SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED
DECEMBER 31, 2000
COMMISSION FILE NO.: 333-36709
-------------------------------
WATERSIDE CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1694665
(State of incorporation) (I.R.S. Employer Identification Number)
300 EAST MAIN STREET, SUITE 1380, NORFOLK, VIRGINIA 23510
(Address of principal executive office) (Zip Code)
(757) 626-1111
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and has been subject to the
filing requirements for the past 90 days. Yes [X] No [ ]
As of December 31, 2000, the registrant had issued and outstanding
1,581,430 shares of Common Stock, $1.00 par value.
WATERSIDE CAPITAL CORPORATION
FORM 10-Q
Table of Contents
Page
Number
------
PART I. FINANCIAL INFORMATION:
ITEM 1. Balance Sheets as of June 30, 2000 and
December 31, 2000 (unaudited)
Statements of Operations for the Three Months and
Six Months Ended December 31, 1999 and 2000 (unaudited)
Statement of Changes in Stockholders' Equity for the
Six Months Ended December 31, 2000 (unaudited)
Statements of Cash Flows for the Six Months Ended
December 31, 1999 and 2000 (unaudited)
Notes to Financial Statements (unaudited)
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
ITEM 5. Other
SIGNATURES
1
PART I. FINANCIAL INFORMATION
ITEM 1.
WATERSIDE CAPITAL CORPORATION
Balance Sheets
June 30, 2000 and December 31, 2000
------------------------------------------------------------------------------------------------------------------
June 30, December 31,
2000 2000
--------------- ------------------
(unaudited)
Assets:
Investments in portfolio companies, at fair value (note 3):
Equity securities $ 23,237,050 $ 22,643,250
Debt securities 8,877,766 8,907,961
Options and warrants 3,752,744 4,346,699
------------- -------------
Total investments, cost of $37,826,396 and $40,209,783
at June 30, 2000 and December 31, 2000, respectively 35,867,560 35,897,910
------------- -------------
Current assets:
Cash and cash equivalents 118,314 39,145
Dividends receivable 654,767 792,259
Interest receivable 222,517 112,909
Note receivable 237,550 237,550
Refundable income taxes 323,322 -
Prepaid expenses and other current assets 140,403 60,716
------------- -------------
Total current assets 1,696,873 1,242,579
Property and equipment, net 167,919 149,325
Deferred income taxes, net of valuation allowance of $619,000 at
December 31, 2000 650,000 1,232,000
Deferred financing costs, net 716,391 768,342
------------- -------------
Total assets $ 39,098,743 $ 39,290,156
============= =============
Liabilities and Stockholders' Equity:
Current liabilities:
Lines of credit $ 2,200,000 $ 750,000
Accounts payable 31,310 13,102
Accrued expenses 733,042 715,363
------------- -------------
Total current liabilities 2,964,352 1,478,465
Debentures payable 19,300,000 22,400,000
------------- -------------
Total liabilities 22,264,352 23,878,465
------------- -------------
Stockholders' equity:
Common stock, $1 par value, 10,000,000 shares authorized,
1,581,430 issued and outstanding 1,581,430 1,581,430
Preferred stock, $1 par value, 25,000 shares authorized,
no shares issued and outstanding - -
Additional paid-in capital 14,618,719 14,618,719
Net unrealized depreciation on investments, net of income taxes (1,216,357) (3,295,393)
Undistributed accumulated earnings 1,850,599 2,506,935
------------- -------------
Total stockholders' equity 16,834,391 15,411,691
Commitments, contingencies and subsequent event (note 4)
------------- -------------
Total liabilities and stockholders' equity $ 39,098,743 $ 39,290,156
============= =============
Net asset value per common share $ 10.65 $ 9.75
============= =============
See accompanying notes to financial statements.
2
WATERSIDE CAPITAL CORPORATION
Unaudited Statements of Operations
Three months and six months ended December 31, 1999 and 2000
----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
December 31, December 31,
--------------------- -----------------------
1999 2000 1999 2000
---- ---- ---- ----
Operating income:
Dividends $ 534,624 $ 645,559 $ 1,040,276 $ 1,359,906
Interest on debt securities 201,952 198,208 393,633 458,663
Interest on cash equivalents 6,842 1,642 29,689 8,232
Fee and other income 246,500 93,181 356,500 205,227
------------ ------------ ------------ ------------
Total operating income 989,918 938,590 1,820,098 2,032,028
------------ ------------ ------------ ------------
Operating expenses:
Salaries and benefits 211,312 204,836 428,719 455,373
Legal and accounting 50,000 52,100 74,000 94,481
Interest expense 268,047 494,644 493,270 957,659
Other operating expenses 125,118 82,180 203,568 187,179
------------ ------------ ------------ ------------
Total operating expenses 654,477 833,760 1,199,557 1,694,692
------------ ------------ ------------ ------------
Net operating income before income taxes 335,441 104,830 620,541 337,336
Income tax benefit (58,000) (170,000) (129,000) (319,000)
------------ ------------ ------------ ------------
Net operating income 393,441 274,830 749,541 656,336
Realized gain on investments, net of income taxes of $606,000
for the three and six months ended December 31, 1999 986,153 - 986,153 -
Change in unrealized appreciation (depreciation) on investments,
net of income tax expense (benefit) of $615,000 and $159,000
for the three months ended December 31, 1999 and 2000,
respectively, and $476,000 and $(274,000) for the six months
ended December 31, 1999 and 2000, respectively 1,005,973 (1,369,473) 777,651 (2,079,036)
------------ ------------ ------------ ------------
Net increase (decrease) in stockholders' equity
resulting from operations $ 2,385,567 $ (1,094,643) $ 2,513,345 $ (1,422,700)
============ ============ ============ ============
Net increase (decrease) in stockholders' equity resulting from
operations per share - basic and diluted $ 1.51 $ (0.69) $ 1.59 $ (0.90)
============ ============ ============ ============
See accompanying notes to financial statements.
3
WATERSIDE CAPITAL CORPORATION
Unaudited Statements of Changes in Stockholders' Equity
Six months ended December 31, 1999 and 2000
------------------------------------------------------------------------------------------------------------------------------------
Common stock Additional Net unrealized Undistributed Stockholders' Total
---------------------- paid-in appreciation accumulated notes stockholders'
Shares Amount capital on investments earnings receivable equity
-------- ---------- ------------ -------------- ------------ ------------ -------------
Balance at June 30, 1999 1,491,937 $1,491,937 $12,769,895 $ 298,434 $ 966,003 $ (1,455,000) $ 14,071,269
6% stock dividend 89,493 89,493 648,824 - (738,508) - (191)
Capitalization of undistributed
accumulated earnings - - 1,200,000 - (1,200,000) - -
Repayment of stockholders' notes
receivable - - - - - 1,024,000 1,024,000
Net operating income - - - - 749,541 - 749,541
Net realized gain on investments,
net of income taxes - - - - 986,153 - 986,153
Increase in net unrealized
appreciation on investments,
net of income taxes - - - 777,651 - - 777,651
--------- ---------- ----------- ---------- ----------- ------------ ------------
Balance at December 31, 1999 1,581,430 $1,581,430 $14,618,719 $1,076,085 $ 763,189 $ (431,000) $ 17,608,423
========= ========== =========== ========== =========== ============ ============
Common stock Additional Net unrealized Undistributed Stockholders' Total
---------------------- paid-in depreciation accumulated notes stockholders'
Shares Amount capital on investments earnings receivable equity
-------- ---------- ------------- -------------- ------------ ------------ -------------
Balance at June 30, 2000 1,581,430 $ 1,581,430 $ 14,618,719 $(1,216,357) $ 1,850,599 $ - $ 16,834,391
Net operating income - - - - 656,336 - 656,336
Increase in net unrealized
depreciation on investments,
net of income taxes - - - (2,079,036) - - (2,079,036)
---------- ----------- ------------ ----------- ------------ ------------- -------------
Balance at December 31, 2000 1,581,430 $ 1,581,430 $ 14,618,719 $(3,295,393) $ 2,506,935 $ - $ 15,411,691
========= ========== ============ =========== ============ ============= ============
See accompanying notes to financial statements.
4
WATERSIDE CAPITAL CORPORATION
Unaudited Statements of Cash Flows
Six months ended December 31, 1999 and 2000
--------------------------------------------------------------------------------------------------------------
1999 2000
------------- -------------
Cash flows from operating activities:
Net increase (decrease) in stockholders' equity resulting from operations $ 2,513,345 $ (1,422,700)
Adjustments to reconcile net increase (decrease) in stockholders' equity
resulting from operations to net cash provided by operating activities:
Change in unrealized appreciation/depreciation
on investments (1,253,651) 2,353,036
Realized gain on investments (1,592,153) -
Accretion of preferred stock and loan investments (89,527) (269,057)
Depreciation and amortization 31,442 47,115
Deferred income tax expense (benefit) 510,000 (582,000)
Loss on disposal of property and equipment 828 -
Changes in assets and liabilities increasing (decreasing) cash
flows from operating activities:
Dividends receivable (219,362) (137,492)
Interest receivable 123,821 109,608
Refundable income taxes 43,322 323,322
Prepaid expenses and other current assets (205,487) 79,687
Accounts payable and accrued expenses 32,275 (35,887)
Deferred revenue (79,131) -
Income taxes payable 399,678 -
------------- -------------
Net cash provided by operating activities 215,400 465,632
------------- -------------
Cash flows from investing activities:
Investments in equity securities made (4,953,425) (745,112)
Investments in debt securities made (3,754,189) (3,104,148)
Principal collected on debt securities 1,181,842 1,734,931
Proceeds from repayment of stockholders' notes receivable 1,024,000 -
Proceeds from sales of investments 2,002,724 -
Acquisition of property and equipment (3,755) (2,972)
Proceeds from sale of property and equipment 2,000 -
------------- -------------
Net cash used in investing activities (4,500,803) (2,117,301)
------------- -------------
Cash flows from financing activities:
Proceeds from (payments on) lines of credit 3,700,000 (1,450,000)
Proceeds from debentures payable - 3,100,000
Payments in lieu of fractional shares associated with stock dividend (191) -
Payment of deferred financing costs - (77,500)
------------- -------------
Net cash provided by financing activities 3,699,809 1,572,500
------------- -------------
Net decrease in cash and cash equivalents (585,594) (79,169)
Cash and cash equivalents, beginning of period 1,269,409 118,314
------------- -------------
Cash and cash equivalents, end of period $ 683,815 $ 39,145
============= =============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 389,911 $ 827,244
============= =============
Cash paid during the period for income taxes $ - $ -
============= =============
See accompanying notes to financial statements.
5
WATERSIDE CAPITAL CORPORATION
Notes to Financial Statements
June 30, 2000 and December 31, 2000 (Unaudited)
--------------------------------------------------------------------------------
(1) Unaudited Interim Financial Information
In the opinion of management, the accompanying unaudited interim financial
statements of Waterside Capital Corporation (the Company) are prepared in
accordance with generally accepted accounting principles (GAAP) for interim
financial information and pursuant to the requirements for reporting on
Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain
disclosures accompany annual financial statements prepared in accordance
with GAAP are omitted. In the opinion of management, all adjustments,
consisting of normal recurring accruals necessary for the fair presentation
of financial statements for the interim period, have been included. The
current period's results of operations are not necessarily indicative of
results that ultimately may be achieved for the year. The interim
financial statements and notes thereto should be read in conjunction with
the financial statements and notes thereto included in the Company's Form
10-K, as filed with the Securities and Exchange Commission.
(2) Description of Business
The Company was incorporated in the Commonwealth of Virginia on July 13,
1993 and is a closed-end investment company licensed by the Small Business
Administration (the "SBA") as a Small Business Investment Corporation
("SBIC"). The Company makes equity investments in, and provides loans to,
small business concerns to finance their growth, expansion and development.
Under applicable SBA regulations, the Company is restricted to investing
only in qualified small business concerns as contemplated by the Small
Business Investment Act of 1958.
(3) Investments
Investments are carried at fair value, as determined by the Executive
Committee of the Board of Directors. The Company, through its Board of
Directors, has adopted the Model Valuation Policy, as published by the SBA,
in Appendix III to Part 107 of Title 12 of the Code of Federal Regulations
(the "Policy"). The Policy, among other things, presumes that loans and
investments are acquired with the intent that they are to be held until
maturity or disposed of in the ordinary course of business. Except for
interest-bearing securities which are convertible into common stock,
interest-bearing securities are valued at an amount not greater than cost,
with unrealized depreciation being recognized when value is impaired.
Equity securities of private companies are presumed to represent cost
unless the performance of the portfolio company, positive or negative,
indicates otherwise in accordance with the Policy guidelines. The fair
value of equity securities of publicly traded companies are generally
valued at their quoted market price discounted due to the investment size
or market liquidity concerns and for the effect of restrictions on the sale
of such securities.
6
WATERSIDE CAPITAL CORPORATION
Notes to Financial Statements
June 30, 2000 and December 31, 2000 (Unaudited)
--------------------------------------------------------------------------------
Discounts can range from 0% to 40% for investment size and market liquidity
concerns. Actual liquidity discounts in the portfolio at December 31, 2000
ranged from 11% to 40%. Discounts for restriction on the sale of the
investments are 15% in accordance with the provisions of the Policy. The
Company maintains custody of its investments as permitted by the Investment
Company Act of 1940.
Investments consist primarily of preferred stock and debt securities
obtained from portfolio companies in accordance with SBIC investment
regulations. The financial statements include securities valued at
$35,867,560 and $35,897,910 at June 30, 2000 and December 31, 2000 (91.7%
and 91.4% of assets), respectively. The valuation process completed by
management includes estimates made by management and the Executive
Committee in the absence of readily ascertainable market values. These
estimated values may differ significantly from the values that would have
been used had a ready market for the securities existed, and those
differences could be material.
(4) Subsequent Event
In January 2001, the Company entered into employment agreements with four
members of management. These agreements provide for a specified annual
base salary and certain discretionary bonuses, and expire on January 31,
2004. Under the agreements, if the Company terminates the employee's
employment without cause, the Company is obligated to pay the employee an
amount equal to two times the employee's base salary, as then in effect,
plus the average of the bonuses received by the employee for each of the
two years prior to the date of termination. The Company's maximum
potential commitment for termination benefits is approximately $1,000,000.
7
WATERSIDE CAPITAL CORPORATION
Schedule of Portfolio Investments
June 30, 2000 and December 31, 2000
---------------------------------------------------------------------------------------------------------------------------
The Company's investment portfolio at June 30, 2000 consisted of the following:
Cost or
Number of contributed Fair market
shares value value
--------- ------------- -----------
Equity Securities:
------------------
Publicly Traded Companies:
Avery Communications, Inc. Common Stock 245,000 $ 249,900 $ 156,310
Netplex Group, Inc. Common Stock (a) 66,400 464,800 129,281
Netplex Group, Inc. Preferred Stock 1,500,000 1,151,784 1,151,784
Electronic Business Systems, Inc. (formerly Triangle
Imaging Group, Inc.) Convertible Preferred Stock (b) (c) 700 2,046,004 1,346,004
Electronic Business Systems, Inc. (formerly Triangle
Imaging Group, Inc.) Common Stock (b) (c) 500,000 225,000 28,000
Electronic Business Systems, Inc. (formerly Triangle
Imaging Group, Inc.) Common Stock (b) (c) 1,423,821 60,484 60,484
Private Companies:
Real Time Data Management Services, Inc. Preferred Stock 300 286,859 463,500
Delta Education Systems, Inc. Preferred Stock 1,625 1,594,283 1,594,283
Diversified Telecom, Inc. Preferred Stock (c) 1,500 1,500,000 750,000
Crispies, Inc. Preferred Stock 400 398,320 398,320
Triangle Biomedical Sciences Preferred Stock 2,000 1,988,481 1,988,481
JMS Worldwide, Inc. Preferred Stock 1,500 1,500,000 1,500,000
EPM Development Systems Corp. Preferred Stock 1,500 1,492,847 1,492,847
Fire King International Preferred Stock 2,000 2,000,000 2,000,000
SECC (formerly MilleCom, Inc.) Common Stock 840,000 60 60
Eton Court Asset Management, Ltd. Preferred Stock 1,000 973,397 973,397
Fairfax Publishing Co., Inc. Preferred Stock 1,100 1,042,347 1,042,347
DigitalSquare.com Preferred Stock 1,210,739 1,513,425 1,513,425
Answernet, Inc. Preferred Stock 550 303,194 303,194
Answernet, Inc. Preferred Stock 700 376,926 376,926
ISR Solutions, Inc. Preferred Stock 500 497,407 497,407
Capital Markets Group, Inc. Preferred Stock 1,500 1,500,000 1,500,000
Jubilee Tech International, Inc. Convertible Preferred Stock 2,200,000 1,971,000 1,971,000
VentureCom, Inc. Preferred Stock 278,164 2,000,000 2,000,000
---------- ----------
Total equity securities 25,136,518 23,237,050
---------- ----------
Cost or
contributed
Maturity value Fair value
-------- -------------- --------------
Debt Securities:
----------------
Avery Communications, Inc. Convertible Note 12/10/02 $ 350,000 $ 350,000
Extraction Technologies of VA, LLC 7/22/03 900,000 900,000
Extraction Technologies of VA, LLC 8/31/04 202,316 202,316
Extraction Technologies of VA, LLC 11/2/04 373,711 373,711
Extraction Technologies of VA, LLC 2/7/05 263,742 263,742
Extraction Technologies of VA, LLC 2/25/05 97,409 97,409
Extraction Technologies of VA, LLC 3/14/05 95,584 95,584
JMS Worldwide, Inc. 7/31/03 950,000 950,000
Diversified Telecom, Inc. Demand 84,250 84,250
Diversified Telecom, Inc. 5/19/02 156,387 156,387
SECC (formerly MilleCom, Inc.) 3/31/04 900,000 900,000
SECC (formerly MilleCom, Inc.) 5/11/04 360,000 360,000
ISR Solutions, Inc. 6/30/04 742,167 742,167
Fire King International Demand 550,000 550,000
TABET Manufacturing Co., Inc. 12/31/04 283,230 283,230
National Assisted Living, LP 12/31/04 1,408,689 1,408,689
Electronic Business Systems, Inc. (formerly
Triangle Imaging Group, Inc.) (b) 1/31/05 424,931 424,931
New Dominion Pictures LLC 4/30/06 735,350 735,350
--------- ---------
Total debt securities 8,877,766 8,877,766
--------- ---------
8
WATERSIDE CAPITAL CORPORATION
Schedule of Portfolio Investments
June 30, 2000 and December 31, 2000
---------------------------------------------------------------------------------------------------------------
Cost or
Number of Percentage contributed Fair market
shares ownership value value
--------- ---------- ------------ -----------
Stock Options and Warrants:
---------------------------
Publicly Traded Companies:
Avery Communications, Inc. 161,000 0.00 $ - $ -
Netplex Group, Inc. (a) 300,000 2.10 900,000 171,600
Electronic Business Systems, Inc. (formerly
Triangle Imaging Group, Inc.) (a) (b) 56,000 0.39 - -
Private Companies:
Real Time Data Management Services, Inc. 125 29.41 115,000 139,573
Delta Education Systems, Inc. 639 39.00 48,200 69,546
Diversified Telecom, Inc. 8,998 15.00 - -
Crispies, Inc. 524 6.37 2,800 3,235
Triangle Biomedical Sciences 50,743 11.70 127,449 127,449
Extraction Technologies of VA, LLC - 39.00 337,567 337,567
JMS Worldwide, Inc. 199 5.00 - -
EPM Development Systems Corp. 87 8.00 11,600 634,278
Fire King International 4 4.00 - -
SECC (formerly MilleCom, Inc.) 150,000 3.15 - -
Eton Court Asset Management, Ltd. 14,943 13.00 34,700 34,700
Fairfax Publishing Co., Inc. 526 16.50 73,600 73,600
ISR Solutions, Inc. 550,973 7.20 12,936 12,936
DigitalSquare.com 81,074 5.70 - -
Answernet, Inc. 69,837 17.64 268,615 268,615
TABET Manufacturing Co., Inc. 500,000 20.00 175,400 175,400
National Assisted Living, LP - 15.00 667,000 667,000
Capital Markets Group, Inc. 2,294,118 15.00 - -
Jubilee Tech International, Inc. 400,000 1.60 240,000 240,000
Signius Investment Corporation 12 11.67 332,595 332,595
VentureCom, Inc. 38,943 0.37 - -
New Dominion Pictures LLC - 9.00 464,650 464,650
------------- -------------
Total options and warrants 3,812,112 3,752,744
------------- -------------
Total investments $ 37,826,396 $ 35,867,560
============= =============
The Company's investment portfolio at December 31, 2000 consisted of the
following:
Cost or
Number of contributed Fair market
shares value value
------------ -------------- -----------
Equity Securities:
------------------
Publicly Traded Companies:
Avery Communications, Inc. Common Stock 245,000 $ 249,900 $ 121,030
Avery Communications, Inc. Common Stock (a) 190,167 95,084 79,870
Netplex Group, Inc. Common Stock 66,400 464,800 6,773
Netplex Group, Inc. Preferred Stock 1,500,000 1,244,389 1,244,389
Electronic Business Systems, Inc. (formerly Triangle
Imaging Group, Inc.) Convertible Preferred Stock (b) (c) 700 2,046,004 211,384
Electronic Business Systems, Inc. (formerly Triangle
Imaging Group, Inc.) Common Stock (b) (c) 500,000 225,000 -
Electronic Business Systems, Inc. (formerly Triangle
Imaging Group, Inc.) Common Stock (b) (c) 1,423,821 60,484 -
9
WATERSIDE CAPITAL CORPORATION
Schedule of Portfolio Investments
June 30, 2000 and December 31, 2000
------------------------------------------------------------------------------------------------------------------------
Cost or
Number of contributed Fair market
shares value value
----------- --------------- ----------------
Private Companies:
Real Time Data Management Services, Inc. Preferred Stock 300 $ 291,787 $ 487,000
Delta Education Systems, Inc. Preferred Stock 1,625 1,599,103 1,599,103
Diversified Telecom, Inc. Preferred Stock (c) 1,500 1,500,000 750,000
Crispies, Inc. Preferred Stock 400 398,600 398,600
Triangle Biomedical Sciences Preferred Stock 2,100 2,101,225 2,101,225
JMS Worldwide, Inc. Preferred Stock 1,500 1,500,000 1,500,000
EPM Development Systems Corp. Preferred Stock 1,500 1,494,007 1,494,007
Fire King International Preferred Stock 2,000 2,000,000 2,000,000
SECC (formerly MilleCom, Inc.) Common Stock 840,000 60 60
Eton Court Asset Management, Ltd. Preferred Stock 1,000 976,867 976,867
Fairfax Publishing Co., Inc. Preferred Stock 1,100 1,190,207 1,190,207
DigitalSquare.com Convertible Preferred Stock 1,210,739 1,513,425 1,513,425
Answernet, Inc. Preferred Stock 550 318,305 318,305
Answernet, Inc. Preferred Stock 700 393,241 393,241
ISR Solutions, Inc. Preferred Stock 500 497,701 497,701
Capital Markets Group, Inc. Preferred Stock 1,500 1,500,000 1,500,000
Jubilee Tech International, Inc. Convertible Preferred Stock 2,200,000 1,988,572 1,988,572
VentureCom, Inc. Preferred Stock 278,164 2,000,000 2,000,000
Phoenix Fabrications, Inc. Preferred Stock 400 271,463 271,463
AmeriComm Direct Marketing LLC, Common Stock 27,696 28 28
---------- ----------
Total equity securities 25,920,252 22,643,250
---------- ----------
Cost or
contributed
Maturity value Fair value
-------- ----------------- ---------------
Debt Securities:
----------------
Avery Communications, Inc. Convertible Note 12/10/02 $ 350,000 $ 350,000
Extraction Technologies of VA, LLC (c) (d) 7/22/03 900,000 532,567
Extraction Technologies of VA, LLC (c) (d) 8/31/04 202,316 120,316
Extraction Technologies of VA, LLC (c) (d) 11/2/04 373,711 221,711
Extraction Technologies of VA, LLC (c) (d) 2/7/05 263,742 156,742
Extraction Technologies of VA, LLC (c) (d) 2/25/05 97,409 57,409
Extraction Technologies of VA, LLC (c) (d) 3/14/05 95,584 56,584
JMS Worldwide, Inc. 7/31/03 900,000 900,000
Diversified Telecom, Inc. Demand 84,250 84,250
Diversified Telecom, Inc. 5/19/02 156,387 156,387
ISR Solutions, Inc. 6/30/04 743,167 743,167
Fire King International Demand 550,000 550,000
TABET Manufacturing Co., Inc. 12/31/04 293,157 293,157
National Assisted Living, LP 12/31/04 1,489,961 1,489,961
New Dominion Pictures LLC 4/30/06 758,004 758,004
Mayfair Enterprises, Inc. 7/18/05 493,001 493,001
DigitalSquare.com 9/15/05 289,250 289,250
Phoenix Fabrications, Inc. 9/8/05 339,329 339,329
Kotarides Baking Co. of VA 6/5/01 566,126 566,126
AmeriComm Direct Marketing LLC 12/29/05 750,000 750,000
----------------- ---------------
Total debt securities 9,695,394 8,907,961
----------------- ---------------
10
WATERSIDE CAPITAL CORPORATION
Schedule of Portfolio Investments
June 30, 2000 and December 31, 2000
------------------------------------------------------------------------------------------------------------------------
Cost or
Number of Percentage contributed Fair market
shares ownership value value
--------- ----------- ------------ -----------
Stock Options and Warrants:
---------------------------
Publicly Traded Companies:
Netplex Group, Inc. (a) 300,000 2.10 $ 900,000 $ -
Electronic Business Systems, Inc. (formerly
Triangle Imaging Group, Inc.) (a) (b) 98,000 0.63 - -
Private Companies:
Real Time Data Management Services, Inc. 125 29.41 115,000 157,270
Delta Education Systems, Inc. 639 39.00 48,200 69,546
Diversified Telecom, Inc. 8,998 15.00 - -
Crispies, Inc. 524 6.37 2,800 3,235
Triangle Biomedical Sciences 50,743 11.70 127,449 127,449
Extraction Technologies of VA, LLC (d) - 39.00 337,567 -
JMS Worldwide, Inc. 199 5.00 - -
EPM Development Systems Corp. 87 8.00 11,600 634,278
Fire King International 4 4.00 - -
SECC (formerly MilleCom, Inc.) 150,000 3.15 - -
Eton Court Asset Management, Ltd. 14,943 13.00 34,700 34,700
Fairfax Publishing Co., Inc. 696 15.50 83,600 387,000
ISR Solutions, Inc. 588,334 5.90 12,936 12,936
DigitalSquare.com 150,000 - 75,000 75,000
Answernet, Inc. 69,837 16.50 268,615 268,615
TABET Manufacturing Co., Inc. 487,500 19.50 175,400 175,400
National Assisted Living, LP - 15.00 667,000 667,000
Capital Markets Group, Inc. 2,294,118 15.00 - -
Jubilee Tech International, Inc. 400,000 1.60 240,000 240,000
Signius Investment Corporation 12 11.67 332,595 332,595
VentureCom, Inc. 38,943 0.37 - -
New Dominion Pictures LLC - 9.00 464,650 464,650
Mayfair Enterprises, Inc. - 15.00 214,400 214,400
Phoenix Fabrications, Inc. - 25.00 297,000 297,000
Kotarides Baking Co. of VA - 13.75 185,625 185,625
-------------- ---------------
Total options and warrants 4,594,137 4,346,699
-------------- ---------------
Total investments $ 40,209,783 $ 35,897,910
============== ===============
(a) Rule 144A restricted securities.
(b) This entity, which is considered an affiliate of the Company,
filed Chapter 11 bankruptcy on September 1, 2000.
(c) Entity is in arrears with respect to dividend/interest payments.
(d) This entity filed Chapter 11 bankruptcy on December 26, 2000.
11
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
. General
Waterside Capital Corporation ("Waterside" or the "Company") is a
specialty finance company headquartered in Norfolk, Virginia. The
Company invests in equity and debt securities to finance the growth,
expansion and modernization of small private businesses, primarily in the
Mid-Atlantic Region. The Company was formed in 1993 as the Eastern
Virginia Small Business Investment Corporation. Through June 30, 1996,
the Company operated as a development stage company focused primarily on
preparation to commence operation. The Company was licensed in 1996 by
the Small Business Administration (SBA) as a Small Business Investment
Company (SBIC) under the Small Business Investment Act of 1958. In
October 1996 the Company made its first portfolio investment. In January
1998 the Company completed its Initial Public Offering (IPO) to raise
additional equity to support its growth strategy.
The majority of the Company's operating income is derived from dividend
and interest income on portfolio investments and application and
processing fees related to investment originations. The Company's
operating expenses primarily consist of interest expense on borrowings to
fund its portfolio growth and payroll and other expenses incidental to
operations. Waterside currently has 9 full time employees and 2 offices
from which it operates - Norfolk and Reston, Virginia.
. Results of Operations
Comparison of Three Months Ended December 31, 2000 and December 31, 1999
For the three months ended December 31, 2000, total operating income was
$939,000 compared to $990,000 reported during the same period of 1999.
The decrease in operating income is due to a combination of a reversal of
previously accrued interest income of $126,000 associated with the write
down of the Extraction Technologies investment and the reduction in fee
income due to the origination of fewer investments during the quarter.
The December 31, 2000 quarterly operating income consisted of dividends
of $646,000, interest on debt securities of $198,000, fee income of
$93,000 and interest on cash equivalents of $2,000.
Total operating expenses for the three months ended December 31, 2000,
were $834,000, consisting of interest expense of $495,000, salaries and
benefits of $205,000, legal and accounting expense of $52,000, and other
operating expenses of $82,000. These expenses compared to the $654,000
for the three months ended December 31, 1999, consisting of interest
expense of $268,000, salaries and benefits of $211,000, legal and
accounting expenses of $50,000, and other operating expenses of $125,000.
The significant increase in interest expense for the quarter ended
December 31, 2000, compared to the quarter ended December 31, 1999 is due
to the increased borrowings made to fund the growth in the company's
investment portfolio. Net operating income of $275,000 for the three
months ended December 31, 2000, compared to the $393,000 reported for the
three months ended December 31, 1999.
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The realized gain on investments of $986,000 for the three months ended
December 31, 1999 was due to an after tax gain on the company's holdings
in the publicly traded investment The Netplex Group. The increase in
the change in unrealized appreciation on investments of $1,006,000 for
the three months ended December 31, 1999 is primarily attributed to
significant increases in the fair values of the company's publicly traded
investments. The increase in unrealized depreciation on investments net
of taxes of $1,369,000 for the three months ended December 31, 2000 is
primarily due to the write down of a portfolio company (Extraction
Technologies of Virginia) that filed for bankruptcy protection under
Chapter 11 of the U. S. Bankruptcy Code in order to restructure
contractual and debt obligations. The remainder of the increase in
unrealized depreciation for the three months ended December 31, 2000 is
attributable to additional write downs in two publicly traded companies
held in the portfolio due to their changing stock prices
The net increase (decrease) in stockholders' equity resulting from
operations was a decrease of $1,095,000 or $.69 per share for the quarter
ended December 31, 2000, compared to an increase of $2,386,000 or $1.51
per share for the comparable period ended December 31, 1999.
Comparison of Six Months Ended December 31, 2000 and December 31, 1999
For the six months ended December 31, 2000, total operating income was
$2,032,000 compared to $1,820,000 reported during the same period of
1999. The increase in operating income is due to the increase in
interest and dividend income as a result of the growth in the Company's
investment portfolio as compared to 1999 partially offset by the reversal
of previously accrued interest income and the reduction in fee income due
to the origination of fewer investments during the most recent quarter as
described above. The December 31, 2000 year to date operating income
consisted of dividends of $1,360,000, interest on debt securities of
$459,000, fee income of $205,000 and interest on cash equivalents of
$8,000.
Total operating expenses for the six months ended December 31, 2000, were
$1,695,000, consisting of interest expense of $958,000, salaries and
benefits of $455,000, legal and accounting expense of $95,000, and other
operating expenses of $187,000. These expenses compared to the
$1,200,000 for the six months ended December 31, 1999, consisting of
interest expense of $493,000, salaries and benefits of $429,000, legal
and accounting expenses of $74,000, and other operating expenses of
$204,000. The significant increase in interest expense for the six
months ended December 31, 2000, compared to the six months ended December
31, 1999 is due to the increased borrowings made to fund the growth in
the company's investment portfolio. For the six months ended December
31, 2000 net operating income was $656,000 or $.42 per share compared to
the $750,000 or $.47 per share reported for the same six month period of
the previous fiscal year.
During the six months ended December 31, 1999 Waterside realized a pretax
gain of $1.6 million on its holdings in the Netplex group. In addition,
it had an increase in pretax unrealized gains on investments of $1.3
million, primarily due to increases in the fair values of its publicly
traded investments. Net of taxes, total realized and unrealized gains on
investments added $1.8 million to total income during the six months
ended December 31, 1999.
During the six months ended December 31, 2000, Waterside recorded pretax
unrealized depreciation in the fair value of its investments of $2.4
million, primarily due to the write down of two portfolio companies that
each filed for bankruptcy protection under Chapter 11 of the U. S.
Bankruptcy Code. The write downs were $1.2 million for Electronic
Business Systems, Inc., and $1.1 million for Extraction Technologies of
Virginia. In addition, during the six months ended December 31, 2000 the
company reduced its recognized tax benefit by $619,000 on the cumulative
unrealized depreciation on investments due to uncertainty as to the
realization of these associated tax benefits. The Company will continue
to monitor the status of its deferred tax assets to assess whether
amounts recognized are more likely than not to be realized.
13
The net increase (decrease) in stockholders' equity resulting from
operations was a decrease of $1,423,000 or $.90 per share for the
December 31, 2000 six-month period, compared to an increase of $2,513,000
or $1.59 per share for the comparable period ended December 31, 1999.
. Financial Condition, Liquidity And Capital Resources
At December 31, 2000 the company's investment portfolio totaled $35.9
million compared with the $35.9 million reported at June 30, 2000. For
the six months ended December 31, 2000 the company funded $3.8 million in
investments compared to the $8.7 million funded during the comparable six
months of 1999. To fund these new investments, the company borrowed $3.1
million from the SBA during the six months ended December 31, 2000.
Net asset value per common share decreased to $9.75 per share at December
31, 2000 from $10.65 per share at June 30, 2000. This reduction in net
asset value is a result of the investment write downs previously
discussed.
During the six months ended December 31, 2000, net cash provided by
operating activities was $466,000 as compared to the $215,000 provided
during the six months ended December 31, 1999. Refunded income taxes of
$323,000 contributed significantly to the cash provided during the six
months ended December 31, 2000. The company used $2.1 million in
investing activities during the six months ended December 31, 2000 as
compared to the $4.5 million used in investing activities for the six
months ended December 31, 1999, primarily due to the reduction in
investment origination as described above, partially offset by proceeds
from sale of investments and repayment of loansCash flows provided by
financing activities for the six months ended December 31, 2000 were $1.6
million compared to the $3.7 million provided during the six months ended
December 31, 1999, due to increased borrowings in 1999 as compared to
2000 to finance investment origination.
. Quantitative and Qualitative Disclosure About Market Risk
The Company's business activities contain elements of risk. The Company
considers the principal types of market risk to be: risk of lending and
investing in small privately owned companies, valuation risk of
portfolio, risk of illiquidity of portfolio investments and the
competitive market for investment opportunities. The Company considers
the management of risk essential to conducting its business and to
maintaining profitability. Accordingly, the Company's risk management
systems and procedures are designed to identify and analyze the Company's
risks, to set appropriate policies and limits and to continually monitor
these risks and limits by means of reliable administrative and
information systems and other policies and programs.
The Company manages its market risk by maintaining a portfolio of equity
interests that is diverse by industry, geographic area, size of
individual investment and borrower. The Company is exposed to a degree
of risk of public market price fluctuations as three of the Company's
twenty-nine investments are in thinly traded, small public companies,
whose stock prices have been volatile. The other twenty-six investments
are in private business enterprises. Since there is typically no public
market for the equity interests of the small companies in which the
Company invests, the valuation of the equity interests in the Company's
portfolio of private business enterprises is subject to the estimate of
the Company's Executive Committee. In the absence of a readily
ascertainable market value, the estimated value of the Company's
14
portfolio of equity interests may differ significantly from the values
that would be placed on the portfolio if a ready market for the equity
interests existed. Any changes in estimated value are recorded in the
Company's statement of operations as "Net unrealized gains (losses)."
Each hypothetical 1% increase or decrease in value of the Company's
portfolio of equity securities of $35.9 million at December 31, 2000,
would have resulted in unrealized gains or losses and would have changed
net increase in stockholders' equity resulting from operations for the
quarter significantly.
The Company's sensitivity to changes in interest rates is regularly
monitored and analyzed by measuring the characteristics of assets and
liabilities. The Company utilizes various methods to assess interest
rate risk in terms of the potential effect of interest income net of
interest expense, the market value of net assets and the value at risk in
an effort to ensure that the Company is insulated from any significant
adverse effects from changes in interest rates. Based on the model used
for the sensitivity of interest income net of interest expense, if the
balance sheet were to remain constant and no actions were taken to alter
the existing interest rate sensitivity, a hypothetical 100 basis point
change in interest rates would have affected net increase in
stockholders' equity resulting from operations significantly over a three
month horizon. Although management believes that this measure is
indicative of the Company's sensitivity to interest rate changes, it does
not adjust for potential changes in credit quality, size and composition
of the balance sheet and other business developments that could affect
net income. Accordingly, no assurances can be given that actual results
would not differ materially from the potential outcome simulated by this
estimate.
. Forward-Looking Statements
Included in this report and other written and oral information by
management from time to time, including reports to shareholders,
quarterly and semi-annual shareholder letters, filings with the
Commission, news releases and investor presentations, are forward-looking
statements about business objectives and strategies, market potential,
the Company's ability to expand the geographic scope of its investments,
the quality of the Company's due diligence efforts, its financing plans,
its vendors, suppliers, and portfolio companies, future financial
performance and other matters that reflect management's expectations as
of the date made.
Except for historical information, all of the statements, expectations
and assumptions contained in the foregoing are "forward-looking
statements" (within the meaning of the Private Securities Litigation
Reform Act of 1995) that involve a number of risks and uncertainties. It
is possible that the assumptions made by management - including, but not
limited to, the average maturity of our investments, the potential to
realize investment gains as these investments mature, investment
opportunities, results, performance or expectations - may not
materialize. Actual results may differ materially from those projected
or implied in any forward-looking statements. In addition to the above
factors, other important factors that may affect the company's
performance include: the risks associated with the performance of the
Company's portfolio companies, dependencies on key employees, interest
rates, the level of economic activity, and competition, as well as other
risks described from time to time in the Company's filings with the
Securities Exchange Commission, press releases, and other communications.
The Company disclaims any intent or obligation to update these forward
looking statements, whether as a result of new information, future
events, or otherwise.
15
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2000 Annual Meeting of Shareholders of Waterside Capital Corporation
was held on October 23, 2000 to consider two matters of business. The matters
brought before the shareholders and the voting results are as follows:
1. Election of Directors
FOR % WITHHOLD %
--------- ---- -------- ---
James E. Andrews 1,372,195 99.5 6,834 0.5
J. W. Whiting Chisman, Jr. 1,372,195 99.5 6,834 0.5
Jeffrey R. Ellis 1,372,195 99.5 6,834 0.5
Eric L. Fox 1,372,195 99.5 6,834 0.5
Marvin S. Friedberg 1,372,195 99.5 6,834 0.5
Roger L. Frost 1,372,195 99.5 6,834 0.5
Ernest F. Hardee 1,372,195 99.5 6,834 0.5
Henry U. Harris, III 1,372,195 99.5 6,834 0.5
J. Alan Lindauer 1,372,195 99.5 6,834 0.5
Robert I. Low 1,372,195 99.5 6,834 0.5
Harold J. Marioneaux, Jr. 1,372,195 99.5 6,834 0.5
Peter W. Meredith, Jr. 1,372,195 99.5 6,834 0.5
Charles H. Merriman 1,372,195 99.5 6,834 0.5
Augustus C. Miller 1,372,195 99.5 6,834 0.5
Paul F. Miller 1,372,195 99.5 6,834 0.5
Juan M. Montero 1,372,195 99.5 6,834 0.5
R. Scott Morgan, Sr. 1,372,195 99.5 6,834 0.5
Richard G. Ornstein 1,372,195 99.5 6,834 0.5
Jordan E. Slone 1,372,195 99.5 6,834 0.5
Ratification of the appointment of KPMG LLP as independent auditors for 2001
FOR % AGAINST % ABSTAIN %
--------- ----- ------- ---- ------- ----
1,374,517 99.7% 500 0.0% 4,012 0.3%
*"Broker Non-Votes" occur where a broker holding stock in street name does not
vote those shares.
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ITEM 5. OTHER INFORMATION
In January 2001, the Company entered into employment agreements with
four of its executive officers. These agreements provide for a
specified annual base salary and certain discretionary bonuses. These
agreements expire on January 31, 2004. These amounts provide that if
the Company terminates the employee's employment without cause, the
Company is obligated to pay the employee an amount equal to two times
the employee's base salary as then in effect, plus the average of the
bonuses received by the employee for each of the two years prior to
the date of termination.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K:
10.1 Employment Agreement, dated as of January 1, 2001, between
the Registrant and J. Alan Lindauer.
10.2 Employment Agreement, dated as of January 1, 2001, between
the Registrant and Gerald T. McDonald.
10.3 Employment Agreement, dated as of January 1, 2001, between
the Registrant and Martin N. Speroni.
10.4 Employment Agreement, dated as of January 1, 2001, between
the Registrant and Lex W. Troutman.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this Form 10-Q to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Norfolk, Commonwealth of
Virginia on the 14th day of February, 2001.
WATERSIDE CAPITAL CORPORATION
By /s/ J. Alan Lindauer
-----------------------------------------
J. Alan Lindauer
President and Principal Executive Officer
By /s/ Gerald T. McDonald
-----------------------------------------
Gerald T. McDonald
Principal Financial Officer
18