-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UV79TKX0lrJeucEwOOFmF4emI5euzoMnpbHc6gHDhLs2ZrXHE3Fvd8cKeO+mkXoB oV4RL2Pn6Qppjw23whfTLA== 0000916641-99-000815.txt : 19991227 0000916641-99-000815.hdr.sgml : 19991227 ACCESSION NUMBER: 0000916641-99-000815 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990928 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WATERSIDE CAPITAL CORP CENTRAL INDEX KEY: 0000924095 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 541694665 STATE OF INCORPORATION: VA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 811-08387 FILM NUMBER: 99719027 BUSINESS ADDRESS: STREET 1: 300 EAST MAIN STREET CITY: NORFOLK STATE: VA ZIP: 23510 BUSINESS PHONE: 7576261111 MAIL ADDRESS: STREET 1: 300 EAST MAIN STREET STREET 2: #1380 CITY: NORFOLK STATE: VA ZIP: 23510 10-K 1 WATERSIDE CAPITAL CORPORATION 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1999 COMMISSION FILE NO.: 333-36709 WATERSIDE CAPITAL CORPORATION (Exact name of registrant as specified in its charter) VIRGINIA 54-1694665 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 300 EAST MAIN STREET SUITE 1380 NORFOLK, VIRGINIA 23510 (Address of principal executive office) (Zip code) Registrant's telephone number, including area code: - (757) 626-1111 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $ 1.00 PAR VALUE PER SHARE Indicate by check mark whether the registrant (1) 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 (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of the registrant as of August 24, 1999: Common Stock - $7,645,000. The number of shares outstanding of the registrant's common stock as of August 24, 1999: 1,491,937. ================================================================================ WATERSIDE CAPITAL CORPORATION 1999 FORM 10-K TABLE OF CONTENTS PART I............................................................................................................1 Item 1. Business.............................................................................................1 Item 2. Properties..........................................................................................16 Item 3. Legal Proceedings...................................................................................17 Item 4. Submission of Matters to a Vote of Security Holders.................................................17 PART II..........................................................................................................17 Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...............................17 Item 6. Selected Financial Data.............................................................................17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...............17 Item 7A. Quantitative and Qualitative Disclosure About Market Risk...........................................17 Item 8. Financial Statements and Supplementary Data.........................................................18 Item 9. Changes in and Disagreements with Accountants.......................................................18 PART III.........................................................................................................18 Item 10. Directors and Executive Officers of the Registrant; Section 16(a) Beneficial Ownership Reporting Compliance..........................................................................................18 Item 11. Executive Compensation..............................................................................19 Item 12. Security Ownership of Certain Beneficial Owners and Management......................................19 Item 13. Certain Relationships and Related Transactions......................................................19 PART IV..........................................................................................................19 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................19
DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Annual Report to Shareholders (the "Annual Report") are incorporated by reference in Part II of this Form 10-K and portions of the definitive Proxy Statement (the "1999 Proxy Statement") to be used in connection with the 1999 Annual Meeting of Shareholders are incorporated by reference in Part III of this Form 10-K. PART I This Report contains "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Any statements contained in this Report that are not statements of historical fact are forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects" and similar expressions are intended to identify forward-looking statements. The important factors discussed below in "Risk Factors," among others, could cause actual results to differ materially from those indicated by forward-looking statements made in this Report and those presented elsewhere by management from time to time. Please refer to the cautionary statement that appears at the end of "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report for more information. ITEM 1. BUSINESS THE COMPANY Waterside Capital Corporation (the "Company") is a closed-end investment company licensed by the Small Business Administration (the "SBA") as a small business investment company (an "SBIC") under the Small Business Investment Act of 1958, as amended (the "SBA Act"). The Company invests in equity and debt securities of small businesses to finance their growth, expansion and modernization. Its equity investments have generally been in the form of preferred stock bearing current-pay dividends. The weighted average dividend on its preferred stock investments is currently 12.48%. The Company also provides long-term loans at similar rates. The weighted average annual interest rates on its loans is currently 13.31%. To date, the Company has made most of its investments in preferred stock because, as an SBIC, its dividend income is non-taxable. Its equity and debt financings are generally coupled with warrants to acquire common stock representing a minority interest in its portfolio companies. The Company seeks to achieve current income from origination fees, preferred stock dividends and interest on loans, as well as long-term growth in the value of its net assets through the appreciation of its common stock positions in portfolio companies. The Company began business operations in July 1996 after receiving its SBA license and closing its initial private placement of Common Stock. The Company made its first portfolio investment in October 1996 and, as of the date of this Report, has approximately $23.9 million in investments in 20 portfolio companies. The Company targets potential portfolio companies that meet certain investment criteria including potential for significant growth, product, market size, experienced management teams and financial history with significant ownership. The Company believes that the market for financing small businesses, either through equity or debt, is underserved by traditional sources of capital and that many of its potential competitors are burdened with overhead, administrative and regulatory structures that hinder them from competing more effectively in this market. The Company expects to make future investments ranging from $500,000 to $2,500,000 in equity and debt securities of small businesses, although under special circumstances, its investments may be less than or exceed this range. The Company believes that investments of this size will be appropriate given the size of its Private Capital (defined as eligible capital paid for capital stock and additional paid-in capital) base and that non-traditional lenders and investors often focus on larger investments and reject attractive companies with funding needs in this range. -1- To expand its investment opportunities, the Company is also investigating the possibility of restructuring its operations to enable it to pursue investment opportunities not available to SBICs because of regulatory constraints, as well as seeking to acquire SBIC-eligible investments from other investment funds. The Company raised its Private Capital through private investments by individuals, businesses, financial institutions and governmental entities located primarily in eastern Virginia and through its January 1998 public offering. Its Private Capital includes approximately $1.5 million invested by certain "accredited" investors in the form of recourse promissory notes representing the balance of the unpaid purchase price of Common Stock, payable on or before December 31, 1999. To fund its equity investments and debt financings, the Company has used the cash portion of its Private Capital as well as borrowed funds from the SBA ("SBA Debentures") which are available to the Company for up to 10 years. At June 30, 1999, the Company had drawn down debentures totaling $12,300,000 payable to the SBA. The $6,000,000 drawn during the second quarter of 1999 bears interest at a fixed interest rate of 7.240% including an annual servicing fee of 1.0%, and matures March 1, 2009. Interest on the $6,300,000 drawn down in the fourth quarter of 1999 is payable at an interim interest rate of 6.535%, including an annual servicing fee of 1.0%, which is expected to be fixed in September 1999, and matures on September 1, 2009. The debentures require semi-annual payments of interest only, with all principal due upon maturity. The SBA Debentures are subject to a prepayment penalty. In addition to the periodic interest rate described above, the Company pays a 1.0% one-time fee on all SBA Debentures at the time of approval by the SBA and a 2.5% one-time fee on amounts actually drawn by the Company. In June 1999, the Company was granted approval for additional SBA Debentures totaling up to $16,100,000. In conjunction with this approval, the Company paid a $161,000 fee. The debentures will accrue interest at an interim rate to be set at the time of each draw against the facility. The interest rate on any outstanding amounts is fixed in the March or September following each draw. At June 30, 1999, none of these debentures had been drawn upon. In addition to the $28.4 million that the Company has drawn, or has obtained approval to draw, the Company has an additional tier of leverage representing approximately $15.0 million that it may draw from the SBA based on its current regulatory capital position. Incorporated in Virginia on July 13, 1993, the Company is registered under the Investment Company Act of 1940 (the "Investment Act"). Its main office is located at 300 East Main Street, Suite 1380, Norfolk, Virginia 23510, and its telephone number is (757) 626-1111). The Company also maintains an office at 707 E. Main Street, Suite 700, Richmond, Virginia 23219. STRATEGY The Company seeks to provide growth capital financing to small businesses. Primarily through their experience in business and with financial institutions, management and members of the Executive Committee have developed a level of expertise in identifying and developing new investment opportunities in this market. The Company targets portfolio companies that meet certain criteria, including potential for significant growth, experienced management teams and financial history with a significant ownership interest. The Company believes the market for small commercial loans is underserved by traditional lending sources. Traditionally, small businesses have relied on commercial banks and the savings and loan industry to provide debt financing to fund growth. In the latter half of the 1980's and the early 1990's, funds from these traditional lending sources diminished as commercial banks consolidated market share and sought to limit both credit exposure and administrative expense associated with monitoring numerous small company loans. Concurrently, the savings and loan industry experienced significant structural and regulatory changes that greatly reduced the funds previously available as debt financing for small, privately owned businesses. The Company also believes that many of its competitors are also burdened with overhead, regulatory and administrative structures that hinder them from competing more effectively in this market. As a result of these fundamental changes, a significant opportunity has developed for nontraditional lenders to provide not only debt financing to, but also equity infusions in, small companies, creating the potential for attractive risk-adjusted returns. -2- To expand its investment opportunities, the Company is also investigating the possibility of restructuring its operations to enable it to pursue investment opportunities not available to SBICs because of regulatory constraints, as well as seeking to acquire SBIC-eligible investments from other investment funds. INVESTMENT OBJECTIVES The investing formats of SBIC's can range from making long-term secured and unsecured loans to providing equity capital. The Company has utilized, and anticipates continuing to utilize, both types of investments to achieve a balanced portfolio of both equity and debt investments structured to meet the individual needs of, and the investment opportunities associated with, its portfolio companies. The Company seeks to achieve current income through origination fees, preferred stock dividends and loan interest and long-term growth in the value of its assets through appreciation of its common stock interests in portfolio companies. The Company prefers to invest in preferred stock of portfolio companies, as opposed to debt instruments, because, as an SBIC, it receives a 100% deduction for dividends received from taxable domestic corporations. The Company attempts to structure its asset portfolio for relative safety and soundness, while, at the same time, provide for equity features that will permit it to achieve returns commensurate with its risks. Management believes that an attractive return can be obtained on investments in small businesses, provided that their principals contribute the requisite skill and dedication and the investment is appropriately structured. SELECTION OF INVESTMENT OPPORTUNITIES The Company has invested, and expects to continue investing, in a wide range of businesses -- from technology companies to manufacturing and service firms. Since making its first investment in late 1996, the Company has identified certain key elements for investing in emerging growth small businesses. The Company initiates its investment decisions by analyzing traditional criteria for making any equity investment or granting any credit: character, collateral, growth potential, capacity to repay, financial and credit history and other factors. After an initial screening based on these factors, management recommends to the Executive Committee investments in those small businesses it believes will succeed and contribute to the profitability of the Company. In general, although obviously involving substantially more risk, providing growth capital to small businesses can generate a higher return on investment because these companies often have higher growth rates of revenues and profits than larger, more established firms. The Company generally avoids loans to or investments in start-up and early stage companies that may have difficulty making current dividends or interest payments although under certain limited circumstances, it has invested in early stage companies. Traditional lenders require certain standards before affirmatively considering a loan. Among others, these standards include debt service coverage ratios, profit history, adequate working capital and collateral security. The Company includes these factors in its decision-making process, but also attributes significant weight to product, market size, growth potential, capability of management and exit strategies for the equity portion of its investment. To identify an exit strategy, management carefully studies the portfolio company's growth potential, as well as historical financial performance. REALIZATIONS OF GAIN ON EQUITY INVESTMENTS AND REPAYMENT OF LOANS The Company makes its equity investments with the intention of liquidating for cash within five to seven years, although situations may arise in which it may hold equity securities for a longer period. Its loans are made for a minimum of five years as required by SBA regulations. The Company expects that a successful investment will result in the redemption of preferred stock with dividends or the repayment of a loan with interest, and a gain on the sale of the portfolio company's common stock, generally through the exercise of warrants acquired in connection with the investment. Preferred stock purchased by the Company generally bears a "put option," exercisable after five years, requiring the portfolio company to -3- repurchase the shares at par, together with any unpaid dividends. The warrants it acquires often carry a similar put option, also exercisable generally after five years, requiring a repurchase of the underlying common stock at fair market value. The warrants also contain anti-dilution provisions and are detachable and transferable. Before making any investment, the Company analyzes the potential for the portfolio company to experience a liquidity event that will allow the Company to recover the purchase price of its preferred stock investments or to have its loan repaid and to realize appreciation in its common stock positions. Liquidity events include, not only the exercise of put options or loan maturity, but an initial public offering or the sale, merger or recapitalization of the portfolio company. ASSET/RISK MANAGEMENT Investment in a small business, whether by debt or equity, necessarily involves the risk that the debt will not be repaid or that the equity component will remain illiquid even if the portfolio company performs and underlying value is present. The Company expects that losses will occur in its investments. Management attempts to minimize any such losses through several strategies. LIMITATION ON INVESTMENTS IN ONE BORROWER. Except with prior SBA approval, SBA regulations allow only up to 20% of an SBIC's Regulatory Capital (defined as Private Capital less certain non-cash assets) to be committed to one portfolio company. Currently, this would allow the Company to only invest $2.85 million in one portfolio company. The Company has adopted a policy allowing an investment to approach this outside limit only in rare circumstances. The Company's largest investment in any one portfolio company is currently $2.5 million. APPROPRIATE UNDERWRITING STANDARDS. Management analyzes each proposed transaction. If analysis does not reveal an investment meeting the Company's underwriting standards, management promptly notifies the applicant business of the denial of its funding request. Management examines numerous applications for every one recommended to the Executive Committee. EXECUTIVE COMMITTEE APPROVAL. If the investment appears to management to meet Company underwriting standards, it must be presented to the Executive Committee for additional evaluation and approval. The Executive Committee rejected a number of investments in 1999. BOARD REPRESENTATION. The Company generally requires portfolio companies to have a majority of the members of its boards of directors who are not shareholders or employees. The Company also requires that it have the right to designate one or more members. MONITORING. Management closely and frequently monitors the performance of each portfolio company through its board representation and otherwise. The Company requires the submission of financial statements on a periodic basis, but it understands that such submission alone does not provide the timely information necessary to evaluate current performance. The Company believes that, by the time financial statements are submitted and analyzed, many problems may be out of control and beyond solution. Accordingly, it attempts to stay in contact with its portfolio companies on a regular basis. DEFAULT COVENANTS. Typically, the Company's investment documents contain covenants allowing the Company to acquire control of the board of directors of the portfolio company and replace its management, if necessary, in the event certain financial standards are not met or maintained. PORTFOLIO COMPANIES As of the date of this Report, the Company has approximately $23.9 million invested in 20 portfolio companies. -4- SBA LEVERAGE The SBA raises capital to enable it to provide funds to SBICs by guaranteeing certificates or bonds that are pooled and sold to purchasers of government-guaranteed securities. The amount of funds that SBA may lend is determined by annual Congressional appropriations of amounts necessary to cover anticipated losses in the program (the "Subsidy Rate"). If the Subsidy Rate is reduced, the same level of Congressional appropriations will support higher levels of SBA Leverage available to SBICs. Congress authorizes appropriations to the extent it determines to fund SBIC borrowings from the SBA. To be eligible to use funds provided by the SBA, an SBIC must obtain a license and satisfy other requirements. The need for SBA Leverage must be established. To establish need, an SBIC must invest 50% of its Leverageable Capital (defined as Regulatory Capital less unfunded commitments and federal funds) and any outstanding SBA Leverage. Other requirements include compliance with SBA regulations, adequacy of capital and meeting liquidity standards. An SBIC's license entitles an SBIC to apply for SBA Leverage, but does not assure it will be available. Availability depends on the SBIC's continued regulatory compliance and sufficient SBA Leverage being available when the SBIC applies to draw down SBA Leverage. SBIC's may obtain up to $90 million in SBA Leverage in the following ratios: LEVERAGEABLE CAPITAL MATCHING RATIO SBA LEVERAGE First $15 million 3:1 $45 million Second $15 million 2:1 $30 million Third $15 million 1:1 $15 million
SBA Debentures are issued with 10-year maturities. Interest only is payable semi-annually until maturity. Ten-year SBA Debentures may be prepaid with a penalty during the first 5 years, and then are prepayable without penalty. TEMPORARY INVESTMENTS Pending investment in portfolio company securities, the Company will invest its otherwise uninvested cash in (i) federal governmental or agency issued or guaranteed securities that mature in 15 months or less, (ii) repurchase agreements with banks, deposits of which are insured by the Federal Deposit Insurance Corporation (the "FDIC") (an "insured bank"), with maturities of seven days or less, the underlying instruments of which are securities issued or guaranteed by the federal government, (iii) certificates of deposit in an insured bank with maturities of one year or less, up to the amount of the deposit insurance, (iv) deposit accounts in an insured bank subject to withdrawal restrictions of one year or less, up to the amount of deposit insurance or (v) certificates of deposit or deposit accounts in an insured bank in amounts in excess of the insured amount if the insured bank is deemed "well-capitalized" by the FDIC. INVESTMENT ADVISER The Company has no investment adviser. COMPETITION The Company competes with so-called "angel" investors, venture capital investment firms, other SBICs and non-traditional investors that, like the Company, take equity positions in small businesses. Some of its competitors invest in earlier stage companies that typically cannot pay dividends and interest on a current basis. These types of investments do not generally fit within the Company's investment guidelines, but can offer attractive investment returns to the Company's competitors who provide this type of financing. The Company also competes, to a limited extent, with commercial banks and commercial finance companies. Most of its competitors have substantially greater assets, capital and personnel resources. The Company believes that because of its size and structure it can tailor equity investment or loan terms to a portfolio company's needs and circumstances better than many of its larger competitors. -5- The Company also believes that it competes effectively on the basis of its reputation, responsiveness and the quality of its service in its timely analysis and decision-making processes. EMPLOYEES The Company has 8 full-time employees. The Company has maintained, and intends to continue to maintain, low personnel overhead by extensively utilizing, in particular, the members of the Executive Committee and the members of its Board of Directors, for business referrals, marketing, investment analysis and due diligence reviews. INVESTMENT POLICIES The following policies of the Company with respect to the activities described below are matters of fundamental policy in accordance with Sections 8(b) and 13(a) of the Investment Act. These policies may not be changed without the approval of the lesser of (i) 67% of the Company's shares present or represented at a shareholders' meeting at which the holders of more than 50% of such shares are present or represented or (ii) more than 50% of the outstanding shares of the Company. (a) The Company is permitted to issue the maximum amount of SBA Debentures permitted by the SBA Act and SBA regulations. (b) The Company is permitted to borrow money only for the purpose of investing in, and making loans to, Small Business Concerns, as defined below. It is, however, permitted to finance the acquisition of capital assets used in its ordinary business operations. (c) The Company is not permitted to engage in the business of underwriting the securities of other issuers. It anticipates that substantially all of its investments in Small Business Concerns will be in securities that may not be sold to the public without registration, or an exemption from registration, under the Securities Act. The vast majority of the Company's current equity investments in Small Business Concerns are so restricted. (d) The Company is prohibited from concentrating more than 25% of the value of its assets, determined at the time an investment is made, exclusive of U.S. government securities, in securities issued by companies engaged primarily in the same industry. (e) The Company is prohibited from engaging in the business of purchasing or selling real estate. The Company may bring mortgage foreclosure actions and take title to and possession of property with respect to which it is the mortgagee in accordance with applicable mortgage foreclosure laws. Additionally, the Company may purchase office facilities, although, at present, it leases its office facilities. (f) The Company is not permitted to engage in the purchase or sale of commodities or commodity contracts. (g) The Company is permitted to make loans and loans with equity features to, as well as equity investments in, Small Business Concerns to the extent allowed by the SBA Act and SBA regulations. The Company is also permitted to extend credit to shareholders to finance the purchase of its or their capital stock. (h) So long as the Company is licensed as an SBIC, it may only conduct those activities permitted by the SBA Act and SBA regulations and policies. The Company's policies with respect to the following matters are not fundamental policies and may be changed, subject to the SBA Act and SBA regulations, by the Company's Executive Committee without shareholder approval. (a) The Company may make investments in equity and debt securities of Small Business Concerns as approved by the Executive Committee. -6- (b) The Company has no strict policy regarding the percentage of its assets that may be invested in any specific type of security. The Company follows SBA regulations prohibiting investment in any single Small Business Concern and its affiliates exceeding 20% of the Company's Regulatory Capital except with prior SBA approval. (c) The Company does not invest in companies for the purpose of exercising control of management and does not intend to do so in the future. Except where necessary to protect an investment, where there has been a breach of the financing agreements, where there has been a substantial change in the Small Business Concerns' operation or when financing a start-up company, SBA regulations prohibit SBICs from controlling a Small Business Concern. (d) The Company does not invest in securities of other investment companies and does not intend to do so in the future. (e) The Company intends to hold its portfolio debt securities for a minimum of five years, to the extent required by SBA regulations or until maturity. It anticipates retaining its equity investments from five to seven years. DETERMINATION OF NET ASSET VALUE The Board of Directors has delegated to the Executive Committee the sole responsibility for determining the asset value of each of the Company's equity investments and loans and of its portfolio in the aggregate. The Executive Committee determines the value of its portfolio companies quarterly, as soon as practicable after and as of the end of each calendar quarter. 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. Discounts range from 0% to 40% for investment size and market liquidity concerns. 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. Pursuant to SBA regulations, investments are deemed to be "fair value" if such values are determined by the Executive Committee in accordance with SBA valuation policy. This requirement is consistent with the procedure for determining fair value contained in the Investment Act. The Company's policy is that equity investments be held for five to seven years and loans for a minimum of five years (as required by SBA regulations) or until maturity. The Executive Committee determines the value of its portfolio companies quarterly, as soon as practicable after and as of the end of each calendar quarter. In making its valuation determination, the Executive Committee adheres to the valuation policy of the SBA. In calculating the value of the Company's total assets, securities traded in the over-the-counter market or on a stock exchange are valued at the average bid at close or closing price, as the case may be, for the valuation date and the preceding two days, unless the investment is subject to a restriction that requires a discount from such price, as determined by the Executive Committee. Discounts typically range from 10% to 40%, but may be more or less, depending on resale restrictions under securities -7- laws or contractual agreements. In valuing equity securities for which there exists no public trading market, investment cost is presumed to represent fair value except when the valuation policy provides that the Executive Committee may determine fair value on the basis of financings by unaffiliated investors or when a company has been self-financing and has had positive cash flow from operations for at least the past two fiscal years. Asset value may be increased based on price/earnings ratios, cash flow multiples and other appropriate financial measures of any similar publicly-traded companies, discounted for illiquidity. If the chosen valuation ceases to be meaningful, it may be restored to a cost basis or, in the event of significant deterioration in performance or potential, to a valuation below cost to reflect impairment. With respect to portfolio companies likely to face bankruptcy or discontinue operations for some other reason, liquidating value may be employed. This value is determined by estimating the realizable value (often through professional appraisals or firm offers to purchase) of all assets and then subtracting all liabilities and all associated liquidation costs. All other investments are valued at fair value as determined in good faith by the Executive Committee. In making its determination, the Executive Committee values loans and nonconvertible debt securities for which there exists no public trading market at cost plus amortized original issue discount, if any, unless adverse factors lead to a determination of a lesser value when unrealized depreciation is recognized. The valuation of loans and associated interest receivables on interest-bearing securities reflects the portfolio company's current and projected financial condition and operating results, its payment history and its ability to generate sufficient cash flow to make payments when due. When a valuation relies more heavily on assets than earnings, additional criteria are considered, including, the value of the collateral, the priority of the Company's security interest, if any, the net liquidation value of collateral and the personal integrity and overall financial condition of the owners of the business. An appropriate writedown is recognized when collection is doubtful. A write-down for impairment is considered when one or both of the following conditions occur (i) interest or dividend payments are more than 120 days past due or (ii) the portfolio company is in bankruptcy, is insolvent or substantial doubt exists about its ability to continue as a going concern. The carrying value of interest-bearing securities is not adjusted for changes in interest rates. The valuation of convertible debt may be adjusted to reflect the value of the underlying equity security net of the conversion price. Convertible debt securities and warrants are valued to reflect the value of the underlying equity security less the conversion or exercise price. Valuation is reduced if a portfolio company's performance has significantly deteriorated. If the factors that led to the reduction in valuation are overcome, the valuation may be restored. Warrants are valued at the excess of the value of the underlying security over the exercise price. The Executive Committee may also consider recent operating results of a portfolio company or offers to purchase its securities when valuing a warrant. MANAGEMENT POWERS OF THE EXECUTIVE COMMITTEE. The Company's Articles of Incorporation provide for the appointment by the Board of Directors of an Executive Committee comprised of not less than five nor more than nine members, all of whom must be a member of the Board of Directors. The Executive Committee was constituted by the Board of Directors in December 1993 and, under Virginia law, may exercise all the authority of the Board of Directors except that it may not (i) approve or recommend to shareholders action that Virginia law requires to be approved by shareholders, (ii) fill vacancies on the Board of Directors or any committee, (iii) amend the Articles of Incorporation, (iv) adopt, amend or repeal the Bylaws, (v) approve a plan of merger, (vi) authorize or approve a distribution, except according to a general formula or method prescribed by the Board of Directors or (vii) authorize or approve the issuance or sale or contract for sale of shares, or determine the designation of relative rights, preferences and limitations of a class or series of shares except within limits specifically prescribed by the Board of Directors. MEMBERS OF THE EXECUTIVE COMMITTEE AND EXECUTIVE OFFICERS. The following table sets forth the names, addresses, ages and positions with the Company of all members of the Executive Committee (who also are directors of the Company) and Executive Officers of the Company. Information concerning their principal occupation and background follows. -8-
Name and Address Age Position and Offices with the Company J. W. Whiting Chisman, Jr. 58 Member of Executive 226 Creekview Lane Committee and Director Hampton, VA 23669 Ernest F. Hardee 59 Member of Executive 100 E. 15th Street Committee and Director Norfolk, VA 23510 J. Alan Lindauer 60 Chairman of Executive 300 East Main Street Committee, Director, President And Suite 1380 Chief Executive Officer Norfolk, VA 23510 Robert P. Louthan 39 Vice President 300 East Main Street Suite 1380 Norfolk, VA 23510 Robert I. Low 62 Member of Executive P. O. Box 3297 committee and Director Norfolk, VA 23514 Gerald T. McDonald 52 Chief Financial Officer 1501 Layden Cove Way And Assistant Secretary Virginia Beach, VA 23454 Peter M. Meredith, Jr. 47 Member of Executive Committee P. O. Box 11265 Chairman of the Board of Directors Norfolk, VA 23517 Charles H. Merriman, III 65 Member of Executive Committee and Director 5507 Cary Street Road Richmond, VA 23226 R. Scott Morgan 54 Member of Executive 316 Court Street Committee and Director Portsmouth, VA 23704 Richard G. Ornstein 57 Member of Executive 524 Fisherman's Bend Committee And Director Virginia Beach, VA 23451 Martin N. Speroni 34 Director of Research 300 East Main Street Suite 1380 Norfolk, VA 23510 Lex W. Troutman 46 Vice President 300 East Main Street Suite 1380 Norfolk, VA 23510
-9- J. W. Whiting Chisman, Jr. has served as a director of the Company since February 1994. Since 1988, he has been President of Dare Investment Company, a land developer and investor in equities. Ernest F. Hardee has served as a director of the Company since September 1997. Since 1963, he has been President and Chief Executive Officer of Hardee Realty Corporation, a real estate brokerage firm. He has also served as a director of Branch Bank & Trust Corp. since 1995. J. Alan Lindauer has served as a director since July 1993 and as Chairman of the Executive Committee of the Company since December 1993 and since March 1994 as its President and Chief Executive Officer. Since 1986, Mr. Lindauer has been President of JTL, Inc., a business consulting firm. Mr. Lindauer is a Certified Management Consultant. Robert P. Louthan has served as Vice President of the Company since January 1998. From February 1990 through November 1994, he was Operation Services Manager of American Filtrona Company, a manufacturer of bonded fiber products. From December 1994 through November 1997, he was a Vice President with affiliates of VEDCORP, a venture capital fund. Robert I. Low has served as a director of the Company since July 1993. Mr. Low is a senior partner of Goodman & Company, a firm of Certified Public Accountants. He has been with that firm since 1969. Gerald T. McDonald serves as Assistant Secretary, Treasurer and Chief Financial Officer of the Company effective February 1, 1998. During 1997, Mr. McDonald was Virginia Financial Manager of Branch Bank & Trust Corp. From 1987 through July 1996, Mr. McDonald was Chief Financial Officer of Commerce Bank. Peter M. Meredith, Jr. has served as a director of the Company and as Chairman of the Board of Directors since May 1994. Since 1978, he has served in various executive capacities with Meredith Construction Company, Inc. Since 1995, he has been the Chairman of the Board of Directors of Heritage Bank. Charles H. Merriman, III, has served as a director of the Company since March 1998. He is currently a Managing Director with Scott & Stringfellow, an investment banking firm, where he has served in various capacities since 1972. R. Scott Morgan, Sr. has served as a director of the Company since September 1997. Since 1995, Mr. Morgan has been Executive Vice President and Corporate Banking Manager with the Corporate Banking Group of Branch Bank & Trust Corp. Between 1992 and 1995, he was employed in various capacities with Commerce Bank. Richard G. Ornstein has served as a director of the Company and a member of the Executive Committee since September 1997. Since 1964, Mr. Ornstein has been privately engaged in real estate management and development. Martin N. Speroni has served as Director of Research since November, 1998. Between 1993 and 1997 Mr. Speroni traded fixed income securities for Raymond James & Associates. Before that he was a financial analyst with Continental Grain Company, a New York based international conglomerate. Mr. Speroni holds an MBA from Columbia University and an M.A. from the University of South Florida. Lex W. Troutman has served as a Business Development Officer since May 1998. From 1981 to 1992, he served as a Senior Vice President of Crestar Bank. From July 1992 to May 1998, he served as Principal of Meridian Investment Company, Inc., a business consulting firm. Mr. Troutman is a Certified Public Accountant. OTHER MEMBERS OF THE BOARD OF DIRECTORS. The Company's existing Board of Directors has 22 members of which 21 will be nominated for re-election at the Company's 1999 Annual Meeting. Directors hold office until expiration of their -10- respective terms and until their successors are elected, or until death, resignation or removal. Officers of the Company serve at the discretion of the Board of Directors, subject to any employment contract rights. The following table sets forth the names, addresses and ages of all directors of the Company who are not members of the Executive Committee. Information concerning their principal occupation and background follows.
Name and Address Age Position and Offices With the Company James E. Andrews 61 Director 109 East 40th Street Norfolk, VA 23504 Donna C. Bennett 38 Director 500 East Plume Street Norfolk, VA 23510 Jeffrey R. Ellis 55 Director 513 Kerry Lane Virginia Beach, VA 23451 Eric L. Fox 52 Director 1412 Whittier Road Virginia Beach, VA 23454 Marvin S. Friedberg 56 Director 8204 Ocean Front Virginia Beach, VA 23451 Roger L. Frost 67 Director 1700 Grove Court Norfolk, VA 23503 Henry U. Harris, III 46 Director 500 E. Main Street, Suite 1500 Norfolk, VA 23510 Harold J. Marioneaux, Jr. 43 Director 504 Mill Stone Road Chesapeake, VA 23320 Augustus C. Miller 65 Director 1000 E. City Hall Avenue Norfolk, VA 23504 Paul F. Miller 67 Director 2400 Washington Avenue Newport News, VA 23607 Juan M. Montero, II 57 Director 2147 Old Greenbrier Road Chesapeake, VA 23320
-11- James W. Noel, Jr. 43 Director 224 Ballard Street P. O. Box 612 Yorktown, VA 23690 Richard A. Schreiber 57 Director 36076 Lankford Highway P. O. Box 395 Belle Haven, VA 23306 Jordan E. Slone 37 Director 555 E. Main Street Norfolk, VA 23510
James E. Andrews has served as a director of the Company since May 1997. Since 1974, Mr. Andrews has been the principal owner of Anzell Automotive, Inc., an automotive repair firm and franchisor of automotive repair shops. Donna C. Bennett has served as a director of the Company since September 1996. She is a Vice-President of First Union Bank and has been employed since 1985 with First Union Bank, or its predecessors, in various capacities. Jeffrey R. Ellis has served as a director of the Company since August 1997. Between 1973 and 1986, Mr. Ellis was the President and Chief Executive Officer of Ridgewell Caterers, Inc. Since 1986, he has been a private investor. Marvin S. Friedberg, has served as a director since May 1999. Since 1989, he has served as a chief executive officer of Virginia Commonwealth Trading Company, a firm engaged in international trading. Roger L. Frost has served as a director of the Company since May 1997. Between 1956 and 1997, he was an accountant with Goodman & Company, a firm of Certified Public Accountants, from which he retired as a senior partner in 1997. Henry U. Harris, III has served as a director of the Company since September 1997. Since 1980, he has been Portfolio Manager of Virginia Investment Counselors, Inc., a financial consulting firm, of which he is now President. Since 1991, he has been the vice-chairman of the Board of Directors of Heritage Bank & Trust. Harold J. Marioneaux, Jr. has served as a director of the Company since November 1994. Since 1990, he has practiced as a dental surgeon and since 1993 has acted as a certified financial planner. Augustus C. Miller has served as a director of the Company since August 1994. Since 1977, he has been President and Chief Executive Officer of Miller Oil Co., Inc., a distributor of fuels. Paul F. Miller has served as a director of the Company since May 1994. Since 1987, he has served as Director of Planning and Development for the City of Newport News, Virginia. Juan M. Montero, II has served as a director of the Company since July 1995. Since 1972, he has engaged in the private practice of general and thoracic surgery. James W. Noel, Jr. has served as a director of the Company since August 1994. Since 1993, Mr. Noel has been the Executive Director of the York County Industrial Development Authority. Between 1991 and 1993, he served in various capacities with the City of Portsmouth, Virginia. -12- Richard A. Schreiber has served as a director of the Company since May 1995. Since 1994, he has been President and Chief Executive Officer of the Virginia Eastern Shore Corporation, which is engaged in development of business for the Eastern Shore of Virginia. Between 1980 and 1993, he was Vice President and Chief Executive Officer of Colonial Williamsburg Hotel Properties, Inc. Mr. Schreiber has informed the Company that he will resign from the Board effective as of the Company's 1999 Annual Meeting. Jordan E. Slone has served as a director of the Company since July 1995. Since 1987, Mr. Slone has been Chairman and Chief Executive Officer of the Harbor Group Companies, a diversified real estate and financial services firm. AUDIT COMMITTEE AND COMPENSATION/STOCK OPTION COMMITTEE. The Board of Directors has established a Compensation/Stock Option Committee and an Audit Committee. The Members of the Compensation/Stock Option Committee are Messrs. Meredith, Chisman and Hardee. The Compensation/Stock Option Committee reviews compensation arrangements for management and key employees and makes recommendations concerning compensation to the Executive Committee. It also administers the Company's 1998 Employee Stock Option Plan (the "Stock Option Plan"). It also grants options to officers and key employees and sets the exercise price, terms and other provisions of the options granted. The Members of the Audit Committee are Ms. Bennett and Messrs. Low and Frost. The Audit Committee recommends selection of the Company's independent accountants and reviews the scope of the annual audit and the results of the audit with management and the independent accountants. RISK FACTORS Prospective investors in the Company's Common Stock should consider carefully the specific factors set forth below as well as the other information included in this Report before deciding to invest in the Shares of Common Stock. All statements and information in this Report, other than statements of historical fact, are forward-looking statements based on a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. These forward-looking statements may be identified by the use of words like "believe," "expect," "intend," "target" and "anticipate" and concern, among other things, the Company's ability to identify profitable investments in small businesses, manage payment defaults, value its portfolio accurately and realize value from its investments in the securities of small businesses. Many phases of the Company's operations are subject to influences outside its control. Any one or any combination of factors could have a material adverse effect on the Company's business, financial condition and results of operations. These factors include competitive pressures, local, regional and national economic conditions, governmental regulation and policies and other conditions affecting capital markets. The following factors should be carefully considered, together with other information in this Report. INVESTMENTS IN SMALL, PRIVATELY OWNED COMPANIES. The Company's portfolio consists of equity and debt securities issued by small, privately owned businesses that, under SBA regulations, must have a tangible net worth of less than $18 million and average net income after federal income tax for the preceding two years of $6 million or less (computed without benefit of any carryover loss). Furthermore, 20% of the Company's portfolio must consist of investments in smaller enterprises with a net worth of not more than $6 million and average net income after federal income tax for the preceding two years of $2 million or less (computed without benefit of any carryover loss). See "Regulation." The Company's equity investments in these small businesses have primarily been in the form of preferred stock, coupled with warrants to acquire shares of common stock. There is generally no publicly available information about such companies, so the Company must rely on the diligence of its employees and agents to obtain information in connection with the Company's investment decisions. Typically, small businesses depend for their success on the management talents and efforts of one person or a small group of persons, and the death, disability or resignation of one or more of these persons could have a material adverse impact on the Company's business, financial condition and results of operations. Moreover, small businesses frequently have smaller product lines and market shares than their competitors, may be more vulnerable to economic downturns and often need substantial additional capital to expand or compete. Such companies may also experience substantial variations in operating -13- results. Investment in small businesses therefore involves a high degree of business and financial risk, can result in substantial losses and should be considered highly speculative. See "Investment Policies." PAYMENT DEFAULTS. Generally, the Company makes current-pay, dividend-bearing preferred stock investments in, and nonamortizing, five-year term loans with fixed or variable rates of interest to, small businesses that have limited financial resources and are able to obtain only limited financing from traditional sources. Its loans may or may not be secured by the assets of the borrower. A portfolio company's ability to pay preferred stock dividends or to repay its loan may be adversely affected by numerous factors, including the failure to meet its business plan, the death, disability or resignation of senior management, a downturn in its industry or negative economic conditions. A deterioration in a portfolio company's financial condition and prospects usually will be accompanied by a deterioration in the value of its preferred stock or any collateral for a loan. As a holder of preferred stock, the Company is always subordinate to any indebtedness of the portfolio company and, when the Company is not the senior lender, any collateral for a loan will be subordinate to another lender's security interest. LIMITED OPERATING HISTORY. The Company obtained its license from the SBA in May 1996 and made its first portfolio investment in October 1996. The vast majority of its investments have been made since the closing of its initial public offering in February 1998. Accordingly, its operating history is extremely limited. Since that time, it has made only 10 loans and 14 equity investments. The Company continues to hold its equity positions, and anticipates holding them for an extended period of time. See "Investment Policies." The Company has a very limited history of realized profits in its investments. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Determination of Net Asset Value." The Company has not operated in recessionary economic periods when the operating results of small business companies like those in the Company's portfolio often are adversely affected. FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company has experienced, and expects to continue experiencing, quarterly variations in net operating income as a result of many factors. Accordingly, it is possible that the Company's results of operations, including quarter to quarter results, will be below the expectations of public market analysts and investors. In addition, the Company plans its operating expenditures based on operating income forecasts, and an operating income shortfall below its forecasts in any quarter would likely adversely affect the Company's business, financial condition and results of operations for the year. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." VALUATION OF PORTFOLIO. Typically, no public market exists for the equity or debt securities of small, privately owned companies. As a result, in the absence of readily ascertainable market values, the valuation of securities in the Company's portfolio is made by the good faith determination of the Company's Executive Committee in accordance with the SBA's model valuation policy, which the Company has adopted. The estimated values may differ significantly from the values that would have been established had a ready market for the securities existed, and the differences could be material. Unlike commercial lending institutions, the Company does not establish reserves for investment losses, but revalues its portfolio on a quarterly basis to reflect the Company's estimate of the current fair value of the investment portfolio. There can be no assurance that this estimate is accurate and that the Company will not ultimately suffer losses on its investments. See "Determination of Net Asset Value." ILLIQUIDITY OF PORTFOLIO INVESTMENTS. Most of the Company's investments are, and will continue to be, securities acquired directly from small, privately owned companies. The Company's portfolio securities are, and will continue to be, subject to restrictions on resale or otherwise have no established trading market. The illiquidity of most of the Company's portfolio securities may adversely affect its ability to dispose of such securities in a timely manner and at a fair price when necessary or advantageous. LIMITED PUBLIC MARKET; VOLATILITY OF STOCK PRICE. The Company's Common Stock is listed on The Nasdaq SmallCap Market under the symbol "WSCC." Continued inclusion requires that the Company satisfy a minimum tangible net worth or net income standard and that the Common Stock satisfy minimum standards of public float, bid price and market makers. -14- The Common Stock has been, and is expected to continue to be thinly traded with a significant differential between the bid and ask price and a highly volatile trading price that will be subject to wide fluctuations in response to factors, many of which are beyond the Company's control. These may include fluctuations in the operating results of its portfolio companies, sales of the Common Stock in the marketplace, shortfalls in revenues, earnings or other operating results of the Company, general financial conditions and other factors. There can be no assurance that the market price of the Common Stock will not experience significant fluctuations that are material, adverse and unrelated to the Company's performance. In addition, the stock market has from time to time experienced extreme price and volume fluctuations that often have been unrelated to the operating performance of particular companies. Changes in earnings estimates by analysts and economic and other external factors and period-to-period fluctuations in financial results of the Company may have a significant impact on the market price of the Common Stock. Fluctuations or decreases in its trading price may adversely affect the liquidity of the trading market for the Common Stock. RELIANCE ON MANAGEMENT. Management is a key factor in the successful development and operation of an SBIC. The Company depends for the selection, structuring, closing and monitoring of its loans and investments on the diligence and skill of management and members of the Executive Committee, particularly J. Alan Lindauer, the loss of whose services could have a material adverse effect on the operations of the Company. Mr. Lindauer serves as President and Chief Executive Officer, and as a Director and Chairman of the Executive Committee of the Company. Although Mr. Lindauer is a Certified Management Consultant and has experience in business evaluation and small business investing, until his election as President of the Company in March 1994, he had never served as an executive officer of an SBIC prior to joining the Company. See "Management." The Company does not maintain key man life insurance on Mr. Lindauer. EXPANSION. The Company intends to expand substantially its small business investment activities, both in size, and geographic scope. In addition, it is investigating the possibility of restructuring its operations to enable it to pursue investment opportunities not available to SBICs because of regulatory constraints, as well as seeking to acquire SBIC-eligible investments from other investment funds. No assurance can be given that the Company will restructure its operations in this manner, or that if it does, that the restructuring will benefit shareholders. If the Company accomplishes these objectives, no assurance can be given that it will be able to develop sufficient administrative personnel, management and operating systems to manage its expansion effectively. COMPETITION. A large number of institutions and individuals compete to make the types of investments made by the Company. There can be no assurance that the Company will be able to identify and make investments that satisfy its investment objectives or that it will be able to invest fully its available capital. The Company competes with other SBICs, other non-bank financial companies and, to a limited extent, commercial banks and venture capital investors and venture capital investment firms. Most of its competitors have greater resources and significantly more operating history. LEVERAGE. An important aspect of the Company's long term strategy in achieving investment returns is the use of SBA Debentures. Obtaining a license as an SBIC does not insure that the Company will be able to obtain funds from the SBA ("SBA Leverage") in the amounts and at times required to optimize investment returns. The amount of available SBA Leverage is determined by annual Congressional appropriations. While the Company's management believes that adequate SBA Leverage will be available, there can be no assurance that there will be sufficient SBA Leverage available to satisfy the demands of the Company and other SBICs. The Company has currently issued $12.3 million of SBA Debentures. This issuance involves associated fixed costs. SBA Debentures require that interest be paid on a current basis and the income from the Company's investments may not be sufficient to make the required payments. Leverage increases the risk of loss because increased operating revenues are needed to make required payments of principal and interest on loans. As such, losses on a small percentage of the Company's investments and loans can result in a much larger percentage reduction in shareholders' equity. See "Business -- SBA Leverage." -15- REGULATION AS AN SBIC. As an SBIC, the Company is subject to a variety of regulations concerning, among other things, the size and nature of the companies in which it may invest and the structure of those investments. SBA regulations provide a variety of remedies if an SBIC fails to comply with these regulations. These remedies are graduated in severity depending on the severity of the SBIC's financial condition or misconduct. In certain circumstances, the SBA may prohibit an SBIC from making new investments or distributions to shareholders, require the removal of one or more officers or directors or obtain the appointment of a receiver for the SBIC. It is likely that new regulations governing SBICs will be adopted in the future and the Company cannot offer any assurance that any such new regulations will not have a material adverse effect on the Company's business and results of operations. Although the Company is not aware of any pending legislation to eliminate the SBA or restrict or terminate the specific program of the SBA in which the Company participates, any significant restrictions on funds available to the Company from the SBA may adversely affect the Company's plans for future operations and growth. SHARES ELIGIBLE FOR FUTURE SALE. 597,345 shares of Common Stock currently outstanding were offered and sold by the Company in private transactions in reliance on exemptions from registration under the Securities Act of 1933 (the "Securities Act"). Accordingly, all of such shares are "restricted securities," as defined by Rule 144 ("Rule 144") under the Securities Act and cannot be resold without registration, except in reliance on Rule 144 or another applicable exemption from registration. Certain shares of Common Stock are eligible for resale under Rule 144, depending on their date of issue (assuming the other requirements of Rule 144 are met). No prediction can be made as to the effect, if any, that future sales of restricted shares of Common Stock, or the availability of such Common Stock for sale, will have on the market price of the Shares prevailing from time to time. Sales of substantial amounts of formerly restricted Common Stock in the public market, or the perception that such sales may occur, could adversely affect the then prevailing market price of the Common Stock. In addition, in the future the Company may issue additional shares of Common Stock. No prediction can be made as to the effect, if any, that future issuances of Common Stock may have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of such Common Stock, or the perception that such sales may occur, could adversely affect the then prevailing market price of the Common Stock. ABSENCE OF DIVIDENDS. The Company has not declared or paid any cash dividends in the past and does not expect to pay cash dividends in the foreseeable future. The Company currently intends to retain its future earnings, if any, to finance the development and expansion of its business. Any future dividend policy will be determined by the Board of Directors in light of conditions then existing, including the Company's earnings and its financial condition and requirements. POSSIBLE ISSUANCE OF PREFERRED SHARES; ANTI-TAKEOVER PROVISIONS. The Company's Articles of Incorporation authorize the Board of Directors to issue, without shareholder approval, 25,000 shares of preferred stock with voting, conversion and other rights and preferences that could materially and adversely affect the voting power or other rights of the holders of Common Stock. The Company presently has no plans or commitments to issue any shares of preferred stock. The issuance of preferred stock or of rights to purchase preferred stock, as well as certain provisions of the Company's Articles of Incorporation and Virginia law, could delay, discourage, hinder or preclude an unsolicited acquisition of the Company, make it less likely that shareholders receive a premium for their shares as a result of any such attempt and adversely affect the market price, and voting and other rights of the holders of Common Stock. ITEM 2. PROPERTIES The Company believes that its Norfolk and Richmond offices are adequate for its current and near-term future requirements. -16- ITEM 3. LEGAL PROCEEDINGS The Company is a party to several legal actions which are ordinary, routine litigation incidental to its business. The Company believes that none of those actions, either individually or in the aggregate, will have a material adverse effect on the results of operations or financial position of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the fourth quarter of the year ended June 30, 1999. PART II The information required by Part II, Items 5, 6, 7 and 8 has been incorporated herein by reference to the Waterside Capital Corporation 1999 Annual Report as set forth below, in accordance with General Instruction G(2) of Form 10-K. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Since February 2, 1998, Waterside Capital Corporation Common Stock has traded on the Nasdaq Market under the symbol "WSCC." Share price information with respect to the Common Stock is set forth in the "Selected Quarterly Data" table included in the Waterside Capital Corporation 1999 Annual Report, which is incorporated herein by reference. As of August 1, 1999, there were approximately 650 holders of the Common Stock, including approximately 120 holders of record. No cash dividends have been paid with respect to the Common Stock since issuance. The Company has no current plans to pay any cash dividends relating to the Common Stock in the foreseeable future, although any dividends on the Common Stock will be at the sole discretion of the Company's Board of Directors and will depend upon the Company's profitability and financial condition, capital requirements, statutory restrictions, requirements of the Small Business Administration, future prospects and other factors deemed relevant by the Company's Board of Directors. If any dividends are paid to the holders of Common Stock, all holders will share equally on a per share basis. The Company has not issued any of its authorized preferred stock. ITEM 6. SELECTED FINANCIAL DATA Information included in the section entitled "Five-Year Summary of Selected Financial Data" in the Waterside Capital Corporation 1999 Annual Report is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information included in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Waterside Capital Corporation 1999 Annual Report is incorporated herein by reference. ITEM 7A. 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 interest rate risk and valuation risk. The Company considers the management of risk essential to conducting its businesses 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. -17- The Company manages its market risk by maintaining a portfolio of equity interests that is diverse by industry, geographic area, property type, 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 20 investments are in thinly traded, small public companies, whose stock prices have been volatile. The other 17 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 "Net unrealized gains (losses)." Each hypothetical 1% increase or decrease in value of the Company's portfolio of equity interests of $23.9 million at June 30, 1999 would have resulted in unrealized gains or losses and would have changed net increase in stockholders' equity resulting from operations in 1999 by less than 15%. 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 on 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 by less than 4% over a six month horizon. Although management believes that this measure is indicative of the Company's sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size and composition of the balance sheet and other business developments that could affect net income. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by this estimate. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements of Waterside Capital Corporation, including notes thereto, are presented in the Waterside Capital Corporation 1999 Annual Report and are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS None. PART III The information required by Part III, Items 10, 11, 12, and 13 has been incorporated herein by reference to the Company's 1999 Proxy Statement as set forth below, in accordance with General Instruction G(3) of Form 10-K. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Information relating to directors of the Company and compliance with Section 16(a) of the Exchange Act is set forth in the sections entitled "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's 1999 Proxy Statement and is incorporated herein by reference. Pursuant to General Instruction G(3) of Form 10-K, certain information concerning the executive officers of the Company is set forth under the caption entitled "Executive Officers of the Company" in Part I, Item 1, of this Form 10-K. -18- ITEM 11. EXECUTIVE COMPENSATION Information regarding compensation of officers and directors of the Company is set forth in the section entitled "Executive Compensation" in the Company's 1999 Proxy Statement and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding ownership of certain of the Company's securities is set forth in the section entitled "Security Ownership of Management and Certain Beneficial Owners" in the Company's 1999 Proxy Statement and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions with the Company is set forth in the section entitled "Certain Relationships and Related Transactions" in Waterside's 1999 Proxy Statement and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of this Report: (1) Financial Statements The Consolidated Financial Statements of Waterside Capital Corporation and the Auditor's Report thereon, are incorporated herein by reference. Applicable pages in the Waterside Capital Corporation 1999 Annual Report are as follows: PAGE Financial Statements: Independent Auditors Report of KPMG LLP 8 Balance Sheets at June 30, 1998 and 1999 9 Statements of Operations for the Years ended June 30, 1997, 1998 and 1999 10 Statements of Changes in Stockholders' Equity for the Years ended June 30, 1997, 1998 and 1999 11 Statements of Cash Flows for the Years ended June 30, 1997, 1998 and 1999 12 Notes to Financial Statements 13 (2) Financial Statement Schedule This information required by Schedule I - Investments in Securities of Unaffiliated Issurers is included in the schedule of Portfolio Investments which is an integral part of the financial statements. All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. -19- (3) Exhibits The exhibits listed on the accompanying Exhibit Index are filed or incorporated by reference as part of this Form 10-K and such Exhibit Index is incorporated herein by reference. (b) Reports on Form 8-K (filed during the fourth quarter of 1999): None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. WATERSIDE CAPITAL CORPORATION By: /s/ J. Alan Lindauer, Jr. ----------------------------------- J. Alan Lindauer, Jr. President and Chief Executive Officer Dated September 24, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date: /s/ J. Alan Lindauer, Jr. Director, President September 24, 1999 - ------------------------------------ And Chief Executive Officer J. Alan Lindauer, Jr. /s/ James E. Andrews Director September 24, 1999 - ------------------------------------ James E. Andrews /s/ Donna C. Bennett Director September 24, 1999 - ------------------------------------ Donna C. Bennett /s/ J. W. Whiting Chisman, Jr. Director September 24, 1999 - ------------------------------------ J. W. Whiting Chisman, Jr. /s/ Jeffrey R. Ellis Director September 24, 1999 - ------------------------------------ Jeffrey R. Ellis /s/ Eric L. Fox Director September 24, 1999 - ------------------------------------ Eric L. Fox /s/ Roger L. Frost Director September 24, 1999 - ------------------------------------ Roger L. Frost
-20- /s/ Marvin S. Friedberg Director September 24, 1999 - ----------------------------------- Marvin Friedberg /s/ Ernest F. Hardee Director September 24, 1999 - ----------------------------------- Ernest F. Hardee /s/ Henry U. Harris, III Director September 24, 1999 - ----------------------------------- Henry U. Harris, III /s/ Robert L. Low Director September 24, 1999 - ----------------------------------- Robert L. Low /s/ Harold J. Marioneaux, Jr. Director September 24, 1999 - ----------------------------------- Harold J. Marioneaux, Jr. /s/ Peter J. Meredith, Jr. Chairman of the Board and Director September 24, 1999 - ----------------------------------- Peter J. Meredith /s/ Charles H. Merriman, III Director September 24, 1999 - ----------------------------------- Charles H. Merriman, III /s/ Augustus C. Miller Director September 24, 1999 - ----------------------------------- Augustus C. Miller /s/ Paul F. Miller Director September 24, 1999 - ----------------------------------- Paul F. Miller /s/ Juan M. Montero, II Director September 24, 1999 - ----------------------------------- Juan M. Montero, II /s/ R. Scott Morgan, Sr. Director September 24, 1999 - ----------------------------------- R. Scott Morgan, Sr. /s/ James W. Noel, Jr. Director September 24, 1999 - ----------------------------------- James W. Noel, Jr. /s/ Richard G. Ornstein Director September 24, 1999 - ----------------------------------- Richard G. Ornstein
-21- /s/ Jordan E. Slone Director September 24, 1999 - ------------------------------------ Jordan E. Slone /s/ Gerald T. McDonald Chief Financial Officer September 24, 1999 - ------------------------------------ (Principal Accounting and Financial Gerald T. McDonald Officer)
EXHIBIT INDEX
EXHIBIT SEQUENTIAL NO. DESCRIPTION PAGE NO. * 1 Amended and Restated Articles of Incorporation of the Registrant * 2 Amended and Restated Bylaws of the Registrant * 8 The Registrant's License From the Small Business Administration * 9.1 Employment Agreement, dated as of December 1, 1997, between the Registrant and J. Alan Lindauer, Jr. * 9.4 1998 Employee Stock Option Plan **13 Annual Report to Shareholders 23 **27 Financial Data Schedule 31 **99.1 The Financial Statements and notes thereto which appear on pages 8 through 22 of Waterside Capital Corporation 1999 Annual Report to Shareholders (filed as Exhibit 13 to this Form 10-K) are incorporated herein by reference.
* (Not filed herewith. In accordance with Rule 12b-32 of the General Rules and Regulations under the Securities Exchange Act of 1934, the exhibit is incorporated by reference). ** Filed herewith. -22- EX-13 2 EXHIBIT 13 WATERSIDE CAPITAL CORPORATION 1999 ANNUAL REPORT TABLE OF CONTENTS LETTER TO STOCKHOLDERS ................. FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA ......................... MANAGEMENT'S DISCUSSION AND ANALYSIS ... INDEPENDENT AUDITORS' REPORT ........... FINANCIAL STATEMENTS ................... CORPORATE INFORMATION .................. Inside Back Cover
WATERSIDE CAPITAL CORPORATION A Small Business Investment Company Letter to Stockholders Fiscal 1999 marked the first full year of operations subsequent to our successful IPO in February 1998. We feel we made tremendous progress in 1999 and look forward to continuing to grow in 2000. We are a specialty finance company that invests in equity and debt securities of small primarily privately held businesses to finance their growth and expansion. We evaluate potential investments for credit quality through a due diligence process that assesses traditional criteria such as profit history, cash flow, debt service coverage and collateral. As a Small Business Investment Corporation (SBIC) which primarily invests in equity securities, our due diligence also includes a thorough evaluation of the prospect's products, market size, growth potential, a thorough review of management abilities and experience and determination of the best and most likely exit strategy. Our typical investment is currently structured as a preferred stock security generally ranging in size from $500,000 to $1,500,000 although we have invested as much as $2.5 million in one company. To enhance the overall due diligence process necessary with our emphasis on future growth we added Mr. Martin N. Speroni as Director of Research during fiscal 1999. Mr. Speroni has extensive experience as a trader in fixed income securities as well as being a Financial Analyst with a New York based international conglomerate. Mr. Speroni also holds a MBA from Columbia University. With our current professional staff we believe that we are now positioned for solid growth. We aggressively monitor the status and quality of the investments in our current portfolio, which enables us to take quick responsive action when necessary to protect any of our investments. The theme for the Company's financial performance has been continuing growth and diversification. Due to the successful completion of its IPO and the Company's initiation of its growth strategy using those proceeds, results for the year ended June 30, 1999 do not offer a meaningful comparison with the financial performance for fiscal 1998. We originated $18.5 million in new financing during fiscal 1999 compared to $6.5 million during 1998. We currently have investments in 20 companies compared to 11 companies the previous year. Net operating income reflected tremendous growth to $1.0 million for fiscal 1999 compared to the $218 thousand for fiscal 1998 reflecting a 377% increase. Per share net operating income of $.70 for 1999 compared to the $.23 generated during fiscal 1998. This significant growth in per share earnings is extremely gratifying in light of the 56% increase in average number of shares outstanding due to the IPO completed in February 1998. We paid our first 5% stock dividend in March 1999. Our only significant disappointment during 1999 was a stock price that we do not believe reflects the true value of our company given our earnings growth and potential. We believe market perceptions and valuations often tend to lag underlying realities and true valuations especially in small capitalization stocks. With our current infrastructure and growth potential, we believe total returns can improve dramatically. Our job is to tell our story to the market so that our stock price can better approach its true value. For fiscal 2000, we will continue the course currently established with quality controlled growth. We will continue diversification of the investment portfolio and emphasize current pay income instruments. Our top priority will be to continue to leverage our return on equity, which should equate to a positive driver for our stock market valuation. We are grateful for the loyalty of our staff and their dedication to the achievement of our goals. We thank our shareholders for their continued interest and support. /s/ J. Alan Lindauer - --------------------- J. Alan Lindauer President & CEO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following analysis of the financial condition and results of operations of the Company should be read in conjunction with the Company's fiscal year 1999 financial statements and the notes thereto and the other information included elsewhere in this report. Because of the very limited operating results and history of the Company there can be no assurance that the Company's historical financial performance is indicative of its future results of operations. o General Waterside Capital Corporation ("Waterside" or the "Company") is a specialty finance company headquartered in Norfolk, Virginia. The Company invests in equity and debt securities to finance the growth, expansion and modernization of small private businesses, primarily in the Mid-Atlantic Region. The Company was formed in 1993 as the Eastern Virginia Small Business Investment Corporation. Through June 30, 1996 the Company operated as a development stage company focused primarily on preparation to commence operation. The Company was licensed in 1996 by the Small Business Administration (SBA) as a Small Business Investment Company (SBIC) under the Small Business Investment Act of 1958. In October 1996 the Company made its first portfolio investment. In January 1998 the Company completed its Initial Public Offering (IPO) to raise additional equity to support its growth strategy. The majority of the Company's operating income is derived from dividend and interest income on portfolio investments and application and processing fees related to investment originations. The remaining portion of the Company's operating income comes from interest earned on cash equivalents. The Company's operating expenses primarily consist of payroll and other expenses incidental to operation. Waterside currently has 8 full time employees and 2 offices from which it operates - Norfolk and Richmond, Virginia. o Portfolio Composition The Company's primary business is investing in and lending to privately owned businesses through investments in subordinated debt with detachable common stock warrants, preferred stock and common stock. The portfolio composition at June 30, 1999 and 1998 is shown in the following table at fair value: JUNE 30, ----------------------------------- 1999 1998 1999 1998 % % $ $ ---- ---- ------- ----- Subordinated debt 28.3% 18.5% $ 6,894 $1,575 Preferred stock 66.3 70.7 16,146 6,014 Common stock warrants 1.6 2.4 377 207 Common stock 3.8 8.4 925 710 ----- ---- --------- -------- Total 100% 100% $24,342 $8,506 The weighted average effective interest rate on the Investment Portfolio was 11.26% at June 30, 1999 and 11.45% at June 30, 1998. The following tables show the Portfolio Composition by geographic region and industry grouping: JUNE 30, ------------- GEOGRAPHIC REGION 1999 1998 ---- ---- Mid-Atlantic 66% 86% Midwest 16 14 Southeast 9 0 Northeast 7 0 West 2 0 -------------------------------------------- Total 100% 100% JUNE 30, ------------- INDUSTRY 1999 1998 ---- ---- Business Services 44% 23% Manufacturing 25 35 Telecommunications 15 32 Education 7 5 Publishing 5 0 Retail 2 5 High Tech (software) 2 0 -------------------------------------------- Total 100% 100% Management intends to continue to diversify the portfolio and will explore new investment opportunities in a variety of industries as market conditions permit. o Results of Operations 1999 Compared to 1998 Due to the successful completion of its IPO in January 1998 and the Company's initiation of its growth strategy using the proceeds from its IPO, results from the year ended June 30, 1999 do not offer a meaningful comparison with the performance for the year ended June 30, 1998. For the year ended June 30, 1999, total operating income was $2.9 million compared to the $807 thousand generated during the same period of 1998. The increase in operating income is due to the growth in the Company's investment portfolio. The 1999 operating income consisted of dividends of $1.1 million, fee income of $947 thousand, interest on loans of $717 thousand and interest on cash equivalents of $161 thousand. Total operating expenses for the year ended June 30, 1999 were $1.8 million, consisting primarily of salary and benefits of $914 thousand, interest expense on SBA borrowings of $418 thousand, legal and accounting expenses of $122 thousand and other operating expenses of $352 thousand. These total operating expenses compared to the $636 thousand expended during 1998. Net operating income of $1.0 million for the year ended June 30, 1999 compared favorably to the $218 thousand generated during 1998. The realized appreciation on investments net of taxes of $234 thousand for the year ended June 30, 1999 was due to the sale of our equity investments in four private companies. There were no realized gains during 1998. The decrease in unrealized appreciation on investments net of taxes of $238 thousand for the year ended June 30, 1999 was due primarily to the changing stock price of two publicly traded portfolio companies. The increase in unrealized appreciation on investments, net of taxes, was $325 thousand for the year 1998 due primarily to the change in stock price of our publicly traded portfolio company. The Company declared and paid a 5% stock dividend during the quarter ended March 31, 1999. 1998 Compared to 1997 During the fiscal year ended June 30, 1998, the Company generated $807 thousand in operating income compared to the $265 thousand generated during the fiscal year ended June 30, 1997. The largest component of the change in operating income relates to an increase in dividends earned to $299 thousand in fiscal 1998 from $51 thousand in fiscal 1997. Another component of the change in operating income related to the increase in fee income, consisting of a combination of application and closings fees, to $272 thousand in fiscal 1998 from $37 thousand in fiscal 1997. The increases in dividends and fee income were derived from the new investments and loans made during fiscal year 1998 of $6.5 million as compared to $1.5 million for fiscal year 1997. The remainder of the increase in operating income can be primarily attributed to an increase in interest income from cash equivalents due to the investment of proceeds from the IPO. Operating expenses for the year ended June 30, 1998 were $636 thousand as compared to the $215 thousand reported for the year ended June 30, 1997. The significant increase in expenses is a function of the growth of the Company through increased investment activity and the related accompanying increases in payroll, legal and accounting costs, and other general operating expenses. The work force grew from three employees at June 30, 1997 to eight full time equivalents at June 30, 1998. The increase in employees primarily consisted of three additional business development officers necessary to sustain the Company's growth strategy. The remaining two additional employees handle administrative and financial management functions. The Company reported $325 thousand, net of taxes, of unrealized appreciation on investments for the year ended June 30, 1998 as compared to the $212 thousand reported for the year ended June 30, 1997. The increase can be primarily attributed to the growth in value of a publicly traded portfolio company, as well as appreciation measured by the sale of one of its investments in July 1998. o Financial Condition, Liquidity And Capital Resources During the year ended June 30, 1999, the Company made $12.9 million in new equity investments and $5.6 million in loans as compared to the $5.2 million of equity investments and $1.3 million of loans made during the fiscal year ended June 30, 1998. To fund these investments and loans, the Company borrowed $12.3 million from the SBA from a leverage commitment previously granted on June 8, 1998. The notes are due on March 1, 2009 for the $6 million draw and on September 1, 2009 for the $6.3 million draw and bear interest at a blended rate of 5.879% plus a 1.35% fee annually on the outstanding balance. The Company received a commitment letter on May 26, 1999 from the SBA reserving additional leverage in an amount equal to $16.1 million that will expire on September 30, 2003. The Company anticipates drawing the entire $16.1 million in leverage during fiscal year 2000. The Company has an additional tier of leverage (representing approximately $15 million) that it may borrow from the SBA based on its current regulatory capital position. Management believes that these sources of capital will be sufficient to fund the company's operations and grow its portfolio in fiscal 2000. During the year ended June 30, 1999, cash provided by operating activities was $988 thousand as compared to the $125 thousand provided during the year ended June 30, 1998, primarily due to the growth in the Company's net operating income. The Company used $15.9 million in investing activities during the year ended June 30, 1999 as compared to the $6.0 million used in the comparable period of 1998. This increase is primarily attributable to the growth in the investment portfolio described above, net of the cash generated from the liquidation of the Company's investment in four portfolio companies. The Company generated $11.8 million in cash from financing activities for the year ended June 30, 1999 primarily representing the proceeds from the borrowings from the SBA described above. The Company generated $8.0 million in cash from financing activities during the year ended June 30, 1998 primarily representing the proceeds from the IPO consummated in January 1998. o The Year 2000 State of readiness: The Company has identified and addressed the potential impact of the Year 2000 issue on its operations. This process has identified three primary areas in which the Company could be affected: financial and administrative programs, service providers, and portfolio companies. First, the Company has assessed its financial and administrative software programs. As part of this process, the Company has contacted its software vendors, who have indicated that their programs either are or will be Year 2000 compliant. The Company will continue to work with these vendors to ensure that necessary upgrades and testing are completed. Due to the nature of the Company's business, management does not expect a significant impact associated with non-information technology systems. Second, the Company is assessing its key relationships with suppliers and other third parties, including its principal bank, to determine the potential impact of Year 2000 on these parties, and in turn on the Company. The Company is not aware of any critical service provider that will not be Year 2000 compliant. However, the Company cannot give any assurance that the service providers will be Year 2000 compliant and that no interruption of business will occur as a result of their non-compliance. Finally, the Company is investigating the impact of Year 2000 issues on its portfolio companies. Because of the relatively small size of its portfolio companies and their lack of sophisticated operating systems, their readiness represents the Company's most significant risk with regards to the Year 2000. The Company sent Year 2000 questionnaires to each of its portfolio companies to assess their awareness and to evaluate their Year 2000 readiness. The Company is not aware of any significant deficiencies in the Year 2000 readiness of its portfolio companies. In addition, the Company evaluates each new portfolio company's Year 2000 readiness as part of the due diligence process when making a new investment. Although the Company is currently unaware of any significant Year 2000 issues related to its portfolio companies, the failure of one or more of the portfolio companies to properly prepare for the Year 2000 could have a material adverse impact on the Company's business, results of operations and financial condition. Based on the assessment performed to date, the Company does not believe that the cost of its Year 2000 remediation activities will exceed $50,000. This includes time allocated to this task by Company personnel and costs incurred in the testing phase. The Company believes it has taken the necessary steps to be Year 2000 compliant; however, it is difficult to fully predict the impact on the Company of non-compliance in any of the above mentioned areas. Significant non-compliance could result in a material adverse effect on the Company's financial condition and results of operations. The Company believes that the worst-case Year 2000 scenarios may include the inability of the Company to access or transfer cash needed to pay its bills or fund new investments or a disruption of a portfolio company's business that results in a loss of the Company's investment. o 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, the impact of Year 2000 issues on itself, its vendors, suppliers, and portfolio companies, future financial performance and other matters that reflect management's expectations as of the date made. Without limiting the foregoing, the words "believes", "anticipates", "plans", "expects", "seeks" and similar expressions are intended to identify forward-looking statements. Future events and the Company's actual results could differ materially from the results reflected in these forward-looking statements. Please refer to a discussion of these and other factors in this Report and the Company's other Commission filings. The Company disclaims any intent or obligation to update these forward-looking statements, whether as a result of new information, future events, or otherwise. WATERSIDE CAPITAL CORPORATION FINANCIAL STATEMENTS JUNE 30, 1998 AND 1999 (WITH INDEPENDENT AUDITORS' REPORT THEREON) Independent Auditors' Report The Stockholders and Board of Directors Waterside Capital Corporation: We have audited the accompanying balance sheets of Waterside Capital Corporation, including the schedule of portfolio investments, as of June 30, 1998 and 1999 and the related statements of operations, changes in stockholders' equity and cash flows for each of the years in the three-year period ended June 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Waterside Capital Corporation as of June 30, 1998 and 1999, and the results of its operations and cash flows for each of the years in the three-year period ended June 30, 1999 in conformity with generally accepted accounting principles. /s/ KPMG LLP August 5, 1999 Norfolk, Virginia FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
YEAR ENDED JUNE 30, INCEPTION (JULY 13, 1993) ------------------------------------------------ TO JUNE 30, 1995(1) 1996(1) 1997 1998 1999 ------------------------- ------- ---- ---- ---- SUMMARY OF EARNINGS INFORMATION: Operating Income: Interest on loans $ -- $ -- $ 9,430 $ 24,290 $ 717,437 Dividends -- -- 51,425 299,080 1,071,899 Interest on cash equivalents 8,955 42,262 166,573 211,440 160,889 Fee and other income -- 17,255 37,450 271,714 947,013 -------- ------- -------- -------- ---------- Total operating income 8,955 59,517 264,878 806,524 2,897,238 Total operating expenses 36,025 59,777 214,667 635,519 1,805,130 -------- ------- -------- -------- ---------- Net operating income (loss) before income taxes (27,070) (260) 50,211 171,005 1,092,108 Income tax expense (benefit) 1,880 (7,346) (12,370) (47,220) 51,000 -------- ------- -------- -------- ---------- Net operating income (loss) (28,950) 7,086 62,581 218,225 1,041,108 Realized gain on investments, net of income taxes(2) -- -- -- -- 234,312 Change in unrealized appreciation on investments, net of income taxes (3) -- -- 211,700 325,110 (238,376) Net increase (decrease) in stockholders' equity resulting from operations $(28,950) $ 7,086 $274,281 $543,335 $1,037,044 -------- ------- -------- -------- ---------- Net operating income per share - basic and diluted -- -- $ .11 $ .23 $ .70 Net increase in stockholders' equity resulting from operations per share - basic and diluted -- -- $ .46 $ .57 $ .70 Weighted average number of shares outstanding -- -- 590,223 955,749 1,491,937
JUNE 30, 1995(1) 1996(1) 1997 1998 1999 ------- ------- ---- ---- ---- BALANCE SHEET INFORMATION: Investments in portfolio companies, at fair value(5): Equity securities $ -- $ -- $1,142,410 $ 6,724,337 $17,070,782 Loans -- -- -- 1,575,264 6,894,468 Options and warrants -- -- 388,890 206,624 377,000 ------- ---------- ---------- ----------- ----------- Total investments -- -- 1,481,300 8,506,225 24,342,250 Cash and cash equivalents 409,869 3,595,766 2,329,148 4,393,501 1,269,409 Total assets 420,012 3,655,018 3,963,648 13,374,729 27,109,870 Debentures payable -- -- -- -- 12,300,000 Total stockholders' equity 319,850 3,512,636 3,856,417 13,034,288(4) 14,071,269
(1) Through June 30, 1996, the Company operated as a development stage enterprise. The Company made its first portfolio investment during the year ended June 30, 1997. (2) Amount presented net of income tax expense of $144,000. (3) Amounts have been presented net of deferred income tax expense (benefit) of $129,600, $198,920 and (145,000), respectively, for the years ended June 30, 1997, 1998 and 1999. (4) In January 1998, the Company completed an initial public offering of 852,000 shares of common stock at $11 per share. The net proceeds for the offering, after $1,288,464 of expenses, were $8,083,536. (5) The Company's portfolio investments are presented at fair value, as determined by the Executive Committee of the Board of Directors, using the Model Valuation Policy as published by the Small Business Administration (SBA). The valuation policy includes estimates made by management in the absence of readily ascertainable market values. These estimated values may differ from those that would have been used had a ready market for the securities existed. See the Notes to the Company's Financial Statements included elsewhere herein. The cost of the portfolio investments was $1,140,000, $7,640,893 and $23,860,295 at June 30, 1997, 1998 and 1999, respectively. PRICE RANGE OF COMMON STOCK The Company's Common Stock is quoted on the NASDAQ Stock Market under the symbol WSCC. As of August 23, 1999 the Company had 120 stockholders of record and approximately 650 beneficial owners. The following table sets forth the range of high and low bid prices of the Company's common stock as reported on the NASDAQ stock market for the period from February 2, 1998, when public trading of the common stock commenced pursuant to the IPO, through June 30, 1999. Bid Price Net Asset --------------------------------- Value Per Share(1) High Low Close ------------------ ------- -------- ------- 1998 Third Quarter $8.67 $ 11.750 $ 10.750 $10.875 Fourth Quarter 8.74 11.375 10.125 11.125 1999 First Quarter $8.74 $ 11.375 $ 9.000 $ 9.250 Second Quarter 8.87 10.620 7.500 8.500 Third Quarter 9.24 8.750 6.500 7.250 Fourth Quarter 9.43 7.875 6.000 6.750 - ----------------- 1. Net asset value per share is determined as of the last day in the calendar quarter and therefore may not reflect the net asset value per share on the date of the high or low sales prices for that specific quarter. The net asset values shown are based on outstanding shares at the end of each quarter and the previously reported values have been restated to reflect the 5% stock dividend declared on February 5, 1999 and paid on March 15, 1999. WATERSIDE CAPITAL CORPORATION Balance Sheets June 30, 1998 and 1999 - --------------------------------------------------------------------------------
1998 1999 ---------------- ---------------- Assets: Investments in portfolio companies, at fair value (notes 2 and 16): Equity securities $ 6,724,337 17,070,782 Loans 1,575,264 6,894,468 Options and warrants 206,624 377,000 ---------------- ---------------- Total investments, cost of $7,640,893 and $23,860,295 at June 30, 1998 and 1999, respectively 8,506,225 24,342,250 ---------------- ---------------- Current assets: Cash and cash equivalents 4,393,501 1,269,409 Dividend receivable 172,842 311,737 Interest receivable 21,272 228,438 Note receivable (note 3) - 150,000 Refundable income taxes - 43,322 Prepaid expenses and other current assets 45,137 77,916 ---------------- ---------------- Total current assets 4,632,752 2,080,822 Property and equipment, net (note 4) 112,002 118,961 Deferred financing costs, net 123,750 567,837 ---------------- ---------------- Total assets $ 13,374,729 27,109,870 ================ ================ Liabilities and Stockholders' Equity: Current liabilities: Accounts payable $ 15,616 57,142 Accrued expenses (note 5) 66,825 372,828 Deferred revenue - 113,631 ---------------- ---------------- Total current liabilities 82,441 543,601 Deferred income taxes (note 7) 258,000 195,000 Debentures payable (note 6) - 12,300,000 ---------------- ---------------- Total liabilities 340,441 13,038,601 ---------------- ---------------- Stockholders' equity (note 8): Common stock, $1 par value, 10,000,000 shares authorized, 1,420,900 and 1,491,937 issued and outstanding at June 30, 1998 and 1999, respectively 1,420,900 1,491,937 Preferred stock, $1 par value, 25,000 shares authorized, no shares issued and outstanding - - Additional paid-in capital 12,272,636 12,769,895 Net unrealized appreciation on investments, net of income taxes 536,810 298,434 Undistributed accumulated earnings 258,942 966,003 Stockholders' notes receivable (1,455,000) (1,455,000) ---------------- ---------------- Total stockholders' equity 13,034,288 14,071,269 Commitments and contingencies (notes 2, 11, 12 and 13) ---------------- ---------------- Total liabilities and stockholders' equity $ 13,374,729 27,109,870 ================ ================ Net asset value per common share (note 8) $ 8.74 9.43 ================ ================
See accompanying notes to financial statements. 2 WATERSIDE CAPITAL CORPORATION Statements of Operations Years ended June 30, 1997, 1998 and 1999 - --------------------------------------------------------------------------------
1997 1998 1999 --------------- -------------- -------------- Operating income: Interest on loans $ 9,430 24,290 717,437 Dividends 51,425 299,080 1,071,899 Interest on cash equivalents 166,573 211,440 160,889 Fee and other income 37,450 271,714 947,013 --------------- -------------- -------------- Total operating income 264,878 806,524 2,897,238 --------------- -------------- -------------- Operating expenses: Management fees (note 10) 52,000 39,000 - Salary and benefits 41,965 326,261 913,786 Legal and accounting 41,128 90,592 122,080 Interest expense - - 417,605 Other operating expenses (note 10) 79,574 179,666 351,659 --------------- -------------- -------------- Total operating expenses 214,667 635,519 1,805,130 --------------- -------------- -------------- Net operating income before income taxes 50,211 171,005 1,092,108 Income tax expense (benefit) (note 7) (12,370) (47,220) 51,000 --------------- -------------- -------------- Net operating income 62,581 218,225 1,041,108 Realized gain on investments, net of income taxes of $144,000 - - 234,312 Change in unrealized appreciation on investments, net of income tax expense (benefit) of $129,600, $198,920 and $(145,000) for 1997, 1998 and 1999, respectively (note 16) 211,700 325,110 (238,376) --------------- -------------- -------------- Net increase in stockholders' equity resulting from operations $ 274,281 543,335 1,037,044 =============== ============== ============== Net increase in stockholders' equity resulting from operations per share - basic and diluted (notes 8 and 9) $ 0.46 0.57 0.70 =============== ============== ==============
See accompanying notes to financial statements. 3 WATERSIDE CAPITAL CORPORATION Statements of Changes in Stockholders' Equity (Note 8) Years ended June 30, 1997, 1998 and 1999 - --------------------------------------------------------------------------------
Common Stock Additional -------------------------------------------------------------- Shares Shares paid-in ------------------------------ ------------------------------ Subscribed Amount Issued Amount capital --------------------------------------------------------------------------- Balance at June 30, 1996 26,000 $ 26,000 537,400 $ 537,400 4,987,100 Common stock issued pursuant to private placement (26,000) (26,000) 31,500 31,500 54,000 Repayment of stockholders' notes receivable - - - - - Net operating income - - - - - Increase in net unrealized appreciation on investments - - - - - -------- ---------- ----------- ----------- ------------ Balance at June 30, 1997 - - 568,900 568,900 5,041,100 Common stock issued pursuant to initial public offering - - 852,000 852,000 7,231,536 Repayment of stockholders' notes receivable - - - - - Net operating income - - - - - Increase in net unrealized appreciation on investments - - - - - -------- ---------- ----------- ----------- ----------- Balance at June 30, 1998 - - 1,420,900 1,420,900 12,272,636 5% stock dividend - - 71,037 71,037 497,259 Net operating income - - - - - Net realized gain on investments - - - - - Decrease in net unrealized appreciation on investments - - - - - --------- ---------- ----------- ----------- ------------ Balance at June 30, 1999 - $ - 1,491,937 $ 1,491,937 12,769,895 ========= =========== =========== ============ ============ Net unrealized Undistributed appreciation accumulated Stockholders' Total (depreciation) earnings notes stockholders' on investments (deficit) receivable equity --------------------------------------------------------------- Balance at June 30, 1996 $ - (21,864) (2,016,000) 3,512,636 Common stock issued pursuant to private placement - - - 59,500 Repayment of stockholders' notes receivable - - 10,000 10,000 Net operating income - 62,581 - 62,581 Increase in net unrealized appreciation on investments 211,700 - - 211,700 ----------- ------------ ------------- ------------- Balance at June 30, 1997 211,700 40,717 (2,006,000) 3,856,417 Common stock issued pursuant to initial public offering - - - 8,083,536 Repayment of stockholders' notes receivable - - 551,000 551,000 Net operating income - 218,225 - 218,225 Increase in net unrealized appreciation on investments 325,110 - - 325,110 ---------- ----------- ------------ ------------ Balance at June 30, 1998 536,810 258,942 (1,455,000) 13,034,288 5% stock dividend - (568,359) - (63) Net operating income - 1,041,108 - 1,041,108 Net realized gain on investments - 234,312 - 234,312 Decrease in net unrealized appreciation on investments (238,376) - - (238,376) ---------- ------------ ------------- ------------- Balance at June 30, 1999 $ 298,434 966,003 (1,455,000) 14,071,269 =========== ============ ============ =============
See accompanying notes to financial statements. 4 - -------------------------------------------------------------------------------- WATERSIDE CAPITAL CORPORATION Statements of Cash Flows Years ended June 30, 1997, 1998 and 1999 - --------------------------------------------------------------------------------
1997 1998 1999 --------------- ------------- ------------ Cash flows from operating activities: Net increase in stockholders' equity resulting from operations $ 274,281 543,335 1,037,044 Adjustments to reconcile net increase in stockholders' equity resulting from operations to net cash provided by (used in) operating activities: Decrease (increase) in unrealized appreciation on investments (341,300) (524,030) 383,376 Realized gain on investments - - (378,312) Accretion of preferred stock and loan investments - - (71,823) Depreciation and amortization 15,346 38,634 42,185 Deferred income tax expense (benefit) 117,230 151,700 (63,000) Changes in assets and liabilities increasing (decreasing) cash flows from operating activities: Dividend receivable (51,425) (121,417) (138,895) Interest receivable (5,730) (15,542) (207,166) Refundable income taxes (16,752) 16,752 (43,322) Prepaid expenses and other current assets - (45,137) (32,779) Other assets (390) (750) - Accounts payable and accrued expenses (114,058) 81,510 347,529 Deferred revenue - - 113,631 Income taxes payable (1,823) - - ------------ ------------- ---------------- Net cash provided by (used in) operating activities (124,621) 125,055 988,468 ------------ ------------- ---------------- Cash flows from investing activities: Investments made (1,140,000) (5,175,893) (12,872,180) Loans made (400,000) (1,325,000) (5,633,270) Principal collected on loans made 400,000 - 66,163 Issuance of note receivable - - (150,000) Proceeds from repayment of stockholders' notes receivable 10,000 551,000 - Proceeds from sales of investments - - 2,670,021 Acquisition of property and equipment (52,997) (71,345) (24,731) ------------ ------------- ---------------- Net cash used in investing activities (1,182,997) (6,021,238) (15,943,997) ------------ ------------- ---------------- Cash flows from financing activities: Proceeds from notes payable - - 12,300,000 Payment of deferred financing costs - (123,000) (468,500) Proceeds from issuance of common stock 59,500 8,083,536 - Payment related to fractional shares associated with stock dividend - - (63) Repayment of short-term debt (18,500) - - ------------ ------------- ---------------- Net cash provided by financing activities 41,000 7,960,536 11,831,437 ------------ ------------- ---------------- Net increase (decrease) in cash and cash equivalents (1,266,618) 2,064,353 (3,124,092) Cash and cash equivalents, beginning of year 3,595,766 2,329,148 4,393,501 ------------ ------------- ---------------- Cash and cash equivalents, end of year $ 2,329,148 4,393,501 1,269,409 ============= ============= ================ Supplemental disclosure of cash flow information: Cash paid during the year for interest $ - - 196,462 ============= ============= ================ Cash paid during the year for income taxes $ 10,180 - 160,000 ============= ============= ================
See accompanying notes to financial statements. 5 WATERSIDE CAPITAL CORPORATION Notes to Financial Statements June 30, 1998 and 1999 - -------------------------------------------------------------------------------- (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Waterside Capital Corporation (the "Company") was incorporated in the Commonwealth of Virginia on July 13, 1993 and is a closed-end investment company licensed by the Small Business Administration (the "SBA") as a Small Business Investment Corporation ("SBIC"). 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. The Company made its first loan to a small business concern in October 1996 and its first equity investment in November 1996. On September 10, 1997, the Company authorized a common stock split of 100 to 1. This increased the authorized number of common shares to 10,000,000 and the issued and outstanding common shares to 568,900. In January 1998, the Company completed an Initial Public Offering ("IPO") of 852,000 shares of common stock at a price of $11.00 per share. The net proceeds, after $1,288,464 of offering costs, were $8,083,536. CASH AND CASH EQUIVALENTS The Company considers all highly liquid securities purchased with insignificant interest rate risk and original maturities of three months or less at the acquisition date to be cash equivalents. Cash and cash equivalents consisted of the following at June 30, 1998 and 1999: 1998 1999 ---- ---- Cash $ 193,501 269,409 Repurchase agreements 4,200,000 1,000,000 --------- ------------- Total $ 4,393,501 1,269,409 ========= ============= (Continued) 6 The repurchase agreements reflected above consist of overnight agreements collateralized by U.S. government securities. Due to the short-term nature of the agreements, the securities are held for the Company by a bank. INVESTMENT VALUATION 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. Discounts range from 0% to 40% for investment size and market liquidity concerns. 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. REALIZED AND UNREALIZED GAIN OR LOSS ON INVESTMENTS Realized gains or losses recorded upon disposition of investments are calculated on the difference between the net proceeds and the cost basis determined using the specific identification method. All other changes in the value of investments, including any provision for losses, are included as changes in the unrealized appreciation or depreciation in the statement of operations. RECOGNITION OF INTEREST AND DIVIDEND INCOME Interest income is recorded on the accrual basis. In the case of dividends on preferred stock investments where the Company has an agreement stipulating dividends payable, the Company accrues the dividends in income on a pro-rata basis during the year. Otherwise, dividends are recorded as income on the ex-dividend date. The Company ceases to accrue dividends and interest income if the investee is more than 120 days delinquent in their payments. Accretion of loans and preferred stock investments are recorded as a component of interest and dividend income in the statement of operations. (Continued) 7 FEE INCOME Portfolio investment processing fees are recognized as income upon consummation of the related investment transaction. PROPERTY AND EQUIPMENT Property and equipment is stated at cost. Depreciation and amortization of property and equipment is calculated on the straight-line method over the estimated useful lives of the assets ranging from 5 to 7 years. Property and equipment held under leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or estimated useful life of the asset. DEFERRED FINANCING COSTS Deferred financing costs consist of origination and processing fees paid in connection with SBA debentures. The origination and processing fees are amortized over the life of the debentures using the straight-line method, which approximates the effective interest method. INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. NET INCREASE IN STOCKHOLDERS' EQUITY RESULTING FROM OPERATIONS PER SHARE The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 128, EARNINGS PER SHARE, for the year ended June 30, 1998. Basic earnings per share as calculated in accordance with SFAS No. 128 has been computed by dividing net increase in stockholders' equity resulting from operations by the weighted average number of common shares outstanding. Diluted earnings per share reflects the potential dilution that could occur assuming the inclusion of common share equivalents and has been computed by dividing net increase in stockholders' equity resulting from operations by the weighted average number of common shares and common share equivalents outstanding. Common share equivalents include all outstanding stock options and warrants after applying the treasury stock method. All share and per share data in the financial statements and the accompanying notes have been retroactively adjusted to reflect the implementation of SFAS No. 128. 8 STOCK OPTION PLAN The Company accounts for stock options issued to employees under the provisions of Statement of Financial Accounting Standards (SFAS) No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION, which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of Accounting Principles Board (APB) Opinion No. 25 and provide pro forma net income and pro forma net income per common share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. RECLASSIFICATIONS Certain reclassifications have been made to the 1997 and 1998 financial statements to conform to 1999 financial statement presentation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (2) INVESTMENTS Investments consist primarily of preferred stock obtained from and loans made to portfolio companies under SBIC investment and loan regulations. The financial statements include securities valued at $8,506,225 and $24,342,250 at June 30, 1998 and 1999 (63.6% and 89.8% of assets), respectively. Investments are recorded at fair value as determined by the Executive Committee of the Board of Directors or by current market prices, if available, in accordance with the Company's valuation policy. 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. Since December 4, 1998, Diversified Telecom, Inc. has not made required dividend payments to the Company. As a result, the Company has discontinued accruing dividends on the investment. Certain changes have been made at the portfolio company level and management does not believe that the underlying investment is impaired. (Continued) 9 (3) NOTE RECEIVABLE The Company has a note receivable due from the chief executive officer of one of its investees. The note earns interest at 9% per annum and matures on June 30, 2000. Interest payments are due monthly, and a final installment in the amount of all outstanding principal, plus accrued and unpaid interest, is due upon maturity. (4) PROPERTY AND EQUIPMENT Property and equipment at June 30, 1998 and 1999 consists of the following:
1998 1999 ---- ---- Furniture and fixtures $ 66,189 80,479 Computer equipment 30,226 37,296 Leasehold improvements 27,927 31,298 ------------ ----------- 124,342 149,073 Less accumulated depreciation and amortization 12,340 30,112 ------------ ----------- Property and equipment, net $ 112,002 118,961 ============ =========
(5) ACCRUED EXPENSES Accrued expenses at June 30, 1998 and 1999 consist of the following:
1998 1999 ---- ---- Accrued accounting and legal expense $ 45,500 37,932 Accrued salaries and benefits 21,325 114,766 Accrued interest payable - 196,730 Other accrued expenses - 23,400 ------------ ---------- Total accrued expenses $ 66,825 372,828 ============ =========
(6) DEBENTURES PAYABLE At June 30, 1999, the Company had drawn down debentures totaling $12,300,000 payable to the SBA. The $6,000,000 drawn down during the second quarter of 1999 bears interest at a fixed interest rate of 6.240% and matures March 1, 2009. Interest on the $6,300,000 drawn down in the fourth quarter of 1999 is payable at an interim interest rate of 5.535% which is expected to be fixed in September 1999, and matures on September 1, 2009. The debentures require semi-annual interest-only payments, with all principal due upon maturity. The SBA debentures are subject to a prepayment penalty. 10 In May 1999, the Company was granted approval for additional SBA debentures totaling up to $16,100,000. The debentures will accrue interest at an interim rate to be set at the time of each draw against the facility. The interest rate on any outstanding amounts is fixed in the March or September following the draw down. At June 30, 1999 none of these debentures had been drawn upon. (7) INCOME TAXES The Company's provision for income taxes for the years ended June 30, 1997, 1998 and 1999 was allocated as follows:
1997 1998 1999 ---- ---- ---- Income tax expense (benefit) attributable to operations $ (12,370) (47,220) 51,000 Deferred tax expense (benefit) attributable to change in unrealized appreciation on investments 129,600 198,920 (145,000) Current tax expense attributable to realized gain on investments - - 144,000 ---------- ----------- ----------- Total income tax expense $ 117,230 151,700 50,000 ========== =========== ===========
The Company's income tax expense (benefit) attributable to operations for the years ended June 30, 1997, 1998 and 1999 is as follows:
1997 1998 1999 ---- ---- ---- Current: Federal $ - - (25,000) State - - (6,000) ---------- ----------- ----------- Total current taxes - - (31,000) ---------- ----------- ----------- Deferred: Federal (10,370) (39,720) 68,000 State (2,000) (7,500) 14,000 ---------- ----------- ----------- Total deferred taxes (12,370) (47,220) 82,000 ---------- ----------- ----------- Total income tax expense (benefit) attributable to operations $ (12,370) (47,220) 51,000 ========== =========== ===========
(Continued) 11 The 1997, 1998 and 1999 actual tax expense (benefit) attributable to operations differs from the amount which would be provided by applying the statutory federal rate to net operating income before income taxes as follows:
1997 1998 1999 ---- ---- ---- Computed "expected" tax expense $ 17,000 58,000 371,000 State taxes, net of federal impact (1,320) (5,000) 5,000 Nontaxable dividend income (17,500) (102,000) (348,000) Other (10,550) 1,780 23,000 ------- ----------- ----------- Total income tax expense (benefit) attributable to operations $ (12,370) (47,220) 51,000 ======= =========== ===========
The Company's deferred tax assets and liabilities at June 30, 1998 and 1999 are as follows:
1998 1999 ---- ---- Deferred tax assets: Net operating loss carryforward $ 53,000 - Organization costs, due to the differing amortization methods and implementation of SOP 98-5 23,000 15,000 ----------- ----------- Total deferred tax assets 76,000 15,000 ----------- ----------- Deferred tax liabilities: Property and equipment, due to differing depreciation methods (5,000) (9,000) Investments, due to recognition of unrealized appreciation and accretion for financial statement purposes (329,000) (201,000) ----------- ----------- Total deferred tax liabilities (334,000) (210,000) ----------- ----------- Net deferred tax liabilities $ (258,000) (195,000) =========== ===========
(Continued) 12 (8) STOCKHOLDERS' EQUITY STOCKHOLDERS' NOTES RECEIVABLE In 1996, the Company completed a private placement under which the Company sold shares of common stock to accredited investors for 50% of the subscription price paid in cash and the balance financed by a non-interest bearing demand recourse promissory note. The Company holds the issued shares as collateral for the note until the note is paid in full. Other investors that purchased shares in this private placement elected to pay all cash for their shares at the time of issuance. As of June 30, 1998 and 1999, $1,455,000 of these notes were outstanding. On December 3, 1997, the Board of Directors of the Company authorized the officers of the Company to demand that the stockholders repay the notes on or before December 31, 1999. Notice of this demand was sent to the stockholders on December 31, 1997. STOCK DIVIDEND On February 5, 1999, the Company declared a 5% stock dividend to shareholders of record as of February 26, 1999. On March 15, 1999, the Company issued 71,037 shares of common stock in conjunction with this dividend. Accordingly, amounts equal to the fair market value (based on quoted market prices) of the additional shares issued have been charged to retained earnings and capitalized as common stock and additional paid-in capital. Historical earnings per share and weighted average shares outstanding and net asset value per share have been restated to reflect the 5% stock dividend. UNDISTRIBUTED ACCUMULATED EARNINGS Undistributed accumulated earnings at June 30, 1998 and 1999 consist of the following: 1998 1999 ---- ---- Undistributed accumulated investment income $ 258,942 731,691 Undistributed accumulated net realized gains - 234,312 ---------- ------- Undistributed accumulated earnings $ 258,942 966,003 ========== ======= (Continued) 13 STOCK OPTION PLAN During 1998, the Company adopted the Waterside Capital Corporation 1998 Employee Stock Option Plan (the "Plan") pursuant to which the Company may grant stock options to officers and key employees. The Plan authorizes the grant of options to purchase up to 105,000 shares of authorized but unissued common stock. Stock options are granted with an exercise price equal to the stock's fair market value at the date of grant. All stock options have ten-year terms and vest on a graded schedule, at which time they become fully exercisable. There was no plan in effect during 1997. During 1998 and 1999, 81,375 and 21,000 options, respectively, were granted under the Plan. At June 30, 1998 and 1999, there were 23,625 and 2,625 additional shares available for future grant under the Plan, respectively. The per share weighted-average fair value of all stock options granted is $2.94. The fair value of each grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: expected life of five years, expected volatility of 18.2%, expected dividend yield of 0% and risk-free interest rate of 5.55% for options granted in fiscal 1998 and expected life of five years, expected volatility of 17.3%, expected dividend yield of 0% and risk-free interest rate of 6.01% for options granted in fiscal 1999. Under the Plan, the employee stock options are dividend protected. As a result, the exercise price of the outstanding options was adjusted downward and the number of options increased so as to equalize the holder's value before and after a stock dividend or split. As a result of the stock dividend described above, all options outstanding were adjusted in accordance with the Plan. The Company applies APB Opinion No. 25 in accounting for its Plan and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income would have been reduced to the pro forma amounts indicated below:
1998 1999 ---- ---- Net increase in stockholders' equity resulting from operations As reported $ 543,335 1,037,044 Pro forma 515,587 855,516 Net increase in stockholders' equity resulting from operations per share - basic and diluted As reported $ 0.57 0.70 Pro forma 0.54 0.57
(Continued) 14 Stock option activity during the periods indicated is as follows:
Number of Weighted-Average Shares Exercise Price ------ -------------- Balance at June 30, 1997 - $ - Granted 81,375 10.49 Exercised - - Forfeited - - Expired - - ---------- ---------- Balance at June 30, 1998 81,375 10.49 Granted 21,000 8.21 Exercised - - Forfeited - - Expired - - ---------- ---------- Balance at June 30, 1999 102,375 $ 10.02 ========== ==========
At June 30, 1998 and 1999, 9,450 and 75,425 options, respectively, were exercisable. The difference between the weighted average exercise prices for all outstanding options and those exercisable on June 30, 1999 was not significant. The weighted average remaining contractual life of outstanding options at June 30, 1999 is 8.9 years. (Continued) 15 (9) NET INCREASE IN STOCKHOLDERS' EQUITY RESULTING FROM OPERATIONS PER SHARE The following table sets forth the calculation of basic and diluted net increase in stockholders' equity resulting from operations per share for the years ended June 30, 1997, 1998 and 1999:
1997 1998 1999 ---- ---- ---- Basic net increase in stockholders' equity resulting from operations per share: Net increase in stockholders' equity resulting from operations $ 274,281 543,335 1,037,044 ============ =========== =========== Weighted average number of common shares outstanding $ 590,223 955,749 1,491,937 ============ =========== =========== Basic net increase in stockholders' equity resulting from operations per share $ 0.46 0.57 0.70 ============ =========== =========== Diluted net increase in stockholders' equity resulting from operations per share: Net increase in stockholders' equity resulting from operations $ 274,281 543,335 1,037,044 ============ =========== =========== Weighted average number of common shares outstanding 590,223 955,749 1,491,937 Dilutive effect of stock options (as determined by using the treasury stock method) - 1,456 - ------------ ----------- ----------- Adjusted weighted average number of common shares outstanding $ 590,223 957,205 1,491,937 ============ =========== =========== Diluted net increase in stockholders' equity resulting from operations per share $ 0.46 0.57 0.70 ============ =========== ===========
(10) RELATED PARTY TRANSACTIONS During the fiscal years ended June 30, 1997 and 1998, the Company paid management fees and expenses to a company owned by an officer and director of the Company of $52,000 and $39,000, respectively. In addition, for the fiscal years ended June 30, 1998 and 1999, the Company paid fees of $14,000 and $88,000, respectively, to an officer and director of the Company and to a partnership owned by an officer and director of the Company for the use of an airplane. (Continued) 16 On February 1, 1997, the Company entered into a sublease agreement with a company in which it has invested. The sublease agreement provides for the same term as the prime lease, except that the sublease may be terminated by either party on 90 days notice. As of June 30, 1999, the Company no longer has an investment in this entity. (11) LEASES The Company has four noncancelable operating leases, primarily for office space, that expire over the next four years. The Company nets rent expense with sublease income. Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) as of June 30, 1999 are: Year ending June 30, 2000 $ 62,907 2001 64,241 2002 65,370 2003 33,326 ------------ Total minimum lease payments $ 225,844 ============ Net rental expense for operating leases for the years ended June 30, 1997, 1998 and 1999 was $20,919, $34,834 and $68,376, respectively. Sublease income for the years ended June 30, 1997, 1998 and 1999 was $3,500, $10,900 and $4,900, respectively. (12) COMMITMENTS AND CONTINGENCIES EMPLOYMENT AGREEMENTS The Company has employment agreements with five active members of management. These agreements provide for a specified annual base salary and certain discretionary and performance-based bonuses. The contracts also provide for stock options to be granted to the executives, where the executives may purchase common shares of the Company at the fair value of the Company's common stock at the time of grant. Annual base salaries under these agreements range from $65,000 to $130,000. The terms for these agreements range from one year to five years and expire between December 1999 and December 2002. If the employees are terminated by the Executive Committee due to disability or without cause, the compensation of four employees will be paid for a period of 90 days from the termination date, and the compensation of one employee will be paid for a period of two years from termination date. The Company's commitment for termination benefits is approximately $276,000. (Continued) 17 LINE OF CREDIT The Company has an open line of credit with a financial institution for $1,500,000. The interest rate on the line is the bank's prime rate. There were no outstanding borrowings under the line of credit at June 30, 1999. (13) CONCENTRATION OF CREDIT RISK Most of the Company's portfolio investment companies are located in the Mid-Atlantic region of the United States. As a result, any adverse impact on the economy of that region could impact the Company's results of operations and financial position. (14) FAIR VALUE OF FINANCIAL INSTRUMENTS The following summary disclosures are made in accordance with the provisions of SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS. Fair value is defined in the statement as the amount at which an instrument could be exchanged in a current transaction between willing parties. The following methods and assumptions were used to estimate the fair value of each class of financial instruments at June 30, 1998 and 1999: CASH AND CASH EQUIVALENTS, DIVIDENDS RECEIVABLE, INTEREST RECEIVABLE, NOTE RECEIVABLE, ACCOUNTS PAYABLE AND ACCRUED EXPENSES: The carrying amounts approximate fair value because of the short maturity of these instruments. INVESTMENTS IN PORTFOLIO COMPANIES: The Company's investments are reflected at fair value in the Company's balance sheets. The fair value of portfolio investments is determined by the Executive Committee of the Board of Directors or by current market prices, if available, in accordance with the Company's valuation policy (see note 2). DEBENTURES PAYABLE: The carrying amounts approximate fair value as the interest rate on the $6,000,000 draw down was fixed in March 1999 and the $6,300,000 draw down received an interim rate on April 22, 1999. In addition, interest rates did not materially change between March and June 30, 1999. (Continued) 18 STOCKHOLDERS' NOTES RECEIVABLE: The fair value of stockholders' notes receivable is estimated by discounting the future cash flows using current interest rates at which similar notes would be made to borrowers with similar credit ratings. The fair value at June 30, 1998 and 1999 is estimated to be $1,279,000 and $1,394,000, respectively. (15) EMPLOYEE BENEFIT PLAN Effective July 1, 1998, the Company adopted the Waterside Capital Corporation Defined Contribution Plan and Trust. The plan is available to all employees of the Company, regardless of age, who have completed at least three months of service. Eligible employees may contribute up to 8% of their compensation annually with the Company providing contributions of 50% of the first 6% of participating employees' contributions. In addition, the Company has the ability to make discretionary contributions which will be determined by a resolution of the Board of Directors. Total employer expense for the plan for the year ended June 30, 1999 was $21,708. (16) CHANGE IN ESTIMATE In the fourth quarter of 1999, the Company changed its estimate of the liquidity discount used to calculate the fair value of investments in publicly traded companies. The change in estimate provides a more reasonable basis to determine the actual liquidity discount based on the amount of shares held and the average daily trading volume. The change resulted in additional unrealized appreciation on investments of approximately $66,000, net of income taxes, for the fourth quarter of 1999. (Continued) 19 WATERSIDE CAPITAL CORPORATION Schedule of Portfolio Investments JUNE 30, 1998 AND 1999 - -------------------------------------------------------------------------------- The Company's investment portfolio at June 30, 1998, consisted of the following:
Cost or contributed Fair Loans: Maturity value value ------ -------- ----- ----- Avery Communications, Inc. Convertible Note 12/10/02 $ 350,000 600,264 Divaris Consolidated Investments, Inc. 6/29/04 975,000 975,000 ------------ ------------ Total loans 1,325,000 1,575,264 ------------ ------------ Cost or Fair Number contributed market Equity Investments: of shares value value ------------------- --------- ----- ----- PUBLICLY-TRADED COMPANY - Avery Communications, Inc. Common Stock 245,000 $ 249,900 568,033 EQUITY INVESTMENTS IN PRIVATE COMPANIES: Real Time Data Management Services, Inc. Preferred Stock 700 585,000 710,247 Mid-Atlantic Small Business Finance, Inc. Preferred Stock 500 140,000 140,000 Coddle Roasted Meats, Inc. Preferred Stock 125 125,000 93,750 Election Products, Inc. Preferred Stock 500 875,000 875,000 Election Products, Inc. Common Stock 223 4 140,518 NKL Industries, Inc. Preferred Stock 900 900,000 900,000 NKL Industries, Inc. Common Stock 989 989 989 Delta Education Systems, Inc. Preferred Stock 425 398,600 398,600 Diversified Telecom, Inc. Preferred Stock 1,500 1,500,000 1,500,000 Crispies, Inc. Preferred Stock 400 397,200 397,200 Triangle Biomedical Sciences Preferred Stock 1,000 1,000,000 1,000,000 ------------ ------------ Total equity investments 6,171,693 6,724,337 ------------ ------------
(Continued) 20 WATERSIDE CAPITAL CORPORATION Schedule of Portfolio Investments (continued) - --------------------------------------------------------------------------------
Cost or Fair Number of Percentage contributed market Stock Options and Warrants: shares ownership value value --------------------------- ------ --------- ----- ----- PUBLICLY-TRADED COMPANY: Avery Communications, Inc. * 91,000 0.00% $ - 53,424 PRIVATE COMPANIES: Real Time Data Management Services, Inc. 125 29.41 115,000 124,000 Coddle Roasted Meats, Inc. 1,177 15.00 - - Delta Education Systems, Inc. 176 15.00 26,400 26,400 Diversified Telecom, Inc. 3,611 10.74 - - Crispies, Inc. 524 6.37 2,800 2,800 Triangle Biomedical Sciences 23,260 6.57 - - ------------ ------------- Total options and warrants 144,200 206,624 ------------ ------------- Total investments $ 7,640,893 8,506,225 ============ =============
The Company's investment portfolio at June 30, 1999 consisted of the following:
Cost or contributed Fair Loans: Maturity value value ------ --------- ----- ----- Avery Communications, Inc. Convertible Note 12/10/02 $ 350,000 350,000 Divaris Consolidated Investments, Inc. 6/29/04 1,100,000 1,100,000 Extraction Technologies of VA, LLC 7/22/03 900,000 900,000 JMS Worldwide, Inc. 7/31/03 1,000,000 1,000,000 Diversified Telecom, Inc. Demand 133,837 133,837 Diversified Telecom, Inc. 5/19/02 152,145 152,145 The Netplex Group, Inc. 2/25/04 758,319 758,319 MilleCom, Inc. 3/31/04 900,000 900,000 MilleCom, Inc. 5/11/04 360,000 360,000 DigitalSquare.com Convertible Note 12/31/99 500,000 500,000 ISR Solutions, Inc. 6/30/04 740,167 740,167 ------------ ------------- Total loans 6,894,468 6,894,468 ------------ -------------
(Continued) 21 WATERSIDE CAPITAL CORPORATION Schedule of Portfolio Investments (continued) - --------------------------------------------------------------------------------
Cost or Fair Number contributed market Equity Investments: of shares value value ------------------- --------- ----- ----- PUBLICLY-TRADED COMPANIES: Avery Communications, Inc. Common Stock 245,000 $ 249,900 223,685 Netplex Group, Inc. Preferred Stock 1,500,000 1,500,000 1,500,000 Netplex Group, Inc. Common Stock * 165,000 237,000 427,425 Triangle Imaging Group, Inc. Preferred Stock 150,000 1,321,500 1,321,500 Triangle Imaging Group, Inc. Convertible Preferred Stock 700 700,000 700,000 Triangle Imaging Group, Inc. Common Stock * 500,000 225,000 273,500 EQUITY INVESTMENTS IN PRIVATE COMPANIES: Real Time Data Management Services, Inc. Preferred Stock 400 369,334 557,479 Coddle Roasted Meats, Inc. Common Stock 1,200 120 120 Delta Education Systems, Inc. Preferred Stock 1,625 1,584,643 1,584,643 Diversified Telecom, Inc. Preferred Stock 1,500 1,500,000 1,500,000 Crispies, Inc. Preferred Stock 400 397,760 397,760 Triangle Biomedical Sciences Preferred Stock 1,000 1,000,000 1,000,000 JMS North America, Inc. Preferred Stock 1,500 1,500,000 1,500,000 EPM Development Systems Corp. Preferred Stock 1,500 1,490,527 1,490,527 Fire King International Preferred Stock 2,000 2,000,000 2,000,000 QuesTech Packaging, Inc. Preferred Stock 600 600,000 600,000 MilleCom, Inc. Common Stock 60 60 60 Eton Court Asset Management, Ltd. Preferred Stock 1,000 966,457 966,457 Fairfax Publishing Co., Inc. Preferred Stock 1,100 1,027,626 1,027,626 -------------- -------------- Total equity investments 16,669,927 17,070,782 -------------- --------------
(Continued) 22 WATERSIDE CAPITAL CORPORATION Schedule of Portfolio Investments (continued)
Cost or Fair Number of Percentage contributed market Stock Options and Warrants: shares ownership value value -------------------------- ------ --------- ------ ------ PUBLICLY-TRADED COMPANIES: Avery Communications, Inc. 126,000 0.00% $ - - Netplex Group, Inc. * 75,000 0.70 - 74,100 Triangle Imaging Group, Inc. * 20,000 0.14 - - PRIVATE COMPANIES: Real Time Data Management Services, Inc. 125 29.41 115,000 122,000 Delta Education Systems, Inc. 639 39.00 48,200 48,200 Diversified Telecom, Inc. 8,998 15.00 - - Crispies, Inc. 524 6.37 2,800 2,800 Triangle Biomedical Sciences 23,260 6.57 - - Extraction Technologies of VA, LLC - 15.00 - - JMS North America, Inc. 199 5.00 - - EPM Development Systems, Corp. 87 8.00 11,600 11,600 Fire King International - 3.75 - - QuesTech Packaging, Inc. - 12.50 - - MilleCom, Inc. 150,000 3.15 - - Eton Court Asset Management, Ltd. 14,943 13.00 34,700 34,700 Fairfax Publishing Co., Inc. 526 16.50 73,600 73,600 ISR Solutions, Inc. 476,951 6.00 10,000 10,000 ------------- ------------- Total options and warrants 295,900 377,000 ------------- ------------- Total investments $ 23,860,295 $ 24,342,250 ============= =============
* Represents Rule 144A restricted securities - -------------------------------------------------------------------------------- 23 SHAREHOLDER INFORMATION CORPORATE OFFICES Norfolk,Virginia -- Headquarters 300 E. Main Street, Suite 1380 Norfolk, VA 23510 Telephone: 757-626-1111 Facsimile: 757-626-0114 RICHMOND, VIRGINIA 707 E. Main Street, Suite 700 Richmond, VA 23219 Telephone: 804-225-5500 Facsimile: 804-225-5501 STOCK TRANSFER AGENT AND REGISTRAR Investors with questions concerning account information, replacing lost or stolen certificates, transferring securities or processing a change of address should contact: RELIANCE TRUST COMPANY 3295 Northcrest Road N.E. Atlanta, GA 30340-4099 Telephone: 770-938-6400 Facsimile: 770-908-7066 INVESTOR RELATIONS Investors requiring information about the Company should contact: GERALD T. MCDONALD Chief Financial Officer Telephone: 757-626-1111 Facsimile: 757-626-0114 ANNUAL MEETING OF SHAREHOLDERS The annual shareholder's meeting will be held Monday, October 25, 1999 at 10:00 a.m. at Nauticus, One Waterside Drive, Norfolk, Virginia. All shareholders are invited to attend. STOCK LISTING WATERSIDE CAPITAL CORPORATION common stock is traded on the NASDAQ Stock Market under the symbol WSCC. INDEPENDENT PUBLIC ACCOUNTANTS KPMG LLP Norfolk, Virginia CORPORATE COUNSEL WILLIAMS, MULLEN, CLARK & DOBBINS, P.C. Virginia Beach, Virginia DIRECTORS AND OFFICERS DIRECTORS Peter M. Meredith, Jr.1,3 Chairman of the Board President Meredith Construction Co. Inc. J. Alan Lindauer1 President and Chief Executive Officer James E. Andrews Principal Owner Anzell Automotive, Inc. Donna C. Bennett2 Vice President First Union National Bank J.W. Whiting Chisman, Jr.1,3 President Dare Investment Company Jeffrey R. Ellis Private Investor Marvin S. Friedberg Chief Executive Officer Virginia Commonwealth Trading Company Eric L. Fox Portfolio Manager Paine Webber Roger L. Frost2 Retired Ernest F. Hardee1,3 President and Chief Executive Officer Hardee Realty Corporation Henry U. Harris, III President Virginia Investment Counselors, Inc. Robert I. Low1,2 Senior Partner Goodman & Company Harold J. Marioneaux, Jr. Dental Surgeon Charles H. Merriman, III1 Manager, Corporate Finance Department Scott & Stringfellow, Inc. Augustus C. Miller President and Chief Executive Officer Miller Oil Co., Inc. Paul F. Miller Director of Planning and Development City of Newport News Juan M. Montero, II General and Thoracic Surgery R. Scott Morgan, Sr.1 Executive Vice President Branch Bank & Trust Corp. James W. Noel, Jr. Executive Director York County Industrial Dev. Authority Richard G. Ornstein1 Real Estate Management and Development Jordan E. Slone Chairman and Chief Executive Officer Harbor Group Companies OFFICERS J. Alan Lindauer President and Chief Executive Officer Robert P. Louthan Vice President and Business Development Officer Gerald T. McDonald Secretary and Chief Financial Officer Mark A. Sommer, III Controller Martin N. Speroni Director of Research Lex W. Troutman Business Development Officer 1 Executive Committee 2 Audit Committee 3 Compensation/Stock Option Committee EX-27 3 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF WATERSIDE CAPITAL CORPORATION AS PRESENTED IN THE FORM 10-K FOR THE YEAR ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS' LEGEND. 1,000 12-MOS JUN-30-1999 JUL-01-1998 JUN-30-1999 1,269 24,342 540 0 0 2,081 119 0 27,110 544 12,300 0 0 1,492 12,579 27,110 0 2,897 0 0 1,387 0 418 1,092 51 1,041 0 0 (4) 1,037 .70 .70
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