisable at various times specified in the option agreements or upon a change in control of the Company. The options allow the holders to purchase shares totaling 5.434 and 3.261 of common stock at exercise prices of $971 per share and $2,676 per share, respectively. As options are exercised, the Company's ownership interest in the Partnership increases, as defined in the Partnership agreement, up to 81%. 7. SUBSEQUENT EVENT In April 1996, the Company entered into a letter of intent with Sirrom Capital Corporation ("Sirrom"), a Nashville based specialty finance company, whereby 100% of its common stock would be exchanged for common stock of Sirrom. Simultaneous with this transaction, Sirrom will also acquire the limited partnership interest in the Partnership not owned by the Company. Consummation of this transaction is subject to a number of conditions including, approval by Sirrom shareholders, receipt of various regulatory approvals and the availability of pooling of interests accounting treatment. F-42 107 - ------------------------------------------------------ - ------------------------------------------------------ NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER AT ANY TIME IMPLIES THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. --------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 3 The Company........................... 9 Additional Information................ 9 Risk Factors.......................... 10 Use of Proceeds....................... 14 Distributions and Price Range of Common Stock........................ 14 Selected Financial Data............... 15 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 16 Business.............................. 21 Investment Objectives and Policies.... 35 Portfolio Companies................... 37 Principal Shareholders................ 46 Management............................ 47 Certain Transactions.................. 52 Determination of Net Asset Value...... 53 Reinvestment Plan..................... 54 Tax Status............................ 55 Description of Capital Stock.......... 57 Regulation............................ 59 Shares Eligible for Future Sale....... 60 Underwriting.......................... 61 Legal Matters......................... 62 Custodian, Transfer and Dividend Paying Agent and Registrar.......... 62 Reports to Shareholders............... 62 Independent Public Accountants........ 62 Index to Financial Statements......... F-1
- ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ 2,000,000 SHARES SIRROM CAPITAL CORPORATION COMMON STOCK ------------------------- PROSPECTUS ------------------------- THE ROBINSON-HUMPHREY COMPANY, INC. J.C. BRADFORD & CO. EQUITABLE SECURITIES CORPORATION June , 1996 - ------------------------------------------------------ - ------------------------------------------------------ 108 PART C INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS. 1. FINANCIAL STATEMENTS. SIRROM CAPITAL CORPORATION Report of Independent Public Accountants Balance Sheets as of December 31, 1994 and 1995 and March 31, 1996 (unaudited) Statements of Operations for the Years Ended December 31, 1993, 1994 and 1995 and for the Three Months Ended March 31, 1995 and 1996 (unaudited) Statements of Changes in Partners' Capital and Shareholders' Equity for the Years Ended December 31, 1993, 1994 and 1995 and the Three Months Ended March 31, 1996 (unaudited) Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and 1995 and the Three Months Ended March 31, 1995 and 1996 (unaudited) Financial Highlights Per Share Data for the Year Ended December 31, 1995 and the Three Months Ended March 31, 1996 (unaudited) Ratios/Supplemental Data for the Years Ended December 31, 1993, 1994 and 1995 and the Three Months Ended March 31, 1996 (unaudited) Notes to Financial Statements Quarterly Financial Information for the Years 1994 and 1995 (unaudited) Portfolio of Investments As of December 31, 1994 As of December 31, 1995 As of March 31, 1996 (unaudited) HARRIS WILLIAMS & CO. AND SUBSIDIARY Report of Independent Public Accountants Consolidated Balance Sheets as of December 31, 1994 and 1995 and March 31, 1996 (unaudited) Consolidated Statements of Income for the Years Ended December 31, 1993, 1994 and 1995 and for the Three Months Ended March 31, 1995 and 1996 (unaudited) Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1993, 1994 and 1995 and the Three Months Ended March 31, 1996 (unaudited) Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and 1995 and the Three Months Ended March 31, 1995 and 1996 (unaudited) Notes Consolidated to Financial Statements 2. EXHIBITS. a. -- Charter of the Company (incorporated by reference to the corresponding exhibit contained in the Registrant's Registration Statement on Form N-2, as amended (File No. 33-86680), filed with the Commission on November 23, 1994)
C-1 109 b.1 -- Bylaws of the Company (incorporated by reference to exhibit b. contained in the Registrant's Registration Statement on Form N-2, as amended (File No. 33-86680), filed with the Commission on November 23, 1994) b.2 -- Amendment No. 1 to Bylaws (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the period ended March 30, 1995 filed with the Commission on May 12, 1995) d.1 -- Specimen form of Common Stock Certificate (incorporated by reference to the corresponding exhibit contained in the Registrant's Registration Statement on Form N-2, as amended (File No. 33-86680), filed with the Commission on November 23, 1994) d.2 -- Instruments defining rights of holders of securities: See Paragraph 6 of the Company's Charter (incorporated by reference to the corresponding exhibit contained in the Registrant's Registration Statement on Form N-2, as amended (File No. 33-86680), filed with the Commission on November 23, 1994) d.3 -- Equity Holders Agreement dated as of November 1, 1994 by and among the Partnership and the other signatories thereto (incorporated by reference to the corresponding exhibit contained in the Registrant's Registration Statement on Form N-2, as amended (File No. 33-86680), filed with the Commission on November 23, 1994) d.4 -- Registration Rights Agreement dated February 1, 1995 (incorporated by reference to the corresponding exhibit contained in the Registrant's Registration Statement on Form N-2, as amended (File No. 33-86680), filed with the Commission on November 23, 1994) e. -- Dividend Reinvestment Plan of the Company (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the period ended March 30, 1995 filed with the Commission on May 12, 1995) *h.1 -- Form of Underwriting Agreement *h.2 -- Form of Agreement Among Underwriters *h.3 -- Form of Selected Dealers Agreement i.1 -- Amended and Restated 1994 Employee Stock Option Plan of the Company (incorporated by reference to the corresponding exhibit contained in the Registrant's Registration Statement on Form N-2, as amended (File No. 33-86680), filed with the Commission on November 23, 1994) i.2 -- Form of Indemnification Agreement (incorporated by reference to the corresponding exhibit contained in the Registrant's Registration Statement on Form N-2, as amended (File No. 33-86680), filed with the Commission on November 23, 1994) i.3 -- 1995 Stock Option Plan for Non-Employee Directors (incorporated by reference to the corresponding exhibit in the Registrant's Registration Statement on Form N-2, as amended (File No. 33-95394), filed with the Commission on August 3, 1995) i.4 -- 1996 Incentive Stock Option (incorporated by reference to Exhibit 10.3 in the Registrant's Financial Report on Form 10-K for the year ended December 31, 1995, filed with the Commission on March 29, 1996) j.1 -- Custodial Services Agreement with First American Trust Company dated March 13, 1992 (incorporated by reference to the corresponding exhibit contained in the Registrant's Registration Statement on Form N-2, as amended (File No. 33-86680), filed with the Commission on November 23, 1994) j.2 -- Custodial Services Agreement Supplement with First American Trust Company dated January 16, 1995 (incorporated by reference to the corresponding exhibit contained in the Registrant's Registration Statement on Form N-2, as amended (File No. 33-86680), filed with the Commission on November 23, 1994) k.1 -- Third Amended and Restated Loan Agreement dated as of December 27, 1995, by and among the Company, as Borrower, the Lenders referred to herein, and First Union National Bank of Tennessee, as Agent (incorporated by reference to Exhibit 10.7 in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995, filed with the Commission on March 29, 1996)
C-2 110 k.2 -- Third Amended and Restated Revolving Credit Note dated December 27, 1995, in the principal amount of $35,000,000, made by the Company in favor of First Union National Bank of Tennessee (incorporated by reference to Exhibit 10.8 in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995, filed with the Commission on March 29, 1996) k.3 -- Revolving Credit Note dated December 27, 1995, in the principal amount of $7,500,000, made by the Company in favor of Amsouth Bank of Tennessee (incorporated by reference to Exhibit 10.9 in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995, filed with the Commission on March 29, 1996) k.4 -- Revolving Credit Note dated December 27, 1995, in the principal amount of $7,500,000, made by the Company in favor of First American National Bank (incorporated by reference to Exhibit 10.10 in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995, filed with the Commission on March 29, 1996) k.5 -- Swingline Note dated December 27, 1995, in the principal amount of $5,000,000, made by the Company in favor of First Union National Bank of Tennessee (incorporated by reference to Exhibit 10.11 in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995, filed with the Commission on March 29, 1996) k.6 -- Second Amended and Restated Security Agreement dated December 27, 1995, by and between the Company and First Union National Bank of Tennessee (incorporated by reference to Exhibit 10.12 in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995, filed with the Commission on March 29, 1996) k.7 -- Pledge Agreement dated December 27, 1995, made by the Company in favor of First Union National Bank of Tennessee (incorporated by reference to Exhibit 10.13 in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995, filed with the Commission on March 29, 1996) k.8 -- ISDA Master Agreement dated as of September 13, 1995 by and between the Company and First Union National Bank (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ending September 30, 1995 filed with the Commission on November 15, 1995) *k.9 -- Acquisition Agreement by and among the Company, Sirrom Capital Acquisition Corporation, Sirrom, Ltd., Harris Williams & Co., L.P. and Harris Williams & Co. dated as of May 16, 1996 *l. -- Opinion of Bass, Berry & Sims PLC n.1 -- Consent of Arthur Andersen LLP *n.2 -- Consent of Bass, Berry & Sims PLC (included in Exhibit 1)
- --------------- * previously filed (c) Not applicable ITEM 25. MARKETING ARRANGEMENTS The information contained under the heading "Underwriting" on pages 61 through 62 of the Prospectus is incorporated herein by this reference. In connection with this Offering, the Underwriters may over-allot or effect transactions which stabilize or maintain the market price of the Common Stock at a level above that which might otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued at any time. C-3 111 ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION SEC registration fee.............................................................. $ 20,125 NASD fee.......................................................................... $ 6,337 Nasdaq additional listing fee..................................................... $ 17,500 Blue Sky fees and expenses........................................................ $ 12,500* Accounting fees and expenses...................................................... $150,000* Legal fees and expenses........................................................... $175,000* Printing and engraving............................................................ $145,000* Registrar and transfer agent's fees............................................... $ 2,500 Miscellaneous fees and expenses................................................... $ 46,038* -------- Total................................................................... $575,000* ========
- --------------- *Estimated for filing purposes. All of the expenses set forth above shall be borne by the Company. ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL. Not applicable. ITEM 28. NUMBER OF HOLDERS OF SECURITIES. The following table sets forth the number of record holders of the Company's Common Stock as of the date hereof.
NUMBER OF TITLE OF CLASS RECORD HOLDERS - ------------------------------------------------------------------------------- -------------- Common Stock, no par value..................................................... 149
ITEM 29. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Tennessee Business Corporation Act ("TBCA") provides that a corporation may indemnify any of its directors and officers against liability incurred in connection with a proceeding if (i) such person acted in good faith; (ii) in the case of conduct in an official capacity, the director or officer reasonably believed such conduct was in the corporation's best interests; (iii) in all other cases, the director or officer reasonably believed that his conduct was not opposed to the best interests of the corporation; and (iv) in connection with any criminal proceeding, the director or officer had no reasonable cause to believe his conduct was unlawful. In actions brought by or in the right of the corporation, however, the TBCA provides that no indemnification may be made if the director or officer was adjudged liable to the corporation. The TBCA also provides that in connection with any proceeding charging improper personal benefit to an officer or director, no indemnification may be made if such officer or director is adjudged liable on the basis that such personal benefit was improperly received. In cases where the director or officer is wholly successful, on the merits or otherwise, in the defense of any proceeding instigated because of his status as an officer or director of a corporation, the TBCA mandates that the corporation indemnify the director or officer against reasonable expenses incurred in the proceeding. Notwithstanding the foregoing, the TBCA provides that a court of competent jurisdiction, upon application, may order that an officer or director be indemnified for reasonable expenses if, in consideration of all relevant circumstances, the court determines that such individual is fairly and reasonably entitled to indemnification, notwithstanding the fact that (i) he was adjudged liable to the corporation in a proceeding by or in right of the corporation; (ii) he was adjudged liable on the basis that a personal benefit was improperly received by him; or (iii) he breached his duty of care to the corporation. The Company's Charter provides that to the fullest extent permitted by Tennessee law, no director shall be personally liable to the Company or its shareholders for monetary damages for breach of any fiduciary duty as a director. Under the TBCA, this charter provision relieves the Company's directors from personal liability to the Company or its shareholders for monetary damages for breach of fiduciary duty as a director, except for C-4 112 liability arising from a judgment or other final adjudication establishing (i) a breach of the director's duty of loyalty, (ii) acts or omissions not in good faith or involving intentional misconduct or a knowing violation of law, (iii) unlawful distributions; or (iv) receipt of an improper personal benefit. In addition, the Company's Bylaws provide that each director or officer of the Company shall be indemnified by the Company to the fullest extent allowed by Tennessee law. ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR. Not applicable. ITEM 31. LOCATION OF ACCOUNTS AND RECORDS. The Company maintains at its principal office physical possession of each account, book or other document required to be maintained by Section 31(a) of the 1940 Act. ITEM 32. MANAGEMENT SERVICES. Not applicable. ITEM 33. UNDERTAKINGS. The Registrant hereby undertakes: (a) to suspend the offering of shares until the Prospectus is amended if subsequent to the effective date of this Registration Statement, its net asset value declines more than ten percent from its net asset value as of the effective date of this Registration Statement. (b) that, for the purpose 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 in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant under Rule 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; and (c) that, 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 the securities at that time shall be deemed to be the initial bona fide offering thereof. Subject to the terms and conditions of Section 15(d) of the Securities Exchange Act of 1934, the 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 liability arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions of its Charter and Bylaws permitting indemnification, or otherwise, the registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities 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 matter 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 Securities Act and will be governed by the final adjudication of such issue. C-5 113 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Nashville, and State of Tennessee, on the 10th day of June, 1996. Sirrom Capital Corporation By: /s/ GEORGE M. MILLER, II ------------------------------------ George M. Miller, II Chief Executive Officer and President Pursuant to the requirements of the Securities Act of 1933, this Amendment has been signed by the following persons in the capacities and on the dates indicated.
NAME TITLE DATE - --------------------------------------------- -------------------------------- -------------- * Chairman of the Board and June 10, 1996 - --------------------------------------------- Director John A. Morris, Jr., M.D. * Chief Executive Officer, June 10, 1996 - --------------------------------------------- President and Director George M. Miller, II (Principal Executive Officer) * Chief Financial Officer June 10, 1996 - --------------------------------------------- (Principal Financial and Carl W. Stratton Accounting Officer) * Director June 10, 1996 - --------------------------------------------- E. Townes Duncan * Director June 10, 1996 - --------------------------------------------- William D. Eberle * Director June 10, 1996 - --------------------------------------------- Edward J. Mathias * Director June 10, 1996 - --------------------------------------------- Robert A. McCabe, Jr. * Director June 10, 1996 - --------------------------------------------- Raymond H. Pirtle, Jr. * Director June 10, 1996 - --------------------------------------------- L. Edward Wilson *By: /s/ GEORGE M. MILLER, II - --------------------------------------------- George M. Miller, II Attorney-in-fact
C-6 114 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ----- ------------------------------------------------------------------------------------ a. -- Charter of the Company (incorporated by reference to the corresponding exhibit contained in the Registrant's Registration Statement on Form N-2, as amended (File No. 33-86680), filed with the Commission on November 23, 1994) b.1 -- Bylaws of the Company (incorporated by reference to exhibit b. contained in the Registrant's Registration Statement on Form N-2, as amended (File No. 33-86680), filed with the Commission on November 23, 1994) b.2 -- Amendment No. 1 to Bylaws (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the period ended March 30, 1995 filed with the Commission on May 12, 1995) d.1 -- Specimen form of Common Stock Certificate (incorporated by reference to the corresponding exhibit contained in the Registrant's Registration Statement on Form N-2, as amended (File No. 33-86680), filed with the Commission on November 23, 1994) d.2 -- Instruments defining rights of holders of securities: See Paragraph 6 of the Company's Charter (incorporated by reference to the corresponding exhibit contained in the Registrant's Registration Statement on Form N-2, as amended (File No. 33-86680), filed with the Commission on November 23, 1994) d.3 -- Equity Holders Agreement dated as of November 1, 1994 by and among the Partnership and the other signatories thereto (incorporated by reference to the corresponding exhibit contained in the Registrant's Registration Statement on Form N-2, as amended (File No. 33-86680), filed with the Commission on November 23, 1994) d.4 -- Registration Rights Agreement dated February 1, 1995 (incorporated by reference to the corresponding exhibit contained in the Registrant's Registration Statement on Form N-2, as amended (File No. 33-86680), filed with the Commission on November 23, 1994) e. -- Dividend Reinvestment Plan of the Company (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the period ended March 30, 1995 filed with the Commission on May 12, 1995) *h.1 -- Form of Underwriting Agreement *h.2 -- Form of Agreement Among Underwriters *h.3 -- Form of Selected Dealers Agreement i.1 -- Amended and Restated 1994 Employee Stock Option Plan of the Company (incorporated by reference to the corresponding exhibit contained in the Registrant's Registration Statement on Form N-2, as amended (File No. 33-86680), filed with the Commission on November 23, 1994) i.2 -- Form of Indemnification Agreement (incorporated by reference to the corresponding exhibit contained in the Registrant's Registration Statement on Form N-2, as amended (File No. 33-86680), filed with the Commission on November 23, 1994) i.3 -- 1995 Stock Option Plan for Non-Employee Directors (incorporated by reference to the corresponding exhibit in the Registrant's Registration Statement on Form N-2, as amended (File No. 33-95394), filed with the Commission on August 3, 1995) i.4 -- 1996 Incentive Stock Option (incorporated by reference to Exhibit 10.3 in the Registrant's Financial Report on Form 10-K for the year ended December 31, 1995, filed with the Commission on March 29, 1996) j.1 -- Custodial Services Agreement with First American Trust Company dated March 13, 1992 (incorporated by reference to the corresponding exhibit contained in the Registrant's Registration Statement on Form N-2, as amended (File No. 33-86680), filed with the Commission on November 23, 1994) j.2 -- Custodial Services Agreement Supplement with First American Trust Company dated January 16, 1995 (incorporated by reference to the corresponding exhibit contained in the Registrant's Registration Statement on Form N-2, as amended (File No. 33-86680), filed with the Commission on November 23, 1994)
115
EXHIBIT NUMBER DESCRIPTION - ----- ------------------------------------------------------------------------------------ k.1 -- Third Amended and Restated Loan Agreement dated as of December 27, 1995, by and among the Company, as Borrower, the Lenders referred to herein, and First Union National Bank of Tennessee, as Agent (incorporated by reference to Exhibit 10.7 in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995, filed with the Commission on March 29, 1996) k.2 -- Third Amended and Restated Revolving Credit Note dated December 27, 1995, in the principal amount of $35,000,000, made by the Company in favor of First Union National Bank of Tennessee (incorporated by reference to Exhibit 10.8 in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995, filed with the Commission on March 29, 1996) k.3 -- Revolving Credit Note dated December 27, 1995, in the principal amount of $7,500,000, made by the Company in favor of Amsouth Bank of Tennessee (incorporated by reference to Exhibit 10.9 in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995, filed with the Commission on March 29, 1996) k.4 -- Revolving Credit Note dated December 27, 1995, in the principal amount of $7,500,000, made by the Company in favor of First American National Bank (incorporated by reference to Exhibit 10.10 in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995, filed with the Commission on March 29, 1996) k.5 -- Swingline Note dated December 27, 1995, in the principal amount of $5,000,000, made by the Company in favor of First Union National Bank of Tennessee (incorporated by reference to Exhibit 10.11 in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995, filed with the Commission on March 29, 1996) k.6 -- Second Amended and Restated Security Agreement dated December 27, 1995, by and between the Company and First Union National Bank of Tennessee (incorporated by reference to Exhibit 10.12 in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995, filed with the Commission on March 29, 1996) k.7 -- Pledge Agreement dated December 27, 1995, made by the Company in favor of First Union National Bank of Tennessee (incorporated by reference to Exhibit 10.13 in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995, filed with the Commission on March 29, 1996) k.8 -- ISDA Master Agreement dated as of September 13, 1995 by and between the Company and First Union National Bank (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ending September 30, 1995 filed with the Commission on November 15, 1995) *k.9 -- Acquisition Agreement by and among the Company, Sirrom Capital Acquisition Corporation, Sirrom, Ltd., Harris Williams & Co., L.P. and Harris Williams & Co. dated as of May 16, 1996 *l. -- Opinion of Bass, Berry & Sims PLC n.1 -- Consent of Arthur Andersen LLP *n.2 -- Consent of Bass, Berry & Sims PLC (included in Exhibit 1)
- --------------- * Previously filed EX-99.2N 2 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT N.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports on Sirrom Capital Corporation and Harris Williams & Co. and Subsidiary (and to all references to our Firm) included in or made a part of this Amendment No. 1 to Form N-2 Registration Statement. ARTHUR ANDERSEN LLP Nashville, Tennessee June 10, 1996 -----END PRIVACY-ENHANCED MESSAGE-----