Edgar Filing: WATERSIDE CAPITAL CORP

Form 10-Q

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
SEPTEMBER 30, 2002

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

As of September 30, 2002, the registrant had issued and outstanding 1,557,630 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, 2002 and September 30, 2002 (unaudited)

	Statements of Operations for the Three Months Ended September 30, 2001 and 2002 (unaudited)

	Statements of Changes in Stockholders’ Equity for the Three Months Ended September 30, 2001 and 2002 (unaudited)

	Statements of Cash Flows for the Three Months Ended September 30, 2001 and 2002 (unaudited)


	Notes to Financial Statements (unaudited)

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 4.	Controls Procedures

PART II.	OTHER INFORMATION

SIGNATURES

CERTIFICATIONS

WATERSIDE CAPITAL CORPORATION

Unaudited Balance Sheets

June 30, 2002 and September 30, 2002

									June 30, 2002			September 30, 2002

Assets:
	Investments in portfolio companies, at fair value (note 3):
		Equity securities							$	15,304,120		$	15,258,164
		Debt securities								8,463,170			8,494,434
		Options and warrants								3,879,533			3,268,788

							Total investments, cost of $35,349,098 and $32,371,690 at June 30, 2002 and September 30, 2002, respectively			27,646,823			27,021,386

	Current assets:
			Cash and cash equivalents							5,417,202			4,461,108
			Current portion of dividends receivable							252,129			380,196
			Interest receivable							98,586			165,470
			Other receivable (note 4)							—			1,348,268
				Prepaid expenses						89,190			76,654
					Other current assets					—			25,914

								Total current assets		5,857,107			6,457,610

	Dividends receivable, excluding current portion									458,583			503,583
	Notes receivable									229,452			229,452
	Property and equipment, net									91,507			81,958
	Deferred financing costs, net									797,897			780,259

								Total assets	$	35,081,369		$	35,074,248

Liabilities and Stockholders’ Equity:
	Current liabilities:
						Accounts payable			$	7,010		$	5,466
						Accrued interest				677,067			166,522
						Accrued expenses				300,008			391,481
						Deferred revenue				91,626			46,140

								Total current liabilities		1,075,711			609,609
	Debentures payable									25,400,000			25,400,000

								Total liabilities		26,475,711			26,009,609

	Stockholders’ equity:
						Common stock, $1 par value, 10,000,000 shares authorized, 1,557,630 issued and outstanding at June 30, 2002 and September 30, 2002, respectively				1,557,630			1,557,630
						Preferred stock, $1 par value, 25,000 shares authorized, no shares issued and outstanding				—			—
						Additional paid-in capital				14,570,319			14,570,319
						Net unrealized depreciation on investments, net of income taxes				(7,702,275	)		(5,350,304	)
						Undistributed accumulated earnings (deficit)				179,984			(1,713,006	)

								Total stockholders’ equity		8,605,658			9,064,639
Commitments and contingencies

								Total liabilities and stockholders’ equity	$	35,081,369		$	35,074,248

								Net asset value per common share	$	5.52		$	5.82

See accompanying notes to financial statements.

WATERSIDE CAPITAL CORPORATION

Unaudited Statements of Operations

Three months ended September 30, 2001 and 2002

			2001			2002

Operating income:
	Dividends		$	600,516		$	498,405
	Interest on debt securities			405,748			347,462
	Interest on cash equivalents			8,237			11,744
	Fee and other income			167,512			3,181

		Total operating income		1,182,013			860,792

Operating expenses:
	Salaries and benefits			193,085			190,272
	Legal and accounting			44,100			56,600
	Interest expense			523,268			528,213
	Other operating expenses			79,245			74,025

		Total operating expenses		839,698			849,110

Recovery related to investee litigation, net (note 4)				—			615,018
		Net operating income before income taxes		342,315			626,700
Income tax benefit				(76,000	)		—

		Net operating income		418,315			626,700
Realized loss on investments, net of income tax benefit of $670,000 for the three months ended September 30, 2001and $0 for the three months ended September 30, 2002				(1,094,985	)		(2,519,690	)
Change in unrealized appreciation on investments, net of income tax expense of $814,000 for the three months ended September 30, 2001 and $0 for the three months ended September 30, 2002				1,331,449			2,351,971

		Net increase in stockholders’ equity resulting from operations	$	654,779		$	458,981

Net increase in stockholders’ equity resulting from operations per share - basic and diluted			$	0.41		$	0.29

Weighted average shares outstanding				1,581,430			1,557,630

See accompanying notes to financial statements.

WATERSIDE CAPITAL CORPORATION

Unaudited Statements of Changes in Stockholders’ Equity

Three months ended September 30, 2001 and 2002

	Common stock				Additional paid-in capital		Net unrealized depreciation on investments			Undistributed accumulated earnings			Total stockholders’ equity

	Shares		Amount

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		—		—		—		—			418,315			418,315
Net realized loss on investments, net of income taxes		—		—		—		—			(1,094,985	)		(1,094,985	)
Change in net unrealized depreciation on investments, net of income taxes		—		—		—		1,331,449			—			1,331,449

Balance at September 30, 2001		1,581,430	$	1,581,430	$	14,618,719	$	(6,132,892	)	$	2,586,533		$	12,653,790

Balance at June 30, 2002		1,557,630	$	1,557,630	$	14,570,319	$	(7,702,275	)	$	179,984		$	8,605,658
Net operating income		—		—		—		—			626,700			626,700
Net realized loss on investments		—		—		—		—			(2,519,690	)		(2,519,690	)
Change in net unrealized depreciation on investments		—		—		—		2,351,971			—			2,351,971

Balance at September 30, 2002		1,557,630	$	1,557,630	$	14,570,319	$	(5,350,304	)	$	(1,713,006	)	$	9,064,639

See accompanying notes to financial statements.

WATERSIDE CAPITAL CORPORATION

Unaudited Statements of Cash Flows

Three months ended September 30, 2001 and 2002

							2001			2002

Cash flows from operating activities:
	Net increase in stockholders’ equity resulting from operations						$	654,779		$	458,981
	Adjustments to reconcile net increase in stockholders’ equity resulting from operations to net cash used in operating activities:
		Unrealized appreciation on investments						(2,145,449	)		(2,351,971	)
		Realized loss on investments						1,764,985			2,519,690
		Accretion of preferred stock and loan investments						(172,364	)		(97,532	)
		Depreciation and amortization						27,456			27,187
		Deferred income tax expense						68,000			—
		Changes in assets and liabilities increasing (decreasing) cash flows from operating activities:
			Dividends receivable					(14,171	)		(173,067	)
			Interest receivable					(52,024	)		(66,884	)
				Other receivable				—			(865,018	)
					Prepaid expenses and other current assets			55,019			(13,378	)
					Accounts payable and accrued expenses			(544,105	)		(420,616	)
					Deferred revenue			—			(45,486	)

						Net cash used in operating activities		(357,874	)		(1,028,094	)

Cash flows from investing activities:
	Investments in debt securities made							(279,697	)		—
	Principal collected on debt securities							84,442			7,000
	Issuance of note receivable							(87,842	)		—
	Proceeds from collection of note receivable							27,500			—
	Proceeds from sales of investments							929,323			65,000

						Net cash provided by investing activities		673,726			72,000

Net increase (decrease) in cash and cash equivalents								315,852			(956,094	)
Cash and cash equivalents, beginning of year								1,089,386			5,417,202

Cash and cash equivalents, end of period							$	1,405,238		$	4,461,108

Supplemental disclosure of cash flow information -
	Cash paid during the period for interest						$	1,011,834		$	1,021,220

Supplemental disclosure of noncash investing activity -
	Recovery of investments (note 4)						$	—		$	483,250

See accompanying notes to financial statements.

WATERSIDE CAPITAL CORPORATION

Notes to Unaudited Financial Statements

September 30, 2002

	(1)	Basis of Presentation

		In the opinion of management, the accompanying unaudited interim financial statements of Waterside Capital Corporation (the Company) as of September 30, 2002 and for the three month periods ended September 30, 2001 and 2002 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 periods, 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 Company’s balance sheet as of June 30, 2002 has been derived from the audited financial statements as of June 30, 2002. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto incorporated by reference in the Company’s Form 10-K as of and for the year ended June 30, 2002, 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

WATERSIDE CAPITAL CORPORATION

Notes to Unaudited Financial Statements

September 30, 2002

		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.

		Discounts can range from 0% to 40% for investment size and market liquidity concerns. Actual liquidity discounts in the portfolio at September 30, 2002 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 $27,646,823 and $27,021,386 at June 30, 2002 and September 30, 2002 (78.8% and 77.0% 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.

	(4)	Settlement of Investee Litigation

		Litigation involving two former investees was settled during the three month period ended September 30, 2002, and the Company was awarded $1,418,268 in connection with the settlements. Of this amount, $935,018 was considered to be a recovery of expenses related to this litigation and is reflected as a component of operating income net of the expenses incurred this quarter. The remaining $483,250 was considered to be a recovery of the investment and is reflected as a component of the realized loss on the investment.

WATERSIDE CAPITAL CORPORATION

Unaudited Schedule of Portfolio Investments

June 30, 2002 and September 30, 2002

The Company’s investment portfolio at June 30, 2002 consisted of the following:

				Number of shares		Cost or contributed value		Fair value

Equity Securities:
	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		2,058
		Netplex Group, Inc. Preferred Stock			500,000		500,000		500,000
		Primal Solutions, Inc. Common Stock			200,000		4,000		6,800
	Private Companies:
		Real Time Data Management Services, Inc. Preferred Stock			125		115,000		100,000
		Delta Education Systems, Inc. Preferred Stock			400		400,000		400,000
		Diversified Telecom, Inc. Preferred Stock (a)			1,500		1,500,000		508,512
		Crispies, Inc. Preferred Stock			400		399,440		399,440
		Triangle Biomedical Sciences Common Stock (b)			54,743		223,738		268,256
		Triangle Biomedical Sciences Preferred Stock (b)			2,200		2,144,272		2,144,272
		EPM Development Systems Corp. Preferred Stock			1,500		1,497,487		1,497,487
		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 (a)			1,000		987,277		—
		Fairfax Publishing Co., Inc. Preferred Stock			600		580,448		580,448
		Digital Square, Inc. Convertible Preferred Stock (a)			1,210,739		1,513,425		—
		Answernet, Inc. Preferred Stock			1,085		728,997		728,997
		Capital Markets Group, Inc. Preferred Stock (a)			1,500		1,500,000		—
		Jubilee Tech International, Inc. Convertible Preferred Stock (a)			2,200,000		2,049,947		2,049,947
		VentureCom, Inc. Convertible Preferred Stock			278,164		2,000,000		2,000,000
		Phoenix Fabrications, Inc. Preferred Stock (a)			400		283,229		—
		AmeriComm Direct Marketing LLC Preferred Stock			27,696		28		28
		Signius Investment Corporation Common Stock (b)			2,059		332,595		586,815
		Wireless Systems Engineering, Inc. Common Stock (c)			8,000		2,350,000		281,000

			Total equity securities				22,824,743		15,304,120

			Maturity		Cost or contributed value		Fair value

Debt Securities:
	Avery Communications, Inc. Convertible Note			12/31/06	$	680,681	$	680,681
	Diversified Telecom, Inc. (a)			10/13/03		69,250		69,250
	Diversified Telecom, Inc. (a)			5/19/02		131,238		131,238
	Fire King International			Demand		550,000		550,000
	TABET Manufacturing Co., Inc.			12/31/04		332,819		332,819
	National Assisted Living, LP (a)			12/31/04		835,880		—
	New Dominion Pictures LLC			6/10/06		848,812		848,812
	Mayfair Enterprises, Inc.			3/31/05		816,923		816,923
	Digital Square, Inc. (a)			Demand		289,250		—
	Phoenix Fabrications, Inc. (a)			9/8/05		379,038		—
	AmeriComm Direct Marketing LLC			12/29/05		750,000		750,000
	Triangle Biomedical Sciences (b)			6/30/05		187,101		187,101
	Triangle Biomedical Sciences (b)			6/30/05		358,916		358,916
	Triangle Biomedical Sciences (b)			12/21/05		200,000		200,000
	Jubilee Tech International, Inc. (a)			3/21/02		125,000		125,000
	Netplex Group, Inc.			5/1/06		500,000		500,000
	Netplex Group, Inc.			7/1/06		733,290		733,290
	Eton Court Asset Management, Ltd. (a)			5/18/04		541,246		541,246
	Caldwell/VSR, Inc.			12/16/06		1,637,894		1,637,894

		Total debt securities				9,967,338		8,463,170

(Continued)

WATERSIDE CAPITAL CORPORATION

Unaudited Schedule of Portfolio Investments

June 30, 2002 and September 30, 2002

				Number of shares		Percentage ownership		Cost or contributed value		Fair value

Stock Options and Warrants:
	Private Companies:
		Diversified Telecom, Inc.			8,998		15.00	$	—	$	—
		Crispies, Inc.			56,250		12.00		2,800		4,800
		EPM Development Systems Corp.			201		7.60		11,600		1,177,415
		Fire King International			67		4.00		—		—
		Fire King Security Products, LLC			—		4.00		—		—
		Image Vault, LLC			—		4.00		—		—
		Eton Court Asset Management, Ltd.			21,848		18.50		34,700		—
		Fairfax Publishing Co., Inc.			1,026		20.30		123,238		426,638
		ISR Solutions, Inc.			534,167		2.25		11,744		801,745
		Digital Square, Inc.			150,000		—		75,000		—
		Answernet, Inc.			69,837		16.50		268,615		643,615
		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		—
		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
		Mayfair Enterprises, Inc.			—		22.30		90,000		90,000

			Total options and warrants						2,557,017		3,879,533

			Total investments					$	35,349,098	$	27,646,823

(Continued)

WATERSIDE CAPITAL CORPORATION

Unaudited Schedule of Portfolio Investments

June 30, 2002 and September 30, 2002

The Company’s investment portfolio at September 30, 2002 consisted of the following:

						Number of shares		Cost or contributed value		Fair value

Equity Securities:
	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		1,394
		Netplex Group, Inc. Preferred Stock					500,000		500,000		500,000
		Primal Solutions, Inc. Common Stock					200,000		4,000		4,800
	Private Companies:
			Real Time Data Management Services, Inc. Preferred Stock				125		115,000		100,000
				Delta Education Systems, Inc. Preferred Stock			400		400,000		400,000
				Diversified Telecom, Inc. Preferred Stock (a)			1,500		1,500,000		508,512
				Crispies, Inc. Preferred Stock			400		399,580		399,580
				Triangle Biomedical Sciences Common Stock (b)			54,743		223,738		268,256
				Triangle Biomedical Sciences Preferred Stock (b)			2,200		2,145,829		2,145,829
				EPM Development Systems Corp. Preferred Stock			1,500		1,498,067		1,498,067
				Fire King International Preferred Stock			2,000		2,000,000		2,000,000
				Eton Court Asset Management, Ltd. Preferred Stock (a)			1,000		987,277		—
				Fairfax Publishing Co., Inc. Preferred Stock			600		582,892		582,892
				Digital Square, Inc. Convertible Preferred Stock (a)			1,210,739		1,513,425		—
				Answernet, Inc. Preferred Stock			1,085		706,901		706,901
				Jubilee Tech International, Inc. Convertible Preferred Stock (a)			2,200,000		2,061,590		2,061,590
				VentureCom, Inc. Convertible Preferred Stock			278,164		2,000,000		2,000,000
				Phoenix Fabrications, Inc. Preferred Stock (a)			400		283,229		—
				AmeriComm Direct Marketing LLC Preferred Stock			27,696		28		28
				Signius Investment Corporation Common Stock (b)			2,059		332,595		586,815
				Wireless Systems Engineering, Inc. Common Stock (c)			8,000		2,350,000		243,500

					Total equity securities				21,318,951		15,258,164

			Maturity		Cost or contributed value		Fair value

Debt Securities:
	Avery Communications, Inc. Convertible Note			12/31/06	$	680,681	$	680,681
	Diversified Telecom, Inc. (a)			10/13/03		62,250		62,250
	Diversified Telecom, Inc. (a)			5/19/02		131,238		131,238
	Fire King International			Demand		550,000		550,000
	TABET Manufacturing Co., Inc.			12/31/04		341,205		341,205
	New Dominion Pictures LLC			6/01/06		868,060		868,060
	Mayfair Enterprises, Inc.			Demand		823,846		823,846
	Digital Square, Inc. (a)			9/15/05		289,250		—
	Phoenix Fabrications, Inc. (a)			9/8/05		379,038		—
	AmeriComm Direct Marketing LLC			12/29/05		750,000		750,000
	Triangle Biomedical Sciences (b)			6/30/05		187,101		187,101
	Triangle Biomedical Sciences (b)			6/30/05		358,916		358,916
	Triangle Biomedical Sciences (b)			12/21/05		200,000		200,000
	Jubilee Tech International, Inc. (a)			3/21/02		125,000		125,000
	Netplex Group, Inc.			5/1/06		500,000		500,000
	Netplex Group, Inc.			7/1/06		733,290		733,290
	Eton Court Asset Management, Ltd. (a)			5/18/04		541,246		541,246
	Caldwell/VSR, Inc.			12/16/06		1,641,601		1,641,601

		Total debt securities				9,162,722		8,494,434

(Continued)

WATERSIDE CAPITAL CORPORATION

Unaudited Schedule of Portfolio Investments

June 30, 2002 and September 30, 2002

				Number of shares		Percentage ownership		Cost or contributed value		Fair value

Stock Options and Warrants:
	Private Companies:
		Diversified Telecom, Inc.			8,998		15.00	$	—	$	—
		Crispies, Inc.			56,250		12.00		2,800		4,800
		EPM Development Systems Corp.			201		7.60		11,600		1,177,415
		Fire King International			67		4.00		—		—
		Fire King Security Products, LLC			—		4.00		—		—
		Image Vault, LLC			—		4.00		—		—
		Eton Court Asset Management, Ltd.			21,848		18.50		34,700		—
		Fairfax Publishing Co., Inc.			1,026		20.30		123,238		426,638
		ISR Solutions, Inc.			534,167		2.25		11,744		150,000
		Digital Square, Inc.			150,000		—		75,000		—
		Answernet, Inc.			69,837		16.50		268,615		684,615
		TABET Manufacturing Co., Inc.			487,500		19.50		175,400		175,400
		Capital Markets Group, Inc.			2,294,118		15.00		—		—
		Jubilee Tech International, Inc.			400,000		1.60		240,000		—
		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
		Mayfair Enterprises, Inc.			—		22.30		90,000		90,000

			Total options and warrants						1,890,017		3,268,788

			Total investments					$	32,371,690	$	27,021,386

(a) This entity is in arrears with respect to dividend/interest payments.

(b) This entity is considered an affiliate of the Company.

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 and payroll and other expenses incidental to operations. Waterside currently has 6 full time employees.

• Results of Operations

Comparison of Three Months Ended September 30, 2002 and September 30, 2001

For the three months ended September 30, 2002, total operating income was $861,000 compared to $1,182,000 reported during the same period of 2001, a decrease of $321,000 or 27.2%. The decrease in operating income is due to a combination of the following:

•	Managements decision to discontinue the accrual of dividend and interest income on an increased number of investments due to the uncertainty of collection of the income
•	Redemption or repayment of a number of performing investments resulting in the reduction in rates earned on the investment of the Company’s assets from approximately 12% to the current rates earned on temporary cash equivalent investments of approximately 1.5%. The Company’s cash position increased from $1.4 million at September 30, 2001 to $4.5 million at September 30, 2002 due to the redemptions and repayments.
•	Fee income for the three months ended September 30, 2001 included a late fee of $75,000 on a delinquent investment that was earned during the quarter.

The Company’s quarterly operating income for the three months ended September 30, 2002 consisted of dividends of $498,000, interest on debt securities of $347,000, interest on cash equivalents of $12,000 and fee and other income of $3,000. For the comparable period of 2001 quarterly operating income consisted of dividends of $601,000, interest on debt securities of $406,000, interest on cash equivalents of $8,000 and fee income of $168,000.

Total operating expenses were $849,000 for the three months ended September 30, 2002, which is consistent with the $840,000 reported for the three months ended September 30, 2001. Total operating expenses for the three months ended September 30, 2002 consisted of interest expense of $528,000, salaries and benefits of $190,000, legal and accounting expenses of $57,000 and other operating expenses of $74,000. For the three months ended September 30, 2001 total operating expenses consisted of interest expense of $523,000, salaries and benefits of $193,000, legal and accounting expenses of $44,000 and other operating expenses of $79,000.

During the quarter ended September 30, 2002, litigation involving two former investees was settled for $1,418,000. As a result, a recovery of $615,000 of legal and other expenses associated with the litigation, net of expenses incurred in the first quarter of 2003 was recorded in net operating income during the quarter.

The Company’s net operating income was $627,000 for the three month ended September 30, 2002 compared to $418,000 reported for the three months ended September 30, 2001.

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 losses 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 realized losses on investments recognized during the quarter ended September 30, 2002 were due to the realization of the previously recorded unrealized losses on two investments related to the litigation settled during the first quarter of 2003. The losses consisted of $1,480,000 related to the Capital Markets Group, Inc. investment and $1,040,000 related to the National Assisted Living investment. The realized loss on investments, net of income tax benefit, of $1,095,000 for the three months ended September 30, 2001 was primarily due 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 ruling.

The change in unrealized appreciation on investments of $2,352,000 for the three months ended September 30, 2002 was due to a combination of the reversal of unrealized depreciation related to the previously mentioned realized loss of the Capital Markets Group, Inc. investment and the National Assisted Living investment. The Company additionally recognized unrealized losses of $652,000 due to the revaluation of stock warrants held in ISR Solutions, Inc. The change in unrealized appreciation on investments, net of taxes, of $1,331,000 for the three months ended September 30, 2001 was due to a combination of the reversal of unrealized depreciation related to the Tangent Solutions, Inc. realized loss and the recognition of $540,000 of unrealized appreciation related to the Netplex Group, Inc investment.

The net increase in stockholders’ equity resulting from operations of $459,000 or $.29 per share for the three months ended September 30, 2002, compared to an increase of $655,000 or $.41 per share, for the comparable three months ended September 30, 2001 is due to the items noted above.

• Financial Condition, Liquidity And Capital Resources

At September 30, 2002, the Company’s investment portfolio totaled $27.0 million compared with the $27.6 million reported at June 30, 2002. For the three months ended September 30, 2002, the Company funded no new investments and received payments and proceeds from sales of investments of $72,000. For the comparable three months ended September 30, 2001, the Company funded $280,000 in new investments and received proceeds of $1,014,000 from sales of investments and principal collected on debt securities.

Net asset value per common share increased to $5.82 per share at September 30, 2002, from $5.52 per share reported at June 30, 2002.

During the three months ended September 30, 2002, the net cash used in operating activities was $1,028,000 compared to the $358,000 used during the three months ended September 30, 2001. This increase in cash used in operating activities is due to the decline in dividend and interest income as a result of the increased number of non-performing investments and the redemption or repayment of some performing investments. In addition, during the

three months ended September 30, 2002, the Company incurred and paid certain legal and other expenses related to the litigation involving two former investees but the Company did not receive settlement proceeds from this litigation until after September 30, 2002. The net cash provided by investing activities was $72,000 for the three months ended September 30, 2002 as compared to the $674,000 provided during three months ended September 30, 2001. This fluctuation is primarily due to proceeds from the sale of investments and principal collected on debt securities of $1,014,000, partially offset by new investments made of $280,000 during the three months ended September 30, 2001 compared to proceeds from the sale of investments and principal collected on debt securities of $72,000 and no investments made during the three months ended September 30, 2002. There were no cash flows provided by financing activities for the three months ending September 30, 2002 or 2001.

• 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-five investments are in thinly traded, small public companies, whose stock prices have been volatile. The other twenty-two 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 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 “Change in unrealized appreciation (depreciation) on investments.” Each hypothetical 1% increase or decrease in value of the Company’s portfolio of equity securities of $27.0 million at September 30, 2002 would have resulted in unrealized gains or losses and would have changed net increase in stockholders’ equity resulting from operations for the quarter by $270,000.

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 immediate 100 basis point change in interest rates would have affected net increase in stockholders’ equity resulting from operations negligibly 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 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 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.

Item 4. Controls Procedures

(a) Within the 90-day period prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company’s Exchange Act filings.

(b) There have been no significant changes in the Company’s internal controls or in other factors which could significantly affect its internal controls subsequent to the date the Company carried out its evaluation.

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.	DEFAULT UPON SENIOR SECURITIES

	Not Applicable.

ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

	None.

ITEM 5.	OTHER INFORMATION

	None.

ITEM 6.	EXHIBITS AND REPORTS ON FORM 8-K

	None.

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 13^th day of November 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

CERTIFICATION UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the Company’s chief executive officer and chief financial officer each certify as follows:

(a) This quarterly report on Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934.

(b) The information contained in this quarterly report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.


	By	/s/ J. ALAN LINDAUER

		President and Chief Executive Officer November 13, 2002

	By	/s/ GERALD T. MCDONALD

		Chief Financial Officer November 13, 2002

I, J. Alan Lindauer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Waterside Capital Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


Date: November 13, 2002	/s/ J. ALAN LINDAUER

	President & Chief Executive Officer

I, Gerald T. McDonald, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Waterside Capital Corporation;

	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


Date: November 13, 2002	/s/ GERALD T. McDONALD

	Chief Financial Officer