-----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, TP/qu/19ph+vms+aEakp/blSfHeP/x4reNYYyw3nHY3ADOy6lrcLqXgIVlwcxSnS bkHuoAmDi2J8PdS2QEbTpQ== 0000916641-99-000909.txt : 19991117 0000916641-99-000909.hdr.sgml : 19991117 ACCESSION NUMBER: 0000916641-99-000909 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99756610 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 WATERSIDE CAPITAL CORPORATION - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 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 September 30, 1999, the registrant had issued and outstanding 1,491,937 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 September 30, 1999 (unaudited) 2 Statements of Operations for the Three Months Ended September 30, 1998 and 1999 (unaudited) Statement of Changes in Shareholders' Equity for the Three Months Ended September 30, 1998 and 1999 (unaudited) Statements of Cash Flows for the Three Months Ended September 30, 1998 and 1999 (unaudited) 5 Notes to Financial Statements (unaudited) 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION SIGNATURES
PART I. FINANCIAL INFORMATION: ITEM 1. FINANCIAL STATEMENTS. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. WATERSIDE CAPITAL CORPORATION Balance Sheets June 30, 1999 and September 30, 1999
- ---------------------------------------------------------------------------------------------------------------------------- June 30, September 30, 1999 1999 --------------- ---------------- (unaudited) Assets: Investments in portfolio companies, at fair value: Equity securities $ 17,070,782 $ 18,340,180 Loans 6,894,468 5,416,649 Options and warrants 377,000 800,121 --------------- ---------------- Total investments, cost of $23,860,295 and $24,442,317 at June 30, 1999 and September 30, 1999, respectively 24,342,250 24,556,950 --------------- ---------------- Current assets: Cash and cash equivalents 1,269,409 667,329 Dividends receivable 311,737 434,909 Interest receivable 228,438 63,716 Note receivable 150,000 150,000 Refundable income taxes 43,322 43,322 Prepaid expenses and other current assets 77,916 144,361 --------------- ---------------- Total current assets 2,080,822 1,503,637 Property and equipment, net 118,961 112,959 Deferred financing costs, net 567,837 557,075 Deferred income taxes - 15,000 --------------- ---------------- Total assets $ 27,109,870 $ 26,745,621 =============== ================ Liabilities and Stockholders' Equity: Current liabilities: Accounts payable $ 57,142 $ 41,263 Accrued expenses 372,828 139,311 Deferred revenue 113,631 66,000 --------------- ---------------- Total current liabilities 543,601 246,574 Deferred income taxes 195,000 - Debentures payable 12,300,000 12,300,000 --------------- ---------------- Total liabilities 13,038,601 12,546,574 --------------- ---------------- Stockholders' equity: Common stock, $1 par value, 10,000,000 shares authorized, 1,491,937 issued and outstanding at June 30, 1999 and September 30, 1999 1,491,937 1,491,937 Preferred stock, $1 par value, 25,000 shares authorized, no shares issued and outstanding - - Additional paid-in capital 12,769,895 12,769,895 Net unrealized appreciation on investments, net of income taxes 298,434 70,112 Undistributed accumulated earnings 966,003 1,322,103 Stockholders' notes receivable (1,455,000) (1,455,000) --------------- ---------------- Total stockholders' equity 14,071,269 14,199,047 Commitments and contingencies --------------- ---------------- Total liabilities and stockholders' equity $ 27,109,870 $ 26,745,621 =============== ================ Net asset value per common share $ 9.43 $ 9.52 =============== ================
See accompanying notes to financial statements. WATERSIDE CAPITAL CORPORATION Unaudited Statements of Operations Three months ended September 30, 1998 and 1999
- ---------------------------------------------------------------------------------------------------------------------------- 1998 1999 ---------------- --------------- Operating income: Dividends $ 225,768 $ 505,652 Interest on loans 104,043 191,681 Interest on cash equivalents 26,823 22,847 Fee and other income 321,634 110,000 ---------------- --------------- Total operating income 678,268 830,180 ---------------- --------------- Operating expenses: Salary and benefits 226,177 217,407 Legal and accounting 14,595 24,000 Interest expense - 225,223 Other operating expenses 81,515 78,450 ---------------- --------------- Total operating expenses 322,287 545,080 ---------------- --------------- Net operating income before income taxes 355,981 285,100 Income tax expense (benefit) 49,400 (71,000) ---------------- --------------- Net operating income 306,581 356,100 Realized gain on investments, net of income taxes of $53,301 87,213 - Decrease in unrealized appreciation on investments, net of income tax benefit of $238,000 for 1998 and $139,000 for 1999 (388,984) (228,322) ---------------- --------------- Net increase in stockholders' equity resulting from operations $ 4,810 $ 127,778 ================ =============== Net increase in stockholders' equity resulting from operations per share - basic and diluted $ - $ 0.09 ================ ===============
See accompanying notes to financial statements. WATERSIDE CAPITAL CORPORATION Unaudited Statements of Changes in Stockholders' Equity Three months ended September 30, 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 - - - - 306,581 - 306,581 Net realized gain on investments - - - - 87,213 - 87,213 Decrease in net unrealized appreciation on investments - - - (388,984) - - (388,984) --------- ---------- ----------- --------- ---------- ----------- ----------- Balance at September 30, 1998 1,420,900 $1,420,900 $12,272,636 $ 147,826 $ 652,736 $(1,455,000) $13,039,098 ========= ========== =========== ========= ========== =========== =========== 1999: 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, 1999 1,491,937 $1,491,937 $12,769,895 $ 298,434 $ 966,003 $(1,455,000) $14,071,269 Net operating income - - - - 356,100 - 356,100 Decrease in net unrealized appreciation on investments - - - (228,322) - - (228,322) --------- ---------- ------------ --------- ---------- ----------- ----------- Balance at September 30, 1999 1,491,937 $1,491,937 $12,769,895 $ 70,112 $1,322,103 $(1,455,000) $14,199,047 ========= ========== ============ ========= ========== =========== ===========
See accompanying notes to financial statements.
WATERSIDE CAPITAL CORPORATION Unaudited Statements of Cash Flows Three months ended September 30, 1998 and 1999 - ------------------------------------------------------------------------------------------------------------------------------- 1998 1999 ---------------- ---------------- Cash flows from operating activities: Net increase in stockholders' equity resulting from operations $ 4,810 $ 127,778 Adjustments to reconcile net increase in stockholders' equity resulting from operations to net cash provided by (used in) operating activities: Decrease in unrealized appreciation on investments 626,984 367,322 Accretion of preferred stock and loan investments - (38,663) Depreciation and amortization 4,159 15,691 Deferred income tax benefit (238,000) (210,000) Loss on disposal of property and equipment - 828 Changes in assets and liabilities increasing (decreasing) cash flows from operating activities: Dividends receivable (127,643) (123,172) Interest receivable (26,665) 164,722 Prepaid expenses and other current assets 6,595 (66,445) Accounts payable and accrued expenses 73,239 (249,396) Deferred revenue 91,028 (47,631) Income taxes payable 102,700 - ---------------- ---------------- Net cash provided by (used in) operating activities 517,207 (58,966) ---------------- ---------------- Cash flows from investing activities: Investments made (4,500,400) (1,363,424) Loans made (1,775,000) (350,579) Principal collected on loans made - 1,170,644 Proceeds from sales of investments 875,405 - Acquisition of property and equipment (10,787) (1,755) Proceeds from sale of property and equipment - 2,000 ---------------- ---------------- Net cash used in investing activities (5,410,782) (543,114) ---------------- ---------------- Cash flows from financing activities - Proceeds from short-term debt 700,000 - ---------------- ---------------- Net decrease in cash and cash equivalents (4,193,575) (602,080) Cash and cash equivalents, beginning of period 4,393,501 1,269,409 ---------------- ---------------- Cash and cash equivalents, end of period $ 199,926 $ 667,329 ================ ================ Supplemental disclosure of cash flow information: Cash paid during the period for interest $ - $ 375,486 ================ ================ 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 September 30, 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. (Continued) WATERSIDE CAPITAL CORPORATION Notes to Financial Statements - -------------------------------------------------------------------------------- Discounts can range from 0% to 40% for investment size and market liquidity concerns. Actual liquidity discounts in the portfolio at September 30, 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 $24,556,950 at June 30, 1999 and September 30, 1999 (89.8% and 91.8% of assets), respectively. The valuation process completed by management includes estimates made by management and the Executive Committee in the absence of readily ascertainable market values. These estimated values may differ significantly from the values that would have been used had a ready market for the securities existed, and those differences could be material. (4) Subsequent Event During October 1999, the Company obtained a new line of credit in the amount of $1,500,000 from a financial institution and increased their existing line of credit from $1,500,000 to $2,500,000. These unsecured lines of credit bear interest at the prime rate and are to be used to fund loans and investments until draw requests can be applied for and processed by the SBA. WATERSIDE CAPITAL CORPORATION Schedule of Portfolio Investments June 30, 1999 and September 30, 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 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)
Cost or Number of Contributed Fair Equity Investments: 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 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 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)
Number Cost or of Percentage Contributed Fair 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 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 - - 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 ================ ================
(Continued) The Company's investment portfolio at September 30, 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 1,089,552 1,089,552 JMS Worldwide, Inc. 7/31/03 950,000 950,000 Diversified Telecom, Inc. Demand 113,193 113,193 Diversified Telecom, Inc. 5/19/02 152,724 152,724 The Netplex Group, Inc. 2/25/04 760,513 760,513 MilleCom, Inc. 3/31/04 900,000 900,000 MilleCom, Inc. 5/11/04 360,000 360,000 ISR Solutions, Inc. 6/30/04 740,667 740,667 --------------- -------------- Total loans 5,416,649 5,416,649 --------------- --------------
(Continued)
Cost or Number of Contributed Fair Equity Investments: Shares Value Value - ------------------- ------ ----- ----- Publicly-Traded Companies: Avery Communications, Inc. Common Stock 245,000 $ 249,900 $ 116,375 Netplex Group, Inc. Preferred Stock 1,500,000 1,500,000 1,500,000 Netplex Group, Inc. Common Stock * 165,000 237,000 326,700 Triangle Imaging Group, Inc. Preferred Stock 150,000 1,331,500 1,331,500 Triangle Imaging Group, Inc. Convertible Preferred Stock 700 700,000 700,000 Triangle Imaging Group, Inc. Common Stock * 500,000 225,000 113,500 Equity Investments in Private Companies: Real Time Data Management Services, Inc. Preferred Stock 400 375,084 572,603 Coddle Roasted Meats, Inc. Common Stock 1,200 120 120 Delta Education Systems, Inc. Preferred Stock 1,625 1,587,053 1,587,053 Diversified Telecom, Inc. Preferred Stock 1,500 1,500,000 1,500,000 Crispies, Inc. Preferred Stock 400 397,900 397,900 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 1,491,107 1,491,107 Fire King International Preferred Stock 2,000 2,000,000 2,000,000 QuesTech Packaging, Inc. Preferred Stock 900 900,000 900,000 MilleCom, Inc. Common Stock 60 60 60 Eton Court Asset Management, Ltd. Preferred Stock 1,000 968,192 968,192 Fairfax Publishing Co., Inc. Preferred Stock 1,100 1,031,307 1,031,307 DigitalSquare.com Preferred Stock 810,739 1,013,424 1,013,424 Answernet, Inc. Preferred Stock 550 290,339 290,339 ----------------- ------------------ Total equity investments 18,297,986 18,340,180 ----------------- ------------------
(Continued)
Number Cost or of Percentage Contributed Fair 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 - 32,325 Triangle Imaging Group, Inc. * 20,000 0.14 - - Private Companies: Real Time Data Management Services, Inc. 125 29.41 115,000 155,114 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 - 18.00 163,167 163,167 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 - - 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. 479,951 6.00 10,000 10,000 DigitalSquare.com 81,074 5.70 - - Answernet, Inc. 68,355 18.00 268,615 268,615 ---------------- --------------- Total options and warrants 727,682 800,121 ---------------- --------------- Total investments $ 24,442,317 $ 24,556,950 ================ ===============
- ----------------------------------------------------------------------- * Represents Rule 144A restricted securities 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 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 Results of Operations For the three months ended September 30, 1999 total operating income was $830 thousand compared to the $678 thousand reported 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 $506 thousand, interest on loans of $192 thousand, fee income of $110 thousand and interest on cash equivalents of $22 thousand. Total operating expenses for the three months ended September 30, 1999 were $320 thousand, excluding interest expense, compared to the $322 thousand for the comparable three month period of 1998. Total operating expenses for the three months ended September 30, 1999 consisted of $217 thousand in salary and benefits, $225 thousand in interest expense, legal and accounting expenses of $24 thousand and other operating expenses of $79 thousand. The significant increase in interest expense for the quarter ended September 30, 1999 over the quarter ended September 30, 1998 is due to the increase in borrowings from the SBA to fund the growth in the company's investment portfolio. Net operating income of $356 thousand for the three months ended 30, 1999 compared favorably to the $307 thousand reported for the three months ended September 30, 1998. The decrease in unrealized appreciation on investments net of taxes of $228 thousand for the three months ended September 30, 1999 and $389 thousand for the three months ended September 30, 1998 was primarily due to the changing stock price of three publicly traded portfolio companies. The realized gain on investments net of taxes of $87 thousand for the three months ended September 30, 1998 was due to the sale of an equity investment in one private company. o Financial Condition, Liquidity and Capital Resources During the quarter ended September 30, 1999, the Company closed $3.0 million in new investments and funded $1.7 million. The investments closed for the quarter consisted of investments in two new private companies and add-ons to three existing investments. Additionally an investee prepaid a $1.1 million loan during the quarter. During the three months ended September 30, 1999, cash used in operating activities was $59 thousand as compared to the $517 thousand provided during the three months ended September 30, 1998, primarily due to increases in the Company's receivables due to growth of the investment portfolio and due to the timing of payments of accounts payable and accrued expenses. The Company used $543 thousand in investing activities during the three months ended September 30, 1999 as compared to the 5.4 million used in the comparable period of 1998. In 1998 the Company originated $6.3 million of debt and equity investments as compared to $1.7 million in 1999. The fluctuation was also affected by the early repayment of a $1.1 million loan by a portfolio company. Cash flows provided by financing activities for the three months ended September 30, 1998 were $700 thousand due to borrowings under the Company's line of credit to facilitate growth in the Company's investment portfolio. There were no such borrowings during the three months ended September 30, 1999. 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 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. The Company manages its market risk by maintaining a portfolio of equity interests that is designed to be diverse in relation to 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 21 investments are in thinly traded, small public companies, whose stock prices have been volatile. The other 18 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 $24.6 million at September 30, 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 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 effected. First, the Company has upgraded its financial and administrative software programs as part of this process. The software vendors have indicated that their programs are Year 2000 compliant. Second, the Company has assessed its key relationships with suppliers and other third parties, including its principal bank. These parties have represented that their software programs are Year 2000 compliant. Finally, the Company has investigated the impact of Year 2000 issues on its portfolio companies. Based on questionnaires completed by the individual investee companies, their managements have represented that the companies are Year 2000 compliant. Because of the relatively small size of its portfolio companies, their readiness represents the Company's most significant risk with regards to the Year 2000. 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 of the three primary areas discussed above and performed to date, the cost of its Year 2000 remediation activities by the Company has been less than $50,000. 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. 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 None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (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 15 day of November, 1999. 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 EXHIBIT 27
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 SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS' LEGEND. 1,000 3-MOS JUN-30-2000 JUL-01-1999 SEP-30-1999 667 24,557 649 0 0 1,504 113 0 26,746 247 12,300 0 0 1,492 12,707 26,746 0 830 0 0 320 0 225 285 (71) 356 0 0 (228) 128 .09 .09
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