-----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, FvRT2Q4TsZQoEY33k6fT9dQncocLLmlLJ1fH+lqcdQpAP3TaAuUCUxOQl5v7Tgx1 yUsm96Rkyjhb6vOMhX/ROA== 0000916641-99-000450.txt : 19990518 0000916641-99-000450.hdr.sgml : 19990518 ACCESSION NUMBER: 0000916641-99-000450 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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: 99626456 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 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 MARCH 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 March 31, 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. Statements of Operations for the Three Months and Nine Months Ended March 31, 1998 and 1999 (unaudited) Balance Sheets as of June 30, 1998 and March 31, 1999 (unaudited) Statement of Changes in Stockholders' Equity for the Nine Months Ended March 31, 1999 (unaudited) Statements of Cash Flows for the Nine Months Ended March 31, 1998 and 1999 (unaudited) Notes to Financial Statements (unaudited) 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 WATERSIDE CAPITAL CORPORATION FINANCIAL STATEMENTS JUNE 30, 1998 AND MARCH 31, 1999 WATERSIDE CAPITAL CORPORATION Statements of Operations For the three months and nine months ended March 31, 1998 and 1999 (Unaudited) - --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended March 31, March 31, 1998 1999 1998 1999 ------- ------ ------ ------ Operating income: Interest on loans $10,451 183,148 $13,673 455,938 Dividends 78,098 245,935 164,577 729,895 Interest on cash equivalents 76,170 32,873 113,400 107,483 Fee and other income 38,800 224,046 79,180 663,545 ------- ------- ------- --------- Total operating income 203,519 686,002 370,830 1,956,861 ------- ------- ------- --------- Operating expenses: Management fees 6,000 - 39,000 - Salary and benefits 127,199 176,314 152,394 552,204 Legal and accounting 2,037 25,000 27,798 68,920 Interest expense - 106,227 - 210,753 Other operating expenses 45,517 76,654 81,113 268,309 ------- ------- ------- --------- Total operating expenses 180,753 384,195 300,305 1,100,186 ------- ------- ------- --------- Net operating income before income taxes 22,766 301,807 70,525 856,675 Income tax expense (benefit) (18,363) 31,000 (34,055) 58,000 ------- ------- ------- --------- Net operating income 41,129 270,807 104,580 798,675 Realized appreciation on investments, net of income taxes of $90,699 and $144,000 for the three months and nine months ended March 31, 1999, respectively - 147,099 - 234,312 Change in unrealized appreciation on investments, net of provision (benefit) for income taxes of $88,242 and $78,100 for the three months ended March 31, 1998 and 1999, respectively, and $127,134 and $(174,900) for the nine months ended March 31, 1998 and 1999, respectively 144,107 128,236 207,783 (284,738) ------- ------- ------- --------- Net increase in stockholders' equity resulting from operations per share-basic and diluted $185,236 546,142 $312,363 748,249 ======= ======= ======== ========= Net increase in stockholders' equity resulting from operations per share - basic and diluted $ 0.12 0.37 $ 0.21 0.50 ======== ======= ======== =========
See accompanying notes to financial statements. WATERSIDE CAPITAL CORPORATION Balance Sheets June 30, 1998 and March 31, 1999 (Unaudited) - --------------------------------------------------------------------------------
June 30, March 31, 1998 1999 --------- ----------- (Unaudited) Assets: Investments in portfolio companies, at fair value (note 3): Equity securities $ 6,724,337 11,929,848 Loans 1,575,264 5,328,653 Options and warrants 206,624 210,275 --------- ----------- Total investments, cost of $7,640,893 and $17,063,083 at June 30, 1998 and March 31, 1999, respectively 8,506,225 17,468,776 --------- ----------- Current assets: Cash and cash equivalents 4,393,501 2,079,797 Dividends receivable 172,842 233,192 Interest receivable 21,272 172,683 Prepaid expenses and other current assets 45,137 83,419 --------- ----------- Total current assets 4,632,752 2,569,091 Property and equipment, net 112,002 121,697 Other assets, net 123,750 260,100 --------- ----------- Total assets $13,374,729 20,419,664 ========= =========== Liabilities and Stockholders' Equity: Liabilities: Current liabilities: Line of credit (note 4) $ - 250,000 Accounts payable 15,616 5,100 Accrued expenses 66,825 49,933 Deferred revenue - 43,379 Income taxes payable - 156,378 --------- ----------- Total current liabilities 82,441 504,790 Deferred income taxes 258,000 132,400 Notes payable (note 5) - 6,000,000 --------- ----------- Total liabilities 340,441 6,637,190 --------- ----------- Stockholders' Equity: Preferred stock, $1 par value, 25,000 shares authorized, no shares issued and outstanding - - Common stock, $1 par value, 10,000,000 shares authorized, 1,420,900 issued and outstanding at June 30, 1998 and 1,491,937 issued and outstanding at March 31, 1999 1,420,900 1,491,937 Additional paid-in capital 12,272,636 12,769,895 Net unrealized appreciation on investments 536,810 252,072 Undistributed accumulated earnings 258,942 723,570 Stockholders' notes receivable (1,455,000 (1,455,000) ---------- ----------- Total stockholders' equity 13,034,288 13,782,474 --------- ----------- Total liabilities and stockholders' equity $ 13,374,729 20,419,664 ========== =========== Net asset value per common share $ 9.17 9.24 ========== ===========
See accompanying notes to financial statements. WATERSIDE CAPITAL CORPORATION Statements of Changes in Stockholders' Equity For the nine months ended March 31, 1999 (Unaudited)
- ----------------------------------------------------------------------------------------------------------------------- Net unrealized Common Stock Additional appreciation Undistributed Stockholders' Total ------------------ paid-in on accumulated notes stockholders' Shares Amount capital investments earnings receivable equity ------------------------------------------------------------------------------------- Balance, 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 - - - - 798,675 - 798,675 Net realized appreciation on investments - - - - 234,312 - 234,312 Decrease in net unrealized appreciation on investments - - - (284,738) - - (284,738) 5% stock dividend (note 6) 71,037 71,037 497,259 - (568,359) - (63) --------- ----------- ---------- --------- ---------- ---------- ---------- Balance, March 31, 1999 (Unaudited) 1,491,937 $1,491,937 12,769,895 252,072 723,570 (1,455,000) 13,782,474 ========= =========== ========== ========= ========== ========== ==========
See accompanying notes to financial statements. WATERSIDE CAPITAL CORPORATION Statements of Cash Flows For the nine months ended March 31, 1998 and 1999 (Unaudited) - --------------------------------------------------------------------------------
Nine Months Ended March 31, 1998 1999 --------- --------- (Unaudited) Cash flows from operating activities: Net increase in stockholders' equity resulting from operations $312,363 748,249 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 (334,917) 459,638 Realized gain on investments - (378,312) Accretion of preferred stock and loan investments - (22,127) Depreciation and amortization 13,763 26,666 Deferred income tax expense (benefit) 128,542 (125,600) Changes in assets and liabilities increasing (decreasing) cash flows from operating activities: Dividends receivable (30,290) (60,350) Interest receivable (43,113) (151,411) Refundable income taxes (18,438) - Prepaid expenses and other current assets (58,976) (38,282) Accounts payable and accrued expenses 60,389 (27,408) Deferred revenue - 43,379 Income taxes payable - 156,378 -------- --------- Net cash provided by operating activities 29,323 630,820 -------- --------- Cash flows from investing activities: Investments made (2,075,892) (7,562,118) Loans made (350,000) (4,031,125) Principal collected on loans outstanding - 41,472 Proceeds from stockholders' notes receivable 551,000 - Proceeds from investment liquidation - 2,530,021 Acquisition of property and equipment (53,836) (22,711) --------- --------- Net cash used in investing activities (1,928,728) (9,044,461) --------- --------- Cash flows from financing activities: Proceeds from line of credit - 250,000 Proceeds from notes payable - 6,000,000 Payment of deferred financing costs - (150,000) Proceeds from issuance of common stock 8,211,553 - Payment related to fractional shares associated with stock dividend - (63) -------- --------- Net cash provided by financing activities 8,211,553 6,099,937 -------- --------- Net (increase) decrease in cash and cash equivalents 6,312,148 (2,313,704) Cash and cash equivalents, beginning of period 2,329,148 4,393,501 -------- --------- Cash and cash equivalents, end of period $ 8,641,296 2,079,797 ========= =========
See accompanying notes to financial statements. WATERSIDE CAPITAL CORPORATION Notes to Financial Statements June 30, 1998 and March 31, 1999 (Unaudited) - -------------------------------------------------------------------------------- (1) UNAUDITED INTERIM FINANCIAL STATEMENTS In the opinion of management, the accompanying unaudited interim financial statements of Waterside Capital Corporation ("Waterside" or 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 N-30D, 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 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 for the effect of restrictions on the sale of such securities. Discounts range from 0% to 50%. The Company maintains custody of its investments as permitted by the Investment Company Act of 1940. (Continued) (3) CONTINUED 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 $17,468,776 at June 30, 1998 and March 31, 1999 (63.6% and 85.5% 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) LINE OF CREDIT On March 31, 1999, the Company borrowed $250,000 under a line-of-credit agreement. The interest rate on the line is the bank's prime rate. Borrowings under the line of credit were fully repaid on April 2, 1999. (5) NOTES PAYABLE On October 2, 1998, the Company borrowed $6,000,000 from the SBA under 10-year notes. The notes are due on October 2, 2008 and bear interest at a rate of 6.24% plus a 1.00% annual charge. The interest rate was finalized on March 18, 1999. In conjunction with the signing of the notes, the Company paid a 2.50% origination fee in addition to the 1% commitment fee paid during fiscal 1998. The total amount of leverage approved by the SBA and available for borrowing is $12,300,000, including the $6,000,000 drawn in October 1998 described above. (6) 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 have been restated to reflect the 5% stock dividend. (7) NEW ACCOUNTING PRONOUNCEMENT As of July 1, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, REPORTING COMPREHENSIVE INCOME. SFAS No. 130 established new rules for the reporting and display of comprehensive income and its components; however, the adoption of this statement had no material impact on the Company's net increase in stockholders' equity resulting from operations per share or stockholders' equity. WATERSIDE CAPITAL CORPORATION Schedule of Portfolio Investments June 30, 1998 and March 31, 1999 - -------------------------------------------------------------------------------- The Company's investment portfolio at June 30, 1998, consisted of the following:
Coupon Cost or interest contributed Fair Loans: Maturity rate value value ----- -------- -------- ----------- ----- Avery Communications, Inc. Convertible Note 12/10/02 12% $ 350,000 $ 600,264 Divaris Consolidated Investments, Inc. 6/29/04 18% 975,000 975,000 ---------- --------- Total loans 1,325,000 1,575,264 ---------- ---------
Cost or Fair Number contributed market Equity Interests: 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 --------- ----------
WATERSIDE CAPITAL CORPORATION Schedule of Portfolio Investments - --------------------------------------------------------------------------------
Cost or Fair Number of Percentage contributed market Stock Warrants and Options: 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 warrants and options 144,200 206,624 ----------- ---------- Total investments $ 7,640,893 8,506,225 =========== ==========
The Company's investment portfolio at March 31, 1999 (unaudited) consisted of the following:
Coupon Cost or interest contributed Fair Loans: Maturity rate value value ------ -------- -------- ----------- ----- Avery Communications, Inc. Convertible Note 12/10/02 12.0% $ 350,000 $ 350,000 Divaris Consolidated Investments, Inc. 6/29/04 18.0% 1,100,000 1,100,000 Extraction Technologies of VA, LLC 7/22/03 14.5% 650,000 650,000 JMS Worldwide, Inc. 7/31/03 13.0% 1,000,000 1,000,000 Triangle Imaging Group, Inc. 2/15/03 14.0% 1,314,000 1,314,000 Diversified Telecom, Inc. Demand 13.0% 158,528 158,528 The Netplex Group, Inc. 2/25/04 14.0% 756,125 756,125 ---------- ----------- Total loans 5,328,653 5,328,653 ---------- -----------
Cost or Fair Number contributed market Equity Interests: of shares value value ---------------- --------- ----------- ------- PUBLICLY-TRADED COMPANIES: Avery Communications, Inc. Common Stock 245,000 $ 249,900 $ 268,030 Netplex Group, Inc. Preferred Stock 1,500,000 1,500,000 1,500,000 Netplex Group, Inc. Common Stock 165,000 237,000 363,270 Triangle Imaging Group, Inc. Common Stock 500,000 225,000 227,995 EQUITY INVESTMENTS IN PRIVATE COMPANIES: Real Time Data Management Services, Inc. Preferred Stock 400 334,285 538,108 Mid-Atlantic Small Business Finance, Inc. Preferred Stock 500 140,000 140,000 Coddle Roasted Meats, Inc. Common Stock 1,117 118 118 Delta Education Systems, Inc. Preferred Stock 425 404,760 404,760 Diversified Telecom, Inc. Preferred Stock 1,500 1,500,000 1,500,000 Crispies, Inc. Preferred Stock 400 397,620 397,620 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 1,489,947 1,489,947 Fire King International Preferred Stock 2,000 2,000,000 2,000,000 QuesTech Packaging, Inc. Preferred Stock 600 600,000 600,000 ---------- ----------- Total equity investments 11,578,630 11,929,848 ------------- -----------
Cost or Fair Number of Percentage contributed market Stock Warrants and Options: shares ownership value value --------------------------- --------- ---------- ----------- ------- PUBLICLY-TRADED COMPANIES: Avery Communications, Inc. 126,000 0.00% $ - $ - Netplex Group, Inc. 75,000 0.70 - 47,475 PRIVATE COMPANIES: Real Time Data Management Services, Inc. 125 29.41 115,000 122,000 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 - 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 - - ----------- ------------ Total warrants and options 155,800 210,275 ----------- ------------ Total investments $ 17,063,083 $ 17,468,776 =========== ============
- -------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONDITION 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 3 offices from which it operates - Norfolk and Richmond, Virginia and Charlotte, North Carolina. o Results of Operations 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, the three months ended March 31, 1999 do not offer a meaningful comparison with the performance for the three months ended March 31, 1998. For the three months ended March 31, 1999, total operating income was $686 thousand compared to the $204 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 $246 thousand, fee income of $224 thousand, interest on loans of $183 thousand and interest on cash equivalents of $33 thousand. Total operating expenses for the three months ended March 31, 1999 were $384 thousand, consisting primarily of salary and benefits of $176 thousand, interest expense on SBA borrowings of $106 thousand, legal and accounting expenses of $25 thousand and other operating expenses of $77 thousand. These total operating expenses compared to the $181 thousand expended during the three months ended March 31, 1998. Net operating income of $271 thousand for the quarter ended March 31, 1999 compared favorably to the $41 thousand during the same quarter of 1998. The realized appreciation on investments net of taxes of $147 thousand for the three months ended March 31, 1999 was due to the redemption of equity investments by four private companies. The change in unrealized appreciation on investments net of taxes of $128 thousand for the three month ended March 31, 1999 and $144 thousand for the three months ended March 31, 1998 was due primarily to the changing stock price of two publicly traded portfolio companies. For the nine months ended March 31, 1999, total operating income was $2.0 million compared to the $371 thousand generated during the same period of 1998. The dramatic increase in operating income is due to the growth in the Company's investment portfolio. Total operating expense of $1.1 million for the nine months ended March 31, 1999 compared to the $300 thousand expended during the nine months ended March 31, 1998. Net operating income of $799 thousand for the nine months ended March 31, 1999 compared favorably to the $105 thousand generated during the nine months ended March 31, 1998. The realized appreciation on investments net of taxes of $234 thousand for the nine months ended March 31, 1999 was due to the redemption of equity investments by four private companies. The reduction in unrealized appreciation on investments, net of taxes, of $285 thousand for the nine months ended March 31, 1999 and the increase in unrealized appreciation on investments, net of taxes, of $208 thousand for the nine months ended March 31, 1998 was due primarily to the changing stock price of two publicly traded portfolio companies. o Financial Condition, Liquidity and Capital Resources During the quarter ended March 31, 1999, the Company closed $4.9 million in new investments and funded $3.4 million. To fund these investments and to fund future originations the Company borrowed $6,000,000 from the SBA on October 2, 1998 as its first draw on a leverage commitment previously outstanding. The notes are due on October 2, 2008 and bear interest at a rate of 6.24% plus a 1.35% fee annually on the outstanding balance. The Company has additional approved leverage of $6.3 million, which it anticipates drawing during the fourth quarter. The Company has an additional two tiers of leverage (representing approximately $28 million) that it may borrow from the SBA based on its current regulatory capital position. These additional two tiers of leverage are subject to approval by the SBA. Management believes that these sources of capital will be sufficient to fund the Company's operations and grow its portfolio in fiscal 1999. The Company declared and paid a 5% stock dividend during the quarter ended March 31, 1999. During the nine months ended March 31, 1999 cash provided by operating activities was $630 thousand as compared to the $29 thousand provided during the nine months ended March 31, 1998,primarily due to the growth in the Company's investment portfolio. The Company used $9.0 million in investing activities during the nine months ended March 31, 1999 as compared to the $1.9 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 three portfolio companies. The Company generated $6.1 million in cash from financing activities in the nine months ended March 31, 1999 primarily representing the proceeds from the borrowings from the SBA described above. 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 effected. 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 by mid 1999. 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 will continue to analyze this area in further detail in 1999. Finally, the Company is investigating the impact of Year 2000 issues on its portfolio companies. This investigation is not complete, and as a result, the Company cannot assess the potential exposure associated with the readiness of its portfolio companies for Year 2000. 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. Until the Company completes its assessment, it cannot offer any assurance that the Year 2000 issue will not adversely affect the Company's business. Based upon its assessment, contingency plans will be developed to mitigate the potential risks by September 30, 1999. 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. 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. There are a number of important factors that could cause the Company's actual results to differ materially from those indicated by such 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 ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION On March 15, 1999, the Company distributed 71,037 shares of common stock to its shareholders as of February 26, 1999 as a stock dividend. 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 12th day of May, 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 MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS' LEGEND. 1,000 9-MOS JUN-30-1998 JUL-01-1998 MAR-31-1999 2,080 17,469 406 0 0 2,569 122 0 20,420 505 6,000 0 0 1,492 12,290 20,420 0 1,957 0 0 889 0 211 857 58 799 0 0 (51) 748 .50 .50
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