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, 2001
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, 2001, 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, 2001 and December 31, 2001 (unaudited) 2
Statements of Operations for the Three Months Ended and Six Month
Ended December 31, 2000 and 2001 (unaudited) 3
Statements of Changes in Stockholders' Equity for the Six
Months Ended December 31, 2000 and 2001 (unaudited) 4
Statements of Cash Flows for the Six Months Ended
December 31, 2000 and 2001 (unaudited) 5
Notes to Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 16
SIGNATURES 17
1
WATERSIDE CAPITAL CORPORATION
Balance Sheets
June 30, 2001 and December 31, 2001
--------------------------------------------------------------------------------
June 30, December 31,
2001 2001
----------------- ------------------
(Unaudited)
Assets:
Investments in portfolio companies, at fair value (note 2):
Equity securities $ 23,146,571 $ 17,963,480
Debt securities 6,514,395 7,704,866
Options and warrants 4,025,942 4,910,454
----------------- ------------------
Total investments, cost of $41,702,728 and $38,457,333
at June 30, 2001 and December 31, 2001, respectively 33,686,908 30,578,800
----------------- ------------------
Current assets:
Cash and cash equivalents 1,089,386 3,706,024
Current portion of dividends receivable 719,188 588,446
Interest receivable 101,304 131,987
Notes receivable 237,550 297,013
Refundable income taxes 533,225 89,513
Prepaid expenses 131,891 107,638
Other current assets 50,466 7,428
----------------- ------------------
Total current assets 2,863,010 4,928,049
----------------- ------------------
Dividends receivable, excluding current portion 278,583 368,583
Property and equipment, net 133,217 110,987
Deferred income taxes 550,000 38,000
Deferred financing costs, net 867,040 834,015
----------------- ------------------
Total assets $ 38,378,758 $ 36,858,434
================= ==================
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable $ 85,224 $ 15,990
Accrued interest 657,514 662,918
Accrued expenses 237,009 74,077
Deferred revenue - 19,417
----------------- ------------------
Total current liabilities 979,747 772,402
Debentures payable 25,400,000 25,400,000
----------------- ------------------
Total liabilities 26,379,747 26,172,402
----------------- ------------------
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 (7,464,341) (7,839,054)
Undistributed accumulated earnings 3,263,203 2,324,937
----------------- ------------------
Total stockholders' equity 11,999,011 10,686,032
Commitments and contingencies
----------------- ------------------
Total liabilities and stockholders' equity $ 38,378,758 $ 36,858,434
================= ==================
Net asset value per common share $ 7.59 $ 6.76
================= ==================
See accompanying notes to financial statements.
2
WATERSIDE CAPITAL CORPORATION
Unaudited Statements of Operations
Three Months and Six Months ended December 31, 2000 and 2001
--------------------------------------------------------------------------------
Three Months ended Six Months ended
December 31, December 31,
-------------------------- ---------------------------
2000 2001 2000 2001
----------- ------------ ------------ ------------
Operating income:
Dividends $ 645,559 $ 519,621 $ 1,359,906 $ 1,120,137
Interest on debt securities 198,208 252,230 458,663 657,978
Interest on cash equivalents 1,642 9,146 8,232 17,383
Fee and other income 93,181 71,795 205,227 239,307
----------- ------------ ------------ ------------
Total operating income 938,590 852,792 2,032,028 2,034,805
----------- ------------ ------------ ------------
Operating expenses:
Salaries and benefits 204,836 176,306 455,373 369,391
Legal and accounting 52,100 44,100 94,481 88,200
Interest expense 494,644 526,995 957,659 1,050,263
Other operating expenses 82,180 68,209 187,179 147,454
----------- ------------ ------------ ------------
Total operating expenses 833,760 815,610 1,694,692 1,655,308
----------- ------------ ------------ ------------
Net operating income before income taxes 104,830 37,182 337,336 379,497
Income tax expense (benefit) (170,000) 76,000 (319,000) -
----------- ------------ ------------ ------------
Net operating income (loss) 274,830 (38,818) 656,336 379,497
Realized loss on investments, net of income tax expense of
of $670,000 for the three months ended December 31,
2001 and $0 for the six months ended December 31, 2001 - (222,778) - (1,317,763)
Change in unrealized depreciation on investments, net of
income tax expense (benefit) of $159,000 and $(302,000)
for the three months ended December 31, 2000 and 2001,
respectively, and $(274,000) and $512,000 for the six
months ended December 31, 2000 and 2001, respectively (1,369,473) (1,706,162) (2,079,036) (374,713)
----------- ------------ ------------ ------------
Net decrease in stockholders' equity resulting
from operations $(1,094,643) $ (1,967,758) $ (1,422,700) $ (1,312,979)
=========== ============ ============ ============
Net decrease in stockholders' equity resulting from
operations per share - basic and diluted $ (0.69) $ (1.24) $ (0.90) $ (0.83)
=========== ============ ============ ============
See accompanying notes to financial statements.
3
WATERSIDE CAPITAL CORPORATION
Unaudited Statements of Changes in Stockholders' Equity
Six Months ended December 31, 2000 and 2001
--------------------------------------------------------------------------------
Common stock Additional Net unrealized Undistributed Total
--------------------------- paid-in depreciation accumulated stockholders'
Shares Amount capital on investments earnings 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
Change 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
============ ============ =========== =========== =========== ===========
Balance at June 30, 2001 1,581,430 $ 1,581,430 $ 14,618,719 $ (7,464,341) $ 3,263,203 $ 11,999,011
Net operating income - - - - 379,497 379,497
Net realized loss on investments, net of income
taxes - - - - (1,317,763) (1,317,763)
Change in net unrealized depreciation on
investments, net of income taxes - - - (374,713) - (374,713)
------------ ------------ ----------- ----------- ----------- -----------
Balance at December 31, 2001 1,581,430 $ 1,581,430 $ 14,618,719 $ (7,839,054) $ 2,324,937 $ 10,686,032
============ ============ =========== =========== =========== ===========
See accompanying notes to financial statements.
4
WATERSIDE CAPITAL CORPORATION
Unaudited Statements of Cash Flows
Six months ended December 31, 2000 and 2001
--------------------------------------------------------------------------------
2000 2001
---------------- ----------------
Cash flows from operating activities:
Net decrease in stockholders' equity resulting from operations $ (1,422,700) $ (1,312,979)
Adjustments to reconcile net decrease in stockholders' equity resulting
from operations to net cash provided by operating activities:
Unrealized depreciation (appreciation) on investments 2,353,036 (137,287)
Realized loss on investments - 1,317,763
Accretion of preferred stock and loan investments (269,057) (250,275)
Depreciation and amortization 47,115 55,255
Deferred income tax expense (benefit) (582,000) 512,000
Changes in assets and liabilities increasing (decreasing)
cash flows from operating activities:
Dividends receivable (137,492) 40,742
Interest receivable 109,608 (30,683)
Refundable income taxes 323,322 443,712
Prepaid expenses and other current assets 79,687 67,291
Accounts payable and accrued expenses (35,887) (226,762)
Deferred revenue - 19,417
---------------- ----------------
Net cash provided by operating activities 465,632 498,194
---------------- ----------------
Cash flows from investing activities:
Investments in equity securities made (745,112) -
Investments in debt securities made (3,104,148) (2,661,258)
Principal collected on debt securities 1,734,931 1,563,454
Issuance of note receivable - (87,842)
Proceeds from collection of note receivable - 28,379
Proceeds from sales of investments - 3,275,711
Acquisition of property and equipment (2,972) -
---------------- ----------------
Net cash provided by (used in) investing activities (2,117,301) 2,118,444
---------------- ----------------
Cash flows from financing activities:
Repayments of lines of credit (1,450,000) -
Proceeds from debentures payable 3,100,000 -
Payment of deferred financing costs (77,500) -
---------------- ----------------
Net cash provided by financing activities 1,572,500 -
---------------- ----------------
Net increase (decrease) in cash and cash equivalents (79,169) 2,616,638
Cash and cash equivalents, beginning of year 118,314 1,089,386
---------------- ----------------
Cash and cash equivalents, end of period $ 39,145 $ 3,706,024
================ ================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 827,244 $ 1,011,834
================ ================
Cash paid during the period for income taxes $ - $ -
================ ================
See accompanying notes to financial statements.
5
WATERSIDE CAPITAL CORPORATION
Notes to Financial Statements
June 30, 2001 and December 31, 2001 (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 accompanying 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 of and for the year ended June 30, 2001, 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, 2001 and December 31, 2001 (Unaudited)
--------------------------------------------------------------------------------
Discounts can range from 0% to 4% for investment size and market liquidity
concerns. Actual liquidity discounts in the portfolio at December 31, 2001
ranged from 15% 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
$33,686,908 and $30,578,800 at June 30, 2001 and December 31, 2001 (87.8%
and 83.0% 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.
7
WATERSIDE CAPITAL CORPORATION
Unaudited Schedule of Portfolio Investments
June 30, 2001 and December 31, 2001
--------------------------------------------------------------------------------
The Company's investment portfolio at June 30, 2001 consisted of the following:
Cost or
Number of contributed
Equity Securities: shares value Fair value
------------------ ------------- ---------------- --------------
Publicly Traded Companies:
Avery Communications, Inc. Common Stock 245,000 $ 235,597 $ 65,660
Avery Communications, Inc. Common Stock (a) 190,167 95,084 43,359
Avery Communications, Inc. Preferred Stock 1,250,000 1,250,000 1,250,000
Netplex Group, Inc. Common Stock 66,400 464,800 9,761
Netplex Group, Inc. Preferred Stock 1,500,000 1,355,504 1,355,504
Tangent Solutions, Inc. (formerly Electronic Business
Systems, Inc.) Common Stock (b) 500,000 225,000 -
Tangent Solutions, Inc. (formerly Electronic Business
Systems, Inc.) Common Stock (b) 1,423,821 60,484 -
Primal Solutions, Inc. Common Stock 475,167 9,503 11,404
Private Companies:
Real Time Data Management Services, Inc. Preferred Stock 300 296,715 512,848
Delta Education Systems, Inc. Preferred Stock 1,625 1,603,923 1,603,923
Diversified Telecom, Inc. Preferred Stock (c) 1,500 1,500,000 508,512
Crispies, Inc. Preferred Stock 400 398,880 398,880
Triangle Biomedical Sciences Preferred Stock (c) 2,100 2,113,969 2,113,969
JMS Worldwide, Inc. Preferred Stock 1,500 1,500,000 1,500,000
EPM Development Systems Corp. Preferred Stock 1,500 1,495,167 1,495,167
Fire King International Preferred Stock 2,000 2,000,000 2,000,000
CCT Holdings (formerly SECC) Common Stock 840,000 60 60
Eton Court Asset Management, Ltd. Preferred Stock 1,000 980,337 980,337
Fairfax Publishing Co., Inc. Preferred Stock 1,100 1,663,746 1,663,746
Digital Square, Inc. Convertible Preferred Stock 1,210,739 1,513,425 1,513,425
Answernet, Inc. Preferred Stock 550 336,232 336,232
Answernet, Inc. Preferred Stock 700 412,369 412,369
ISR Solutions, Inc. Preferred Stock 500 497,995 497,995
Capital Markets Group, Inc. Preferred Stock (c) 1,500 1,500,000 -
Jubilee Tech International, Inc. Convertible Preferred Stock (c) 2,200,000 2,007,514 2,007,514
VentureCom, Inc. Convertible Preferred Stock 278,164 2,000,000 2,000,000
Phoenix Fabrications, Inc. Preferred Stock (c) 400 279,063 279,063
AmeriComm Direct Marketing LLC Preferred Stock 27,696 28 28
Signius Investment Corporation Common Stock 2,059 332,595 586,815
-------------- --------------
Total equity securities 26,127,990 23,146,571
-------------- --------------
Cost or
contributed
Debt Securities: Maturity value Fair value
---------------- -------- ----- ----------
Avery Communications, Inc. Convertible Note 12/10/02 $ 350,000 $ 350,000
Extraction Technologies of VA, LLC (c) (d) 7/22/03 900,000 -
Extraction Technologies of VA, LLC (c) (d) 8/31/04 202,316 -
Extraction Technologies of VA, LLC (c) (d) 11/2/04 373,711 -
Extraction Technologies of VA, LLC (c) (d) 2/7/05 263,742 -
Extraction Technologies of VA, LLC (c) (d) 2/25/05 97,409 -
Extraction Technologies of VA, LLC (c) (d) 3/14/05 95,584 -
JMS Worldwide, Inc. 7/31/03 900,000 900,000
Diversified Telecom, Inc. (c) Demand 84,250 84,250
Diversified Telecom, Inc. (c) 5/19/02 131,238 131,238
ISR Solutions, Inc. 6/30/04 744,167 744,167
Fire King International Demand 550,000 550,000
TABET Manufacturing Co., Inc. 12/31/04 304,575 304,575
National Assisted Living, LP (c) 12/31/04 835,880 -
New Dominion Pictures LLC 4/30/06 784,103 784,103
8 (Continued)
WATERSIDE CAPITAL CORPORATION
Unaudited Schedule of Portfolio Investments
June 30, 2001 and December 31, 2001
--------------------------------------------------------------------------------
Cost or
contributed
Maturity value Fair value
--------------- ------------- ------------
Mayfair Enterprises, Inc. 7/18/05 $ 243,519 $ 243,519
Digital Square, Inc. (c) 9/15/05 289,250 289,250
Phoenix Fabrications, Inc. 9/8/05 348,830 348,830
Kotarides Baking Co. of VA (c) 6/5/01 577,336 577,336
Kotarides Baking Co. of VA Demand 200,000 200,000
AmeriComm Direct Marketing LLC 12/29/05 750,000 750,000
Triangle Biomedical Sciences 12/8/01 164,843 164,843
Tangent Solutions, Inc. (formerly Electronic Business
Systems, Inc.) (b) (c) - 2,038,287 92,284
-------------- ------------
Total debt securities 11,229,040 6,514,395
-------------- ------------
Cost or
Number of Percentage contributed
Stock Options and Warrants: shares ownership value Fair value
--------------------------- -------- ----------------- ------------- -------------
Publicy Traded Companies:
Netplex Group, Inc. (a) 300,000 2.10 $ 900,000 $ -
Tangent Solutions, Inc. (formerly Electronic Business
Systems, 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 75,413
Diversified Telecom, Inc. 8,998 15.00 - -
Crispies, Inc. 524 6.37 2,800 4,395
Triangle Biomedical Sciences 632,916 12.20 171,967 216,485
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 1,177,415
Fire King International 4 4.00 - -
CCT Holdings (formerly SECC) 150,000 3.15 - -
Eton Court Asset Management, Ltd. 14,943 13.00 34,700 34,700
Fairfax Publishing Co., Inc. 1,026 20.30 123,238 426,638
ISR Solutions, Inc. 588,334 5.90 12,936 12,936
Digital Square, Inc. 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 -
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 - -
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 4,345,698 4,025,942
------------- ------------
Total investments $ 41,702,728 $33,686,908
============= ============
9 (Continued)
WATERSIDE CAPITAL CORPORATION
Unaudited Schedule of Portfolio Investments
June 30, 2001 and December 31, 2001
--------------------------------------------------------------------------------
The Company's investment portfolio at December 31, 2001 consisted of the
following:
Cost or
Number of contributed
Equity Securities: shares value Fair value
------------------ ---------------- ------------- --------------
Publicly Traded Companies:
Avery Communications, Inc. Preferred Stock 1,250,000 $ 1,250,000 $ 1,250,000
Netplex Group, Inc. Common Stock 66,400 464,800 2,323
Tangent Solutions, Inc. (formerly Electronic Business
Systems, Inc.) Common Stock (b) 500,000 225,000 -
Tangent Solutions, Inc. (formerly Electronic Business
Systems, Inc.) Common Stock (b) 1,423,821 60,484 -
Primal Solutions, Inc. Common Stock 280,000 5,600 8,960
Private Companies:
Real Time Data Management Services, Inc. Common Stock 125 115,000 157,000
Delta Education Systems, Inc. Preferred Stock 1,625 1,606,333 1,606,333
Diversified Telecom, Inc. Preferred Stock (c) 1,500 1,500,000 508,512
Crispies, Inc. Preferred Stock 400 399,160 399,160
Triangle Biomedical Sciences Preferred Stock (c) 2,200 2,126,713 2,126,713
EPM Development Systems Corp. Preferred Stock 1,500 1,496,327 1,496,327
Fire King International Preferred Stock 2,000 2,000,000 2,000,000
CCT Holdings (formerly SECC) Common Stock 840,000 60 60
Eton Court Asset Management, Ltd. Preferred Stock 1,000 983,807 983,807
Fairfax Publishing Co., Inc. Preferred Stock 600 575,560 575,560
Digital Square, Inc. Convertible Preferred Stock 1,210,739 1,513,425 163,425
Answernet, Inc. Preferred Stock 545 352,500 352,500
Answernet, Inc. Preferred Stock 700 434,794 434,794
Capital Markets Group, Inc. Preferred Stock (c) 1,500 1,500,000 -
Jubilee Tech International, Inc. Convertible Preferred Stock (c) 2,200,000 2,027,934 2,027,934
VentureCom, Inc. Convertible Preferred Stock 278,164 2,000,000 2,000,000
Phoenix Fabrications, Inc. Preferred Stock (c) 400 283,229 283,229
AmeriComm Direct Marketing LLC Preferred Stock 27,696 28 28
Signius Investment Corporation Common Stock 2,059 332,595 586,815
Netplex Systems, Inc. Preferred Stock 1,000,000 1,187,107 1,000,000
-------------- ---------------
Total equity securities 22,440,456 17,963,480
-------------- ---------------
Cost or
contributed
Debt Securities: Maturity value Fair value
---------------- ---------------- ------------- ---------------
Avery Communications, Inc. Convertible Note 12/31/06 $ 680,681 $ 680,681
Extraction Technologies of VA, LLC (c) (d) 7/22/03 900,000 -
Extraction Technologies of VA, LLC (c) (d) 8/31/04 202,316 -
Extraction Technologies of VA, LLC (c) (d) 11/2/04 373,711 -
Extraction Technologies of VA, LLC (c) (d) 2/7/05 263,742 -
Extraction Technologies of VA, LLC (c) (d) 2/25/05 97,409 -
Extraction Technologies of VA, LLC (c) (d) 3/14/05 95,584 -
JMS Worldwide, Inc. (c) 7/31/03 2,350,000 -
Diversified Telecom, Inc. (c) Demand 81,250 81,250
Diversified Telecom, Inc. (c) 5/19/02 131,238 131,238
Fire King International Demand 550,000 550,000
TABET Manufacturing Co., Inc. 12/31/04 317,710 317,710
National Assisted Living, LP (c) 12/31/04 835,880 -
New Dominion Pictures LLC 4/30/06 814,171 814,171
Mayfair Enterprises, Inc. Demand 215,000 215,000
Digital Square, Inc. (c) 9/15/05 289,250 289,250
Phoenix Fabrications, Inc. (c) 9/8/05 379,038 379,038
AmeriComm Direct Marketing LLC 12/29/05 750,000 750,000
10 (Continued)
WATERSIDE CAPITAL CORPORATION
Unaudited Schedule of Portfolio Investments
June 30, 2001 and December 31, 2001
--------------------------------------------------------------------------------
Cost or
contributed
Maturity value Fair value
--------------- -------------- ---------------
Triangle Biomedical Sciences Demand $ 187,101 $ 187,101
Jubilee Tech International, Inc. 3/21/02 125,000 125,000
Netplex Group, Inc. 12/31/01 154,697 154,697
Netplex Group, Inc. 1/28/02 1,068,397 900,000
Eton Court Asset Management, Ltd. 5/18/04 500,000 500,000
Caldwell/VSR, Inc. 12/16/06 1,629,730 1,629,730
-------------- ---------------
Total debt securities 12,991,905 7,704,866
-------------- ---------------
Cost or
Number of Percentage contributed
Stock Options and Warrants: shares ownership value Fair value
--------------------------- -------------- --------------- -------------- ---------------
Private Companies:
Delta Education Systems, Inc. 639 39.00 $ 48,200 $ 1,118,667
Diversified Telecom, Inc. 8,998 15.00 - -
Crispies, Inc. 524 6.37 2,800 4,395
Triangle Biomedical Sciences 632,916 12.20 171,967 216,485
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 1,177,415
Fire King International 4 4.00 - -
Eton Court Asset Management, Ltd. 14,943 13.00 34,700 34,700
Fairfax Publishing Co., Inc. 1,026 20.30 123,238 426,638
ISR Solutions, Inc. 588,334 5.90 11,965 761,834
Digital Square, Inc. 150,000 - 75,000 -
Answernet, Inc. 69,837 16.50 268,615 435,000
TABET Manufacturing Co., Inc. 487,500 19.50 175,400 175,400
National Assisted Living, LP - 15.00 667,000 -
Capital Markets Group, Inc. 2,294,118 15.00 - -
Jubilee Tech International, Inc. 400,000 1.60 240,000 -
Signius Investment Corporation 12 11.67 - -
VentureCom, Inc. 38,943 0.37 - -
New Dominion Pictures LLC - 9.00 464,650 464,650
Phoenix Fabrications, Inc. - 25.00 297,000 -
Caldwell/VSR, Inc. - 5.75 95,270 95,270
-------------- ---------------
Total options and warrants 3,024,972 4,910,454
-------------- ---------------
Total investments $ 38,457,333 $ 30,578,800
============== ===============
(a) Rule 144A restricted securities.
(b) This entity 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 located 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 remaining portion of the
Company's operating income comes from interest earned on cash equivalents.
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 6 full time employees.
. Results of Operations
Comparison of Three Months Ended December 31, 2001 and December 31, 2000
For the three months ended December 31, 2001, total operating income was
$853,000 compared to $939,000 reported during the same period of 2000, a
decrease of $86,000 or 9.2%. The decrease in operating income is primarily
due to management's decision to discontinue the accrual of dividend and
interest income on an increased number of investments which are not
performing as expected. The Company's quarterly operating income for three
months ended December 31, 2001 consisted of dividends of $520,000, interest
on debt securities of $252,000, fee income of $72,000 and interest on cash
equivalents of $9,000. For the comparable period of 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 were $816,000 for the three months ended December
31, 2001, compared to $834,000 reported for the three months ended December
31, 2000. Total operating expenses for the three months ended December 31,
2001 consisted of interest expense of $527,000, salaries and benefits of
$177,000, legal and accounting expenses of $44,000 and other operating
expenses of $68,000. For the three months ended December 31, 2000 total
operating expenses consisted of interest expense of $495,000, salaries and
benefits of $205,000, legal and accounting expenses of $52,000 and other
operating expenses of $82,000. The increase in interest expense for the
quarter ended December 31, 2001, compared to the quarter ended December 31,
2000, is due to the increased borrowings necessary to fund the Company's
investment portfolio. The decrease in salaries and benefits for the quarter
ended December 31, 2001, compared to the quarter ended December 31, 2000,
is due to the reduction in force of one Business Development Officer and
one clerical position. The Company's net operating loss of $39,000 for the
three months ended December 31, 2001 compared unfavorably to the $275,000
net operating income reported for the three months ended December 31, 2000.
The change in unrealized depreciation on investments of $2.0 million before
tax benefit of $302,000 for the three months ended December 31, 2001 was
due to the recognition of numerous gains and losses recognized during the
quarter. The most significant gains recorded during the quarter were a $1.0
million unrealized gain recognized from the Delta Education Systems, Inc
investment and a $750,000 unrealized gain on the ISR Solutions, Inc.
investment both due to new significant outside investments. These gains
were offset by write downs on two investments
12
consisting of $2.4 million on the JMS North America Inc. investment and $1.4
million on the Digital Square investment due to deteriorating financial
condition of these investees. The change in unrealized depreciation on
investments net of taxes of $1.4 million for the three months ended December 31,
2000 was primarily due to the write down of a portfolio company (Extraction
Technologies of Virginia) that filed for bankruptcy protection under Chapter 11
of the US Bankruptcy Code in order to restructure contractual and debt
obligations.
During the quarter ended December 31, 2001, the Company ceased recognizing
deferred tax benefits associated with the generation of net operating losses
from operations and its realized loss because management could no longer
conclude that it is more likely than not that those benefits could be realized.
Because the Company operates as a licensed SBIC, its dividend income is not
taxable. As a result, it is unlikely that the Company will generate taxable
income from operations in the foreseeable future. Unless the Company is able to
generate significant realized gains on sales of investments, the benefits of tax
losses from operations and any realized losses from settlement of investments
are not likely to be realized. As a result, the Company has provided a valuation
allowance against its deferred tax asset to reflect an amount that is more
likely than not to be realized.
The net decrease in stockholders' equity resulting from operations of $1,968,000
for the three months ended December 31, 2001, or $1.24 per share, compared to a
decrease of $1,095,000, or $.69 per share, for the three months ended December
31, 2000.
. Comparison of six months ended December 31, 2001 and December 31, 2000
For the six months ended December 31, 2001, total operating income was
$2,035,000 which is consistent with the $2,032,000 reported for the six months
ended December 31, 2000. The operating income reported for the six months ended
December 31, 2001 consisted of dividends of $1,120,000, interest on debt
securities of $658,000, fee income of $239,000, and interest on cash equivalents
of $18,000. For the six months ended December 31, 2000, 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, 2001 were
$1,655,000, consisting of interest expense of $1,050,000, salaries and benefits
of $369,000, legal and accounting expenses of $88,000 and other operating
expenses of $148,000. These expenses compared to $1,695,000 for the six months
ended December 31, 2000, consisting of interest expense of $958,000, salaries
and benefits of $455,000, legal and accounting expenses of $95,000, and other
operating expenses of $187,000. The increase in interest expense for the six
months ended December 31, 2001, compared to December 31, 2000, is due to the
increased borrowings necessary to fund the Company's investment portfolio. The
decrease in salaries and benefits and other operating expenses when comparing
the six months ended December 31, 2001 to 2000, is due to a combination of a
reduction in force and reduced travel expense. As an SBIC the Company is
regulated by the SBA and must operate within certain prescribed expense
guidelines. At December 31, 2001, the Company is in compliance with the SBA
guidelines for management expense.
For the six months ended December 31, 2001, net operating income before income
taxes was $379,000 compared to the $337,000 reported for the six months ended
December 31, 2000. Net operating income declined to $379,000 for the six months
ended December 31, 2001 from the $656,000 reported for the six months ended
December 31, 2000 due primarily to a valuation allowance recognized for deferred
tax benefits associated with the generation of net operating losses from
operations. The Company recognized $319,000 in income tax benefit for the six
months ended December 31, 2000 compared to $0 for the six months ended December
31, 2001.
During the six months ended December 31, 2001, the Company realized a loss on
investments of $1.3 million due primarily to the realization of the previously
recorded unrealized loss related to Tangent Solutions, Inc. (Formerly named
Electronic Business Systems, Inc. and Triangle Imaging Group, Inc.). The
realization was due to a bankruptcy court ruling.
The change in unrealized depreciation on investments, net of income tax expense,
of $375,000 for the six months ended December 31, 2001 was due to numerous gains
and losses recognized on the company's investment portfolio.
13
The change in unrealized depreciation consisted of gains of $1.0 million on the
Delta Education Systems, Inc. investment due to a new significant outside
investment, $750,000 on the ISR Solutions, Inc. investment due to a new
significant outside investment, $537,000 on the The Netplex Group, Inc.
investment due to restructuring of the terms of the investment and a $1.9
million reclassification of unrealized depreciation related to Tangent
Solutions, Inc to a realized loss. These gains were offset by unrealized losses
recognized of $2.4 million on the JMS North America Inc. investment and $1.4
million on the Digital Square investment due to the deteriorating financial
condition of these investees. During the six months ended December 31, 2000 the
Company 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. As previously discussed in the three month comparison, the Company has
ceased recognizing deferred tax benefits associated with the generation of net
operating losses from operations and its realized loss.
The net decrease in stockholders' equity resulting from operations of $1.3
million for the six months ended December 31, 2001 or $.83 per share compared to
a decrease of $1.4 million or $.90 per share for the comparable six months ended
December 31, 2000.
. Financial Condition, Liquidity And Capital Resources
At December 31, 2001, the Company's investment portfolio totaled $30.6 million
compared with the $33.7 million reported at June 30, 2001. For the six months
ended December 31, 2001, the Company funded $2.7 million in new loans and
investments and received proceeds from sales of investments and principal
collected on debt securities of $4.8 million. For the comparable six months
ended December 31, 2000, the Company funded $3.8 million in new investments and
received $1.7 million in principal collected on debt securities.
Net asset value per common share declined to $6.76 per share at December 31,
2001, from $7.59 per share reported at June 30, 2001.
During the six months ended December 31, 2001, net cash provided by operating
activities was $498,000 compared to the $466,000 provided during the six months
ended December 31, 2000. Net cash provided by investing activities was
$2,118,000 for the six months ended December 31, 2001 as compared to the
$2,117,000 used in investing activities for the six months ended December 31,
2000. This fluctuation is primarily due to new investments made of $ 2.7
million and proceeds from sales of investments and principal collected on debt
securities of $4.8 million for the six month ended December 31, 2001 compared to
new investments made of $3.8 million and principal collected on debt securities
of $1.7 million for the six months ended December 31, 2000. There were no cash
flows provided by financing activities for the six months ended December 31,
2001, compared to the $1,573,000 provided during the six months ended December
31, 2000. The cash was provided by debenture borrowings from the SBA during the
six months ended December 31, 2000, necessary to finance new investments. The
cash received from the SBA was partially offset by repayments on the Company's
lines of credit.
. Quantitative and Qualitative Disclosure About Market Risk
The Company's business activities contain elements of market 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 investments
that is diverse by industry, geographic area, size of individual investment and
borrower. The Company is exposed to a degree of risk of public
14
market price fluctuations as three of the Company's thirty investments are in
thinly traded, small public companies, whose stock prices have been volatile.
The other twenty-seven 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 based on estimates
made by the Company's Executive Committee. In the absence of a readily
ascertainable market value, the estimated value of the Company's 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 investments of $30.6 million at December 31, 2001,
would have resulted in unrealized gains or losses and would have changed net
increase in stockholders' equity resulting from operations for the quarter by
$306,000.
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 a negligible effect on the net increase in
stockholders' equity resulting from operations over the next year. 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 operating results. 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 Securities and Exchange Commission, news
releases and investor presentations, are forward-looking statements about
business objectives and strategies, market potential, its available capital
resources, including SBA leverage, 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. When the Company used words such as
"believes," "expects," "anticipates," "intends," "plans," "estimates," "should,"
"likely," or similar expressions, the Company is making a forward-looking
statement. 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 2001 Annual Meeting of Shareholders of Waterside Capital
Corporation was held on October, 29, 2001 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 1,237,128 93.6 84,531 6.4
J. W. Whiting Chisman, Jr. 1,237,128 93.6 84,531 6.4
Eric L. Fox 1,239,248 93.8 82,411 6.2
Marvin S. Friedberg 1,237,128 93.6 84,531 6.4
Roger L. Frost 1,239,248 93.8 82,411 6.2
Ernest F. Hardee 1,237,128 93.6 84,531 6.4
Henry U. Harris, III 1,239,248 93.8 82,411 6.2
J. Alan Lindauer 1,236,339 93.5 85,320 6.5
Robert L. Low 1,239,248 93.8 82,411 6.2
Peter M. Meredith, Jr. 1,237,128 93.6 84,531 6.4
Charles H. Merriman, III 1,239,248 93.8 82,411 6.2
Augustus C. Miller 1,239,248 93.8 82,411 6.2
Juan M. Montero, II 1,237,128 93.6 84,531 6.4
R. Scott Morgan, Sr. 1,239,248 93.8 82,411 6.2
Richard G. Ornstein 1,237,017 93.6 84,642 6.4
Jordan E. Stone 1,239,248 93.8 82,411 6.2
2. Ratification of the appointment of KPMG LLP as independent auditors for 2002.
FOR % AGAINST % ABSTAIN %
---- - -------- - ------- -
1,278,525 96.7 43,134 3.3 0 0.0
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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 12/th/ day of February 2002.
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
17