-----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, DRGw5qJgbvta2liQTzle+soKL2SsFBDJh//r+sA8sg1hkOiRlfpzcF+oLqSGSf2n 4jxDtPboeOuF2NNBFaQwFw== 0000916641-00-000093.txt : 20000214 0000916641-00-000093.hdr.sgml : 20000214 ACCESSION NUMBER: 0000916641-00-000093 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000211 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-Q SEC ACT: SEC FILE NUMBER: 811-08387 FILM NUMBER: 534929 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-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 -------------------- Form 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED DECEMBER 31, 1999 COMMISSION FILE NO.: 333-36709 ------------------------------ WATERSIDE CAPITAL CORPORATION (Exact name of registrant as specified in its charter) VIRGINIA 54-1694665 (State of incorporation) (I.R.S. Employer Identification Number) 300 EAST MAIN STREET, SUITE 1380, NORFOLK, VIRGINIA 23510 (Address of principal executive office) (Zip Code) (757) 626-1111 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and has been subject to the filing requirements for the past 90 days.Yes [X] No [ ] As of December 31, 1999, the registrant had issued and outstanding 1,581,430 shares of Common Stock, $1.00 par value. WATERSIDE CAPITAL CORPORATION FORM 10-Q Table of Contents
Page Number ------ PART I. FINANCIAL INFORMATION: ITEM 1. Balance Sheets as of June 30, 1999 and December 31, 1999 (unaudited) 3 Statements of Operations for the Three Months and Six Months Ended December 31, 1998 and 1999 (unaudited) 5 Statement of Changes in Stockholders' Equity for the Six Months Ended December 31, 1998 and 1999 (unaudited) 6 Statements of Cash Flows for the Six Months Ended December 31, 1998 and 1999 (unaudited) 7 Notes to Financial Statements (unaudited) 9 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 20 PART II. OTHER INFORMATION ITEM 4. Submission of Matters to a Vote of Security Holders 27 SIGNATURES
WATERSIDE CAPITAL CORPORATION Balance Sheets June 30, 1999 and December 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------------ June 30, December 31, 1999 1999 --------------- ---------------- (unaudited) Assets: Investments in portfolio companies, at fair value: Equity securities $ 17,070,782 $ 20,184,219 Loans 6,894,468 7,951,224 Options and warrants 377,000 4,665,186 -------------- --------------- Total investments, cost of $23,860,295 and $31,065,022 at June 30, 1999 and December 31, 1999, respectively 24,342,250 32,800,629 -------------- --------------- Current assets: Cash and cash equivalents 1,269,409 683,815 Dividends receivable 311,737 531,099 Interest receivable 228,438 104,617 Note receivable 150,000 150,000 Refundable income taxes 43,322 - Prepaid expenses and other current assets 77,916 283,403 -------------- --------------- Total current assets 2,080,822 1,752,934 Property and equipment, net 118,961 109,970 Deferred financing costs, net 567,837 546,313 -------------- --------------- Total assets $ 27,109,870 $ 35,209,846 ============== =============== Liabilities and Stockholders' Equity: Current liabilities: Line of credit $ - $ 3,700,000 Accounts payable 57,142 39,559 Accrued expenses 372,828 422,686 Deferred revenue 113,631 34,500 Income taxes payable - 399,678 -------------- --------------- Total current liabilities 543,601 4,596,423 Deferred income taxes 195,000 705,000 Debentures payable 12,300,000 12,300,000 -------------- --------------- Total liabilities 13,038,601 17,601,423 -------------- --------------- Stockholders' equity: Common stock, $1 par value, 10,000,000 shares authorized, 1,581,430 issued and outstanding at June 30, 1999 and December 31, 1999, adjusted for stock dividends 1,491,937 1,581,430 Preferred stock, $1 par value, 25,000 shares authorized, no shares issued and outstanding - - Additional paid-in capital 12,769,895 14,618,719 Net unrealized appreciation on investments, net of income taxes 298,434 1,076,085 Undistributed accumulated earnings 966,003 763,189 Stockholders' notes receivable (1,455,000) (431,000) -------------- --------------- Total stockholders' equity 14,071,269 17,608,423 Commitments and contingencies -------------- --------------- Total liabilities and stockholders' equity $ 27,109,870 $ 35,209,846 ============== =============== Net asset value per common share $ 8.90 $ 11.13 ============== ===============
See accompanying notes to financial statements. WATERSIDE CAPITAL CORPORATION Unaudited Statements of Operations Three months and six months ended December 31, 1998 and 1999 - ------------------------------------------------------------------------------- Three Months Ended Six Months Ended December 31, December 31, 1998 1999 1998 1999 --------- ---------- ---------- ------------ Operating income: Dividends $ 258,192 $ 534,624 $ 483,960 $ 1,040,276 Interest on loans 168,747 201,952 272,790 393,633 Interest on cash equivalents 47,787 6,842 74,610 29,689 Fee and other income 117,865 246,500 439,499 356,500 --------- ---------- ---------- ------------ Total operating income 592,591 989,918 1,270,859 1,820,098 --------- ---------- ---------- ------------ Operating expenses: Salary and benefits 149,713 211,312 375,890 428,719 Legal and accounting 29,325 50,000 43,920 74,000 Interest expense 104,526 268,047 104,526 493,270 Other operating expenses 110,139 125,118 191,655 203,568 --------- ---------- ---------- ------------ Total operating expenses 393,703 654,477 715,991 1,199,557 --------- ---------- ---------- ------------ Net operating income before income taxes 198,888 335,441 554,868 620,541 Income tax expense (benefit) (22,400) (58,000) 27,000 (129,000) --------- ---------- ---------- ------------ Net operating income 221,288 393,441 527,868 749,541 Realized gain on investments, net of income taxes of $606,000 for the three and six months ended December 31, 1999 and $53,301 for the six months ended December 31, 1998 - 986,153 87,213 986,153 Change in unrealized appreciation on investments, net of income tax expense (benefit) of $(15,000) and $615,000 for the three months ended December 31, 1998 and 1999, respectively, and $(253,000) and $476,000 for the six months ended December 31, 1998 and 1999, respectively (23,989) 1,005,973 (412,974) 777,651 --------- ---------- ---------- ------------ Net increase in stockholders' equity resulting from operations $ 197,299 $2,385,567 $ 202,107 $ 2,513,345 ========= ========== ========== ============ Net increase in stockholders' equity resulting from operations per share - basic and diluted (note 4) $ 0.12 $ 1.51 $ 0.13 $ 1.59 ========= ========== ========== ============
See accompanying notes to financial statements. WATERSIDE CAPITAL CORPORATION Unaudited Statements of Changes in Stockholders' Equity Six months ended December 31, 1998 and 1999
1998: Net Common Stock Additional unrealized Undistributed Stockholders' Total ----------------------- paid-in appreciation accumulated notes stockholders' Shares Amount capital on investments earnings receivable equity ------------------------------------------------------------------------------------ ------------ Balance at June 30, 1998 1,420,900 $ 1,420,900 $12,272,636 $ 536,810 $ 258,942 $(1,455,000) $ 13,034,288 Net operating income - - - - 527,868 - 527,868 Net realized gain on investments, net of income taxes - - - - 87,213 - 87,213 Decrease in net unrealized appreciation on investments, net of income taxes - - - (412,974) - - (412,974) --------- ----------- ----------- ----------- ---------- ----------- ------------ Balance at December 31, 1998 1,420,900 $ 1,420,900 $12,272,636 $ 123,836 $ 874,023 $(1,455,000) $ 13,236,395 ========= =========== =========== =========== ========== =========== ============ 1999: Balance at June 30, 1999 1,491,937 $ 1,491,937 $12,769,895 $ 298,434 $ 966,003 $(1,455,000) $ 14,071,269 6% stock dividend 89,493 89,493 648,824 - (738,508) - (191) Capitalization of undistributed accumulated earnings - - 1,200,000 - (1,200,000) - - Repayment of stockholders' notes receivable - - - - - 1,024,000 1,024,000 Net operating income - - - - 749,541 - 749,541 Net realized gain on investments, net of income taxes - - - - 986,153 - 986,153 Increase in net unrealized appreciation on investments, net of income taxes - - - 777,651 - - 777,651 --------- ----------- ----------- ----------- ---------- ----------- ------------ Balance at December 31, 1999 1,581,430 $ 1,581,430 $14,618,719 $ 1,076,085 $ 763,189 $ (431,000) $ 17,608,423 ========= =========== =========== =========== ========== =========== ============
WATERSIDE CAPITAL CORPORATION Unaudited Statements of Cash Flows Six months ended December 31, 1998 and 1999
- ------------------------------------------------------------------------------------------------------------------------------------ 1998 1999 ----------- ------------ Cash flows from operating activities: Net increase in stockholders' equity resulting from operations $ 202,107 $ 2,513,345 Adjustments to reconcile net increase in stockholders' equity resulting from operations to net cash provided by operating activities: Decrease (increase) in unrealized appreciation on investments 719,074 (1,253,651) Realized gain on investments (140,514) (1,592,153) Accretion of preferred stock and loan investments (53,100) (89,527) Depreciation and amortization 15,225 31,442 Deferred income tax expense (benefit) (191,000) 510,000 Loss on disposal of property and equipment - 828 Changes in assets and liabilities increasing (decreasing) cash flows from operating activities: Dividends receivable (93,375) (219,362) Interest receivable (170,211) 123,821 Refundable income taxes - 43,322 Prepaid expenses and other current assets 6,840 (205,487) Accounts payable and accrued expenses 104,584 32,275 Deferred revenue 66,942 (79,131) Income taxes payable 21,979 399,678 ---------- ---------- Net cash provided by operating activities 488,551 215,400 ---------- ---------- Cash flows from investing activities: Investments made (4,500,000) (4,953,425) Loans made (3,475,000) (3,754,189) Principal collected on loans made 16,483 1,181,842 Proceeds from repayment of stockholders' notes receivable - 1,024,000 Proceeds from sales of investments 1,015,518 2,002,724 Acquisition of property and equipment (14,315) (3,755) Proceeds from sale of property and equipment - 2,000 --------- ---------- Net cash used in investing activities (6,957,314) (4,500,803) ---------- ---------- Cash flows from financing activities: Proceeds from line of credit - 3,700,000 Proceeds from debentures payable 6,000,000 - Payments in lieu of fractional shares associated with stock dividend - (191) Payment of deferred financing costs (150,000) - ----------- ---------- Net cash provided by financing activities 5,850,000 3,699,809 ----------- ---------- Net decrease in cash and cash equivalents (618,763) (585,594) Cash and cash equivalents, beginning of period 4,393,501 1,269,409 ---------- ---------- Cash and cash equivalents, end of period $ 3,774,738 $ 683,815 ========== =========== Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 321 $ 389,911 ========== =========== Cash paid during the period for income taxes $ - $ - ========== ===========
See accompanying notes to financial statements. WATERSIDE CAPITAL CORPORATION Notes to Financial Statements June 30, 1999 and December 31, 1999 (Unaudited) - -------------------------------------------------------------------------------- (1) Unaudited Interim Financial Statements In the opinion of management, the accompanying unaudited interim financial statements of Waterside Capital Corporation (the Company) are prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. In the opinion of management, all adjustments, consisting of normal recurring accruals necessary for the fair presentation of financial statements for the interim period, have been included. The current period's results of operations are not necessarily indicative of results that ultimately may be achieved for the year. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-K, as filed with the Securities and Exchange Commission. (2) Description of Business The Company was incorporated in the Commonwealth of Virginia on July 13, 1993 and is a closed-end investment company licensed by the Small Business Administration (the SBA) as a Small Business Investment Corporation (SBIC). The Company makes equity investments in, and provides loans to, small business concerns to finance their growth, expansion and development. Under applicable SBA regulations, the Company is restricted to investing only in qualified small business concerns as contemplated by the Small Business Investment Act of 1958. (3) Investments Investments are carried at fair value, as determined by the Executive Committee of the Board of Directors. The Company, through its Board of Directors, has adopted the Model Valuation Policy, as published by the SBA, in Appendix III to Part 107 of Title 12 of the Code of Federal Regulations (the Policy). The Policy, among other things, presumes that loans and investments are acquired with the intent that they are to be held until maturity or disposed of in the ordinary course of business. Except for interest-bearing securities which are convertible into common stock, interest-bearing securities are valued in 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 the for the effect of restrictions on the sale of such securities. WATERSIDE CAPITAL CORPORATION Notes to Financial Statements June 30, 1999 and December 31, 1999 (Unaudited) - -------------------------------------------------------------------------------- Discounts can range from 0% to 40% for investment size and market liquidity concerns. Actual liquidity discounts in the portfolio at December 31, 1999 ranged from 15% to 40%. Discounts for restriction on the sale of investments are 15% in accordance with the provisions of the Policy. The Company maintains custody of its investments as permitted by the Investment Company Act of 1940. Investments consist primarily of preferred stock obtained from and loans made to portfolio companies under SBIC investment and loan regulations. The financial statements include securities valued at $24,342,250 and $32,800,629 at June 30, 1999 and December 31, 1999 (89.8% and 93.2% of assets), respectively. The valuation process completed by management includes estimates made by management and the Executive Committee in the absence of readily ascertainable market values. These estimated values may differ significantly from the values that would have been used had a ready market for the securities existed, and those differences could be material. WATERSIDE CAPITAL CORPORATION Notes to Financial Statements June 30, 1999 and December 31, 1999 (Unaudited) - -------------------------------------------------------------------------------- (4) 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 three months and six months ended December 31, 1998 and 1999:
Three months ended Six months ended December 31, December 31, 1998 1999 1998 1999 ------------ ------------ ------------ ------------ Basic net increase in stockholders' equity resulting from operations per share: Net increase in stockholders' equity resulting from operations $ 197,299 2,385,567 202,107 2,513,345 ========= ========= ========= ========= Weighted average number of common shares outstanding 1,581,430 1,581,430 1,581,430 1,581,430 ========= ========= ========= ========= Basic net increase in stockholders' equity resulting from operations per share $ 0.12 1.51 0.13 1.59 ========= ========= ========= ========= Diluted net increase in stockholders' equity resulting from operations per share: Net increase in stockholders' equity resulting from operations $ 197,299 2,385,567 202,107 2,513,345 ========= ========= ========= ========= Weighted average number of common shares outstanding 1,581,430 1,581,430 1,581,430 1,581,430 Dilutive effect of stock options (as determined using the treasury stock method) - 1,032 - 1,032 --------- --------- --------- --------- Adjusted weighted average number of common shares outstanding 1,581,430 1,582,462 1,581,430 1,582,462 ========= ========= ========= ========= Diluted net increase in stockholders' equity resulting from operations per share $ 0.12 1.51 0.13 1.59 ========= ========= ========= =========
WATERSIDE CAPITAL CORPORATION Notes to Financial Statements June 30, 1999 and December 31, 1999 (Unaudited) - -------------------------------------------------------------------------------- (5) Stockholders' Equity Stock Dividend On December 7, 1999, the Company declared a 6% stock dividend to shareholders of record as of January 14, 2000. On January 31, 2000, the Company issued 89,493 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 capitalization 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 6% stock dividend. Capitalization of Undistributed Accumulated Earnings Effective December 7, 1999, the Executive Committee of the Company's Board of Directors and the Small Business Administration approved the capitalization of $1,200,000 of the Company's undistributed accumulated earnings. (6) Subsequent Event During January 2000, the Company liquidated an additional 75,000 shares of Netplex Group, Inc. Common Stock for proceeds of $970,584. A gain of $867,459 was realized on the transaction. WATERSIDE CAPITAL CORPORATION Schedule of Portfolio Investments June 30, 1999 and December 31, 1999 - -------------------------------------------------------------------------------- The Company's investment portfolio at June 30, 1999, consisted of the following:
Cost or Contributed Loans: Maturity Value Fair 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 SECC (formerly MilleCom, Inc.) 3/31/04 900,000 900,000 SECC (formerly 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 ------------------ --------------
Cost or Fair Market Number of Shares Contributed Value Value ---------------- ----------------- ----------- Equity Investments: - ------------------ 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 Electronic Business Systems, Inc. (formerly Triangle Imaging Group, Inc.) Preferred Stock 150,000 1,321,500 1,321,500 Electronic Business Systems, Inc. (formerly Triangle Imaging Group, Inc.) Convertible Preferred Stock 700 700,000 700,000 Electronic Business Systems, Inc. (formerly 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 Worldwide, 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 SECC (formerly 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 ---------------- -----------------
Number Cost or of Percentage Contributed Fair 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 Electronic Business Systems, Inc. (formerly 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 Worldwide, 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 - - SECC (formerly MilleCom, Inc.) 150,000 3.15 - - Eton Court Asset Management, Ltd. 14,943 13.00 34,700 34,700 Fairfax Publishing Co., Inc. 526 16.50 73,600 73,600 ISR Solutions, Inc. 476,951 6.00 10,000 10,000 ------------- ------------ Total options and warrants 295,900 377,000 ------------- ------------ Total investments $23,860,295 $24,342,250 ============= =============
WATERSIDE CAPITAL CORPORATION Schedule of Portfolio Investments June 30, 1999 and December 31, 1999 - -------------------------------------------------------------------------------- The Company's investment portfolio at December 31, 1999 (unaudited) consisted of the following:
Cost or Contributed Loans: Maturity Value Fair Value - ------ -------- ----------- ---------- Avery Communications, Inc. Convertible Note 12/10/02 $ 350,000 $ 350,000 Extraction Technologies of VA, LLC 7/22/03 900,000 900,000 Extraction Technologies of VA, LLC 8/31/04 197,711 197,711 Extraction Technologies of VA, LLC 11/2/04 373,711 373,711 JMS Worldwide, Inc. 7/31/03 950,000 950,000 Diversified Telecom, Inc. Demand 101,995 101,995 Diversified Telecom, Inc. 5/19/02 156,334 156,334 The Netplex Group, Inc. 2/25/04 762,706 762,706 SECC (formerly MilleCom, Inc.) 3/31/04 900,000 900,000 SECC (formerly MilleCom, Inc.) 5/11/04 360,000 360,000 ISR Solutions, Inc. 6/30/04 741,167 741,167 Fire King International Demand 550,000 550,000 TABET Manufacturing Co., Inc. 12/31/04 274,600 274,600 National Assisted Living, LP 12/31/04 1,333,000 1,333,000 ------------ ------------- Total loans 7,951,224 7,951,224 ------------ --------------
Cost or Number of Contributed Market Value Equity Investments: Shares Value Fair - ------------------ --------- ----------- ------------ Publicly-Traded Companies: Avery Communications, Inc. Common Stock 245,000 $ 249,900 $ 248,185 Netplex Group, Inc. Preferred Stock 1,500,000 309,705 309,705 Electronic Business Systems, Inc. (formerly Triangle Imaging Group, Inc.) Preferred Stock 150,000 1,341,500 1,341,500 Electronic Business Systems, Inc. (formerly Triangle Imaging Group, Inc.) Convertible Preferred Stock 700 700,000 700,000 Electronic Business Systems, Inc. (formerly Triangle Imaging Group, Inc.) Common Stock * 500,000 225,000 69,500
WATERSIDE CAPITAL CORPORATION Schedule of Portfolio Investments June 30, 1999 and December 31, 1999
Cost or Number of Contributed Fair Market Equity Investments: Shares Value Value - ------------------ --------- ----------- ----------- Equity Investments in Private Companies: Real Time Data Management Services, Inc. Preferred Stock 300 285,703 441,000 Coddle Roasted Meats, Inc. Common Stock 1,200 120 120 Delta Education Systems, Inc. Preferred Stock 1,625 1,589,463 1,589,463 Diversified Telecom, Inc. Preferred Stock 1,500 1,500,000 1,500,000 Crispies, Inc. Preferred Stock 400 398,040 398,040 Triangle Biomedical Sciences Preferred Stock 1,700 1,575,737 1,575,737 JMS Worldwide, Inc. Preferred Stock 1,500 1,500,000 1,500,000 EPM Development Systems, Corp. Preferred Stock 1,500 1,491,687 1,491,687 Fire King International Preferred Stock 2,000 2,000,000 2,000,000 QuesTech Packaging, Inc. Preferred Stock 1,200 1,200,000 1,200,000 SECC (formerly MilleCom, Inc.) Common Stock 60 60 60 Eton Court Asset Management, Ltd. Preferred Stock 1,000 969,927 969,927 Fairfax Publishing Co., Inc. Preferred Stock 1,100 1,034,987 1,034,987 DigitalSquare.com Convertible Preferred Stock 1,210,739 1,513,424 1,513,424 Answernet, Inc. Preferred Stock 550 303,770 303,770 ISR Solutions, Inc. Preferred Stock 500 497,113 497,113 Capital Markets Group, Inc. Preferred Stock 1,500 1,500,000 1,500,000 ------------ ------------ Total equity investments 20,186,136 20,184,219 ------------ ------------
WATERSIDE CAPITAL CORPORATION Schedule of Portfolio Investments June 30, 1999 and December 31, 1999
Number Cost or of Percentage Contributed Fair Market Stock Options and Warrants: Shares Ownership Value Value - --------------------------- ------ ---------- ----------- ----------- Publicly-Traded Companies: Avery Communications, Inc. 126,000 0.00 $ - $ - Netplex Group, Inc. 475,000 4.40 1,200,000 2,888,713 Electronic Business Systems, Inc. (formerly Triangle Imaging Group, Inc.) * 20,000 0.14 - 1,548 Private Companies: Real Time Data Management Services, Inc. 125 29.41 115,000 150,000 Delta Education Systems, Inc. 639 39.00 48,200 60,463 Diversified Telecom, Inc. 8,998 15.00 - - Crispies, Inc. 524 6.37 2,800 2,800 Triangle Biomedical Sciences 50,743 11.70 127,449 127,449 Extraction Technologies of VA, LLC - 21.00 190,362 190,362 JMS Worldwide, 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 - - SECC (formerly MilleCom, Inc.) 150,000 3.15 - - Eton Court Asset Management, Ltd. 14,943 13.00 34,700 34,700 Fairfax Publishing Co., Inc. 526 16.50 73,600 73,600 ISR Solutions, Inc. 550,973 7.20 12,936 12,936 DigitalSquare.com 81,074 5.70 - - Answernet, Inc. 68,355 18.00 268,615 268,615
WATERSIDE CAPITAL CORPORATION Schedule of Portfolio Investments June 30, 1999 and December 31, 1999
Cost or Number of Percentage Contributed Fair Market Stock Options and Warrants: Shares Ownership Value Value - ---------------------------- --------- ---------- ----------- ----------- Private Companies (cont): TABET Manufacturing Co., Inc. 500,000 20.00 175,400 175,400 National Assisted Living, LP - 15.00 667,000 667,000 Capital Markets Group, Inc. 2,294,118 15.00 - - --------- --------- Total options and warrants 2,927,662 4,665,186 ---------- --------- Total investments $31,065,022 $32,800,629 ========== ==========
* Represents Rule 144A restricted securities PART I. FINANCIAL INFORMATION: ITEM 1. Financial Statements ITEM 2. Management's Discussion and Analysis of Financial Condition and 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 operations. The Company was licensed in 1996 by the Small Business Administration (SBA) as a Small Business Investment Company (SBIC) under the Small Business Investment Act of 1958. In October 1996, the Company made its first portfolio investment. In January 1998 the Company completed its Initial Public Offering (IPO) to raise additional equity to support its growth strategy. The majority of the Company's operating income is derived from dividend and interest income on portfolio investments and application and processing fees related to investment originations. The remaining portion of the Company's operating income comes from interest earned on cash equivalents. The Company's operating expenses primarily consist of interest expense on borrowings made to fund its portfolio growth, payroll and other expenses incidental to operations. Waterside currently has 8 full time employees and 2 offices from which it operates in Norfolk and Richmond, Virginia. o Results of Operations Comparison of Three Months Ended December 31, 1999, and December 31, 1998 For the three months ended December 31, 1999, total operating income was $990,000 as compared to the $593,000 reported during the same quarter of 1998, a 67% increase. The increase in operating income is due to additional dividend, interest and fee income generated as a result of the growth in the Company's investment portfolio over the past year. The 1999 operating income consisted of dividends of $535,000, interest on loans of $202,000, fee income of $246,000, and interest on cash equivalents of $7,000. Total operating expenses for the three months ended December 31, 1999 were $654,000, consisting of interest expense of $268,000, salary and benefits of $211,000, legal and accounting expenses of $50,000, and other operating expenses of $125,000. These expenses compared to the $394,000 reported for the three months ended December 31, 1998, consisting of interest expense of $105,000, salary and benefits of $150,000, legal and accounting expenses of $29,000, and other operating expenses of $110,000. The significant increase in interest expense for the quarter ended December 31, 1999 compared to the quarter ended December 31, 1998, is due to the increase in borrowings to fund the growth in the Company's investment portfolio. Net operating income of $393,000 for the three months ended December 31, 1999 compared favorably to the $221,000 reported for the three months ended December 31, 1998. The Company recorded realized gains on investments, net of taxes, of $986,000 in the three months ended December 31, 1999. The net unrealized appreciation on investments, net of taxes, increased to $1,006,000 in the three months ended December 31, 1999 as compared to the $24,000 decrease in the comparable period of 1998. The significant increase in realized gain on investments and change in unrealized appreciation on investments is due primarily to the increase in market price of our holdings in the Netplex Group, Inc. (NASDAQ:NTPL) which saw its per-share market price improve from $2.35 per share to $11.375 during the quarter. Net of taxes, total realized and unrealized gains and investments added $2.0 million to our stockholders' equity or $1.26 per share during the quarter ended December 31, 1999. Comparison of Six months ended December 31, 1999, and December 31, 1998 For the six months ended December 31, 1999, total operating income was $1,820,000 compared to $1,271,000 for the same period of 1998. The increase in operating income is due to additional dividend, interest and fee income generated as a result of the growth in the Company's investment portfolio. The operating income for the six months ended December 31, 1999, consisted of dividends of $1,040,000, interest on loans of $394,000, fee income of $356,000, and interest on cash equivalents of $30,000. Total operating expenses for the six months ended December 31, 1999 were $1,200,000, consisting of $493,000 in interest expense, $429,000 in salary and benefits, $74,000 in legal and accounting, and $204,000 in other operating expenses. These expenses compared to the $716,000 reported for the six months ended December 31, 1998, consisting of $104,000 in interest expense, $376,000 in salary and benefits, $44,000 in legal and accounting, and $192,000 in other operating expenses. The significant increase in interest expense for the six months ended December 31, 1999 compared to the six months ended December 31, 1998, is due to the increase in borrowings to fund the growth in the Company's investment portfolio. Net operating income of $750,000 for the six months ended December 31, 1999, compared favorably to the $528,000 reported for the six months ended December 31, 1998. The Company recorded realized gains on investments, net of taxes, of $986,000 in the six months ended December 31, 1999 as compared to $87,000 in 1998. The net unrealized appreciation on investments, net of taxes, increased to $778,000 in the six months ended December 31, 1999 as compared to the $413,000 decrease in the comparable period of 1998. The significant increase in realized gains on investments and change in unrealized appreciation on investments for the six months ended December 31, 1999, is a direct result of the holdings in the Netplex Group, Inc. previously discussed. o Financial Condition, Liquidity And Capital Resources For the six months ended December 31, 1999, the Company funded $8.7 million in investments consisting of $4.5 million in four new portfolio companies and $4.2 million in additional investments made in existing investees. To partially fund these new investments, the Company borrowed $3.7 million against its bank lines of credit during the six months ended December 31, 1999. The Company also received $1,024,000 in proceeds from the repayment of stockholders' notes receivable and $3,185,000 from the repayment or redemption of certain of its investments during the six months ended December 31, 1999. Net asset value per common share increased to $11.13 per share at December 31, 1999 from $8.98 per share at September 30, 1999, of which $1.51 per share ($2.4 million) resulted from operations and $0.64 per share resulted from the repayment of stockholders' notes receivable of $1,024,000. During the six months ended December 31, 1999, cash provided by operating activities was $215,000 as compared to the $489,000 provided during the six months ended December 31, 1998. Although net operating income increased for the six months ended December 31, 1999, the income taxes on realized gain on investments also increased and the changes in assets and liabilities from operating activities have resulted in the decrease in cash provided by operating activities. The Company used $4,501,000 in investing activities during the six months ended December 31, 1999, as compared to the $6,957,000 used for the six months ended December 31, 1998. The decrease is primarily due to $2,206,000 of repayments of both stockholder notes and investee loans. Cash flows provided by financing activities for the six months ended December 31, 1999, were $3,700,000 compared to $5,850,000 for the six months ended December 31, 1998. Both amounts resulted from net borrowings to finance the growth in the Company's investment portfolio. o 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 as follows: risk of lending and investing in small privately owned companies, valuation risk of portfolio, risk of illiquidity of portfolio investments and the competitive market for investment opportunities. The Company considers the management of risk essential to conducting its 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. The Company manages its market risk by maintaining a portfolio of equity interests that is designed to be diverse by industry, geographic area, size of individual investment and borrower. The Company is exposed to a degree of risk of public market price fluctuations as three of the Company's twenty-three investments are in thinly traded, small public companies, whose stock prices have been volatile. The other twenty 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 interest of $24.8 million at December 31, 1999, would have resulted in unrealized gains or losses and would have changed net increase in stockholders' equity resulting from operations for the quarter significantly. The Company's sensitivity to changes in interest rates is regularly monitored and analyzed by measuring the characteristics of assets and liabilities. The Company utilizes various methods to assess interest rate risk in terms of the potential effect of interest income net of interest expense, the market value of net assets and the value at risk in an effort to ensure that the Company is insulated from any significant adverse effects from changes in interest rates. Based on the model used for the sensitivity of interest income net of interest expense, if the balance sheet were to remain constant and no actions were taken to alter the existing interest rate sensitivity, a hypothetical 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. o The Year 2000 Although January 1, 2000 has passed and the Company is currently unaware of any significant Year 2000 issues, circumstances related to these issues could arise throughout the course of the current year, and they could have a material adverse impact on the Company's business, results of operations and financial condition. In addition, the Company is currently unaware of any significant Year 2000 issues related to its portfolio companies, however, circumstances related to these issues could arise at one or more of the portfolio companies that could have a material adverse impact on the value of the Company's portfolio investments, results of operations and financial condition. 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, its vendors, suppliers, and portfolio companies, future financial performance and other matters that reflect management's expectations as of the date made. Except for historical information, all of the statements, expectations and assumptions contained in the foregoing are "forward-looking statements" (within the meaning of the Private Securities Litigation Reform Act of 1995) that involve a number of risks and uncertainties. It is possible that the assumptions made by management - including, but not limited to, the average maturity of our investments, the potential to realize investment gains as these investments mature, investment opportunities, valuations, results, performance or expectations - may not materialize. Actual results may differ materially from those projected or implied in any forward-looking statements. In addition to the above factors, other important factors that may effect the Company's performance include: the risks associated with the performance of the Company's portfolio companies, dependencies on key employees, interest rates, the level of economic activity, and competition, as well as other risks described from time to time in the Company's filings with the Securities Exchange Commission, press releases, and other communications. The Company disclaims any intent or obligation to update these forward-looking statements, whether as a result of new information, future events, or otherwise. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is not a party to any material legal proceedings. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The 1999 Annual Meeting of Shareholders of Waterside Capital Corporation was held on October 25, 1999 to consider four matters of business. The matters brought before the shareholders and the voting results are as follows: 1. Election of Directors
BROKER FOR AGAINST ABSTAIN NON-VOTES* --- ------- ------- --------- James E. Andrews 1,216,919 0 525 -- Donna C. Bennett 1,216,919 0 525 -- J. W. Whiting Chisman, Jr. 1,215,369 0 2,075 -- Jeffrey R. Ellis 1,216,919 0 525 -- Eric L. Fox 1,215,077 0 2,367 -- Roger L. Frost 1,216,919 0 525 -- Ernest F. Hardee 1,216,919 0 525 -- Henry U. Harris, III 1,213,419 0 4,025 -- J. Alan Lindauer 1,214,552 0 2,892 -- Robert I. Low 1,216,919 0 525 -- Harold J. Marioneaux, Jr. 1,216,919 0 525 -- Peter W. Meredith, Jr. 1,211,637 0 5,807 -- Charles H. Merriman 1,216,419 0 1,025 -- Augustus C. Miller 1,214,844 0 2,600 -- Paul F. Miller 1,215,369 0 2,075 -- Juan M. Montero 1,216,919 0 525 -- R. Scott Morgan, Sr. 1,216,919 0 525 -- James W. Noel, Jr. 1,215,369 0 2,075 -- Richard G. Ornstein 1,216,419 0 1,025 -- Marvin S. Friedberg 1,216,919 0 525 -- Jordan E. Slone 1,216,919 0 525 --
2. To amend the Company's 1998 Employee Stock Option Plan
BROKER FOR AGAINST ABSTAIN NON-VOTES* --- ------- ------- --------- 894,780 39,341 11,025 272,298
3. Ratification of the appointment of KPMG LLP as independent auditors for 2001
BROKER FOR AGAINST ABSTAIN NON-VOTES* --- ------- ------- --------- 1,217,444 0 0 0
*"Broker Non-Votes" occur where a broker holding stock in street name does not vote those shares. ITEM 5. OTHER INFORMATION On December 17, 1999, the Company declared a 6% stock dividend payable to shareholders of record on January 14, 2000. This dividend was paid on January 31, 2000. This dividend comprised 89,493 shares. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits required by Item 601 of Regulation S-K: 27 Financial Data Schedule SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Norfolk, Commonwealth of Virginia on the 9th day of February, 2000. WATERSIDE CAPITAL CORPORATION By /s/ J. Alan Lindauer ------------------------------ J. Alan Lindauer President and Principal Executive Officer By /s/ Gerald T. McDonald --------------------------- Gerald T. McDonald Principal Financial Officer EX-27 2 FINANCIAL DATA SHEET
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF WATERSIDE CAPITAL CORPORATION AS PRESENTED IN THE FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS' LEGEND. 1000 6-MOS JUN-30-2000 JUL-01-1999 DEC-31-1999 684 32,801 786 0 0 1,753 110 0 35,210 4,596 0 0 0 1,581 16,027 35,210 0 1,820 0 0 706 0 493 621 (129) 750 0 0 1,763 2,513 1.59 1.59
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