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, 2001
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, 2001, the registrant had issued and outstanding
1,581,430 shares of Common Stock, $1.00 par value.
1
WATERSIDE CAPITAL CORPORATION
FORM 10-Q
Table of Contents
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Balance Sheets as of June 30, 2001 and September 30, 2001
(unaudited)
Statements of Operations for the Three Months Ended
September 30, 2000 and 2001 (unaudited)
Statements of Changes in Stockholders' Equity for the Three
Months Ended September 30, 2000 and 2001 (unaudited)
Statements of Cash Flows for the Three Months Ended
September 30, 2000 and 2001 (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
2
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
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
3
WATERSIDE CAPITAL CORPORATION
Balance Sheets
June 30, 2001 and September 30, 2001
--------------------------------------------------------------------------------------------------------------------------------
June 30, September 30,
2001 2001
------------------ ---------------
(Unaudited)
Assets:
Investments in portfolio companies, at fair value (note 2):
Equity securities $ 23,146,571 $ 21,311,337
Debt securities 6,514,395 8,883,414
Options and warrants 4,025,942 3,310,917
------------------ ---------------
Total investments, cost of $41,702,728 and $39,376,039
at June 30, 2001 and September 30, 2001, respectively 33,686,908 33,505,668
------------------ ---------------
Current assets:
Cash and cash equivalents 1,089,386 1,405,238
Current portion of dividends receivable 719,188 688,359
Interest receivable 101,304 153,328
Notes receivable 237,550 297,892
Refundable income taxes 533,225 533,225
Prepaid expenses 131,891 119,927
Other current assets 50,466 7,411
------------------ ---------------
Total current assets 2,863,010 3,205,380
------------------ ---------------
Dividends receivable, excluding current portion 278,583 323,583
Property and equipment, net 133,217 122,102
Deferred income taxes 550,000 482,000
Deferred financing costs, net 867,040 850,699
------------------ ---------------
Total assets $ 38,378,758 $ 38,489,432
================== ===============
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable $ 85,224 $ 54,580
Accrued interest 657,514 152,607
Accrued expenses 237,009 228,455
------------------ ---------------
Total current liabilities 979,747 435,642
Debentures payable 25,400,000 25,400,000
------------------ ---------------
Total liabilities 26,379,747 25,835,642
------------------ ---------------
Stockholders' equity:
Common stock, $1 par value, 10,000,000 shares authorized,
1,581,430 issued and outstanding 1,581,430 1,581,430
Preferred stock, $1 par value, 25,000 shares authorized,
no shares issued and outstanding - -
Additional paid-in capital 14,618,719 14,618,719
Net unrealized depreciation on investments, net of income taxes (7,464,341) (6,132,892)
Undistributed accumulated earnings 3,263,203 2,586,533
------------------ ---------------
Total stockholders' equity 11,999,011 12,653,790
Commitments and contingencies
------------------ ---------------
Total liabilities and stockholders' equity $ 38,378,758 $ 38,489,432
================== ===============
Net asset value per common share $ 7.59 $ 8.00
================== ===============
See accompanying notes to financial statements.
4
WATERSIDE CAPITAL CORPORATION
Unaudited Statements of Operations
Three-months ended September 30, 2000 and 2001
--------------------------------------------------------------------------------------------------------------------
2000 2001
------------ ------------
Operating income:
Dividends $ 714,347 $ 600,516
Interest on debt securities 260,455 405,748
Interest on cash equivalents 6,590 8,237
Fee and other income 112,046 167,512
------------ ------------
Total operating income 1,093,438 1,182,013
------------ ------------
Operating expenses:
Salaries and benefits 250,537 193,085
Legal and accounting 42,381 44,100
Interest expense 463,015 523,268
Other operating expenses 104,999 79,245
------------ ------------
Total operating expenses 860,932 839,698
------------ ------------
Net operating income before income taxes 232,506 342,315
Income tax benefit (149,000) (76,000)
------------ ------------
Net operating income 381,506 418,315
Realized loss on investments, net of income tax benefit of $670,000 - (1,094,985)
Change in unrealized depreciation on investments, net of income
tax expense (benefit) of $(433,000) and $814,000 for 2000
and 2001, respectively (709,563) 1,331,449
------------ ------------
Net increase (decrease) in stockholders' equity
resulting from operations $ (328,057) $ 654,779
============ ============
Net increase (decrease) in stockholders' equity resulting from
operations per share - basic and diluted $ (0.21) $ 0.41
============ ============
See accompanying notes to financial statements.
5
WATERSIDE CAPITAL CORPORATION
Unaudited Statements of Changes in Stockholders' Equity
Three-months ended September 30, 2000 and 2001
------------------------------------------------------------------------------------------------------------------------------------
Additional Net unrealized Undistributed Total
Common stock paid-in depreciation accumulated stockholders'
----------------------
Shares Amount capital on investments earnings equity
--------- ----------- ------------ -------------- ------------ -------------
Balance at June 30, 2000 1,581,430 $ 1,581,430 $ 14,618,719 $ (1,216,357) $ 1,850,599 $ 16,834,391
Net operating income - - - - 381,506 381,506
Change in net unrealized depreciation on
investments, net of income taxes - - - (709,563) - (709,563)
--------- ----------- ------------ ------------ ------------ ------------
Balance at September 30, 2000 1,581,430 $ 1,581,430 $ 14,618,719 $ (1,925,920) $ 2,232,105 $ 16,506,334
========= =========== ============ ============ ============ ============
Balance at June 30, 2001 1,581,430 $ 1,581,430 $ 14,618,719 $ (7,464,341) $ 3,263,203 $ 11,999,011
Net operating income - - - - 418,315 418,315
Net realized loss on investments, net of income
taxes - - - - (1,094,985) (1,094,985)
Change in net unrealized depreciation on
investments, net of income taxes - - - 1,331,449 - 1,331,449
--------- ----------- ------------ ------------ ------------ ------------
Balance at September 30, 2001 1,581,430 $ 1,581,430 $ 14,618,719 $ (6,132,892) $ 2,586,533 $ 12,653,790
========= =========== ============ ============ ============ ============
See accompanying notes to financial statements.
6
WATERSIDE CAPITAL CORPORATION
Unaudited Statements of Cash Flows
Three months ended September 30, 2000 and 2001
------------------------------------------------------------------------------------------------------------------------------
2000 2001
--------------- ----------------
Cash flows from operating activities:
Net increase (decrease) in stockholders' equity resulting from operations $ (328,057) $ 654,779
Adjustments to reconcile net increase (decrease) in stockholders'
equity resulting from operations to net cash used in operating activities:
Unrealized depreciation (appreciation) on investments 1,142,563 (2,145,449)
Realized loss on investments - 1,764,985
Accretion of preferred stock and loan investments (124,096) (172,364)
Depreciation and amortization 21,709 27,456
Deferred income tax expense (benefit) (400,000) 68,000
Changes in assets and liabilities increasing (decreasing)
cash flows from operating activities:
Dividends receivable (59,782) (14,171)
Interest receivable 4,192 (52,024)
Refundable income taxes (182,000) -
Prepaid expenses and other current assets 75,006 55,019
Accounts payable and accrued expenses (530,480) (544,105)
--------------- ----------------
Net cash used in operating activities (380,945) (357,874)
--------------- ----------------
Cash flows from investing activities:
Investments in equity securities made (500,000) -
Investments in debt securities made (1,583,472) (279,697)
Principal collected on debt securities 474,931 84,442
Issuance of note receivable - (87,842)
Proceeds from collection of note receivable - 27,500
Proceeds from sales of investments - 929,323
Acquisition of property and equipment (2,972) -
--------------- ----------------
Net cash provided by (used in) investing activities (1,611,513) 673,726
--------------- ----------------
Cash flows from financing activities:
Repayments of lines of credit (1,086,300) -
Proceeds from debentures payable 3,100,000 -
Payment of deferred financing costs (77,500) -
--------------- ----------------
Net cash provided by financing activities 1,936,200 -
--------------- ----------------
Net increase (decrease) in cash and cash equivalents (56,258) 315,852
Cash and cash equivalents, beginning of year 118,314 1,089,386
--------------- ----------------
Cash and cash equivalents, end of period $ 62,056 $ 1,405,238
=============== ================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 807,214 $ 1,011,834
=============== ================
Cash paid during the period for income taxes $ - $ -
=============== ================
See accompanying notes to financial statements.
7
WATERSIDE CAPITAL CORPORATION
Notes to Financial Statements
June 30, 2001 and September 30, 2001 (Unaudited)
-------------------------------------------------------------------------------
(1) Unaudited Interim Financial Information
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 of
and for the year ended June 30, 2001, as filed with the Securities and
Exchange Commission.
(2) Description of Business
The Company was incorporated in the Commonwealth of Virginia on July
13, 1993 and is a closed-end investment company licensed by the Small
Business Administration (the SBA) as a Small Business Investment
Corporation (SBIC). The Company makes equity investments in, and
provides loans to, small business concerns to finance their growth,
expansion and development. Under applicable SBA regulations, the
Company is restricted to investing only in qualified small business
concerns as contemplated by the Small Business Investment Act of 1958.
(3) Investments
Investments are carried at fair value, as determined by the Executive
Committee of the Board of Directors. The Company, through its Board of
Directors, has adopted the Model Valuation Policy, as published by the
SBA, in Appendix III to Part 107 of Title 12 of the Code of Federal
Regulations (the Policy). The Policy, among other things, presumes that
loans and investments are acquired with the intent that they are to be
held until maturity or disposed of in the ordinary course of business.
Except for interest-bearing securities which are convertible into
common stock, interest-bearing securities are valued at an amount not
greater than cost, with unrealized depreciation being recognized when
value is impaired. Equity securities of private companies are presumed
to represent cost unless the performance of the portfolio company,
positive or negative, indicates otherwise in accordance with the Policy
guidelines. The fair value of equity securities of publicly traded
companies are generally valued at their quoted market price discounted
due to the investment size or market liquidity concerns and for the
effect of restrictions on the sale of such securities.
(Continued)
8
WATERSIDE CAPITAL CORPORATION
Notes to Financial Statements
June 30, 2001 and September 30, 2001 (Unaudited)
-------------------------------------------------------------------------------
Discounts can range from 0% to 40% for investment size and market
liquidity concerns. Actual liquidity discounts in the portfolio at
September 30, 2001 ranged from 15% to 40%. Discounts for restriction on
the sale of the investments are 15% in accordance with the provisions
of the Policy. The Company maintains custody of its investments as
permitted by the Investment Company Act of 1940.
Investments consist primarily of preferred stock and debt securities
obtained from portfolio companies in accordance with SBIC investment
regulations. The financial statements include securities valued at
$33,686,908 and $33,505,668 at June 30, 2001 and September 30, 2001
(87.8% and 87.1% 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.
9
WATERSIDE CAPITAL CORPORATION
Unaudited Schedule of Portfolio Investments
June 30, 2001 and September 30, 2001
-------------------------------------------------------------------------------------------------------------------------------
The Company's investment portfolio at June 30, 2001 consisted of the following:
Cost or
Number of contributed Fair market
Equity Securities: shares value value
------------------ --------------- -------------- ---------------
Publicly Traded Companies:
Avery Communications, Inc. Common Stock 245,000 $ 235,597 $ 65,660
Avery Communications, Inc. Common Stock (a) 190,167 95,084 43,359
Avery Communications, Inc. Preferred Stock 1,250,000 1,250,000 1,250,000
Netplex Group, Inc. Common Stock 66,400 464,800 9,761
Netplex Group, Inc. Preferred Stock 1,500,000 1,355,504 1,355,504
Tangent Solutions, Inc. (formerly Electronic Business
Systems, Inc.) Common Stock (b) 500,000 225,000 -
Tangent Solutions, Inc. (formerly Electronic Business
Systems, Inc.) Common Stock (b) 1,423,821 60,484 -
Primal Solutions, Inc. Common Stock 475,167 9,503 11,404
Private Companies:
Real Time Data Management Services, Inc. Preferred Stock 300 296,715 512,848
Delta Education Systems, Inc. Preferred Stock 1,625 1,603,923 1,603,923
Diversified Telecom, Inc. Preferred Stock (c) 1,500 1,500,000 508,512
Crispies, Inc. Preferred Stock 400 398,880 398,880
Triangle Biomedical Sciences Preferred Stock (c) 2,100 2,113,969 2,113,969
JMS Worldwide, Inc. Preferred Stock 1,500 1,500,000 1,500,000
EPM Development Systems Corp. Preferred Stock 1,500 1,495,167 1,495,167
Fire King International Preferred Stock 2,000 2,000,000 2,000,000
CCT Holdings (formerly SECC) Common Stock 840,000 60 60
Eton Court Asset Management, Ltd. Preferred Stock 1,000 980,337 980,337
Fairfax Publishing Co., Inc. Preferred Stock 1,100 1,663,746 1,663,746
DigitalSquare.com Convertible Preferred Stock 1,210,739 1,513,425 1,513,425
Answernet, Inc. Preferred Stock 550 336,232 336,232
Answernet, Inc. Preferred Stock 700 412,369 412,369
ISR Solutions, Inc. Preferred Stock 500 497,995 497,995
Capital Markets Group, Inc. Preferred Stock (c) 1,500 1,500,000 -
Jubilee Tech International, Inc. Convertible Preferred Stock (c) 2,200,000 2,007,514 2,007,514
VentureCom, Inc. Convertible Preferred Stock 278,164 2,000,000 2,000,000
Phoenix Fabrications, Inc. Preferred Stock (c) 400 279,063 279,063
AmeriComm Direct Marketing LLC Preferred Stock 27,696 28 28
Signius Investment Corporation Common Stock 2,059 332,595 586,815
-------------- --------------
Total equity securities 26,127,990 23,146,571
-------------- --------------
Cost or
contributed
Debt Securities: Maturity value Fair value
---------------- --------------- -------------- --------------
Avery Communications, Inc. Convertible Note 12/10/02 $ 350,000 $ 350,000
Extraction Technologies of VA, LLC (c) (d) 7/22/03 900,000 -
Extraction Technologies of VA, LLC (c) (d) 8/31/04 202,316 -
Extraction Technologies of VA, LLC (c) (d) 11/2/04 373,711 -
Extraction Technologies of VA, LLC (c) (d) 2/7/05 263,742 -
Extraction Technologies of VA, LLC (c) (d) 2/25/05 97,409 -
Extraction Technologies of VA, LLC (c) (d) 3/14/05 95,584 -
JMS Worldwide, Inc. 7/31/03 900,000 900,000
Diversified Telecom, Inc. (c) Demand 84,250 84,250
Diversified Telecom, Inc. (c) 5/19/02 131,238 131,238
ISR Solutions, Inc. 6/30/04 744,167 744,167
Fire King International Demand 550,000 550,000
TABET Manufacturing Co., Inc. 12/31/04 304,575 304,575
National Assisted Living, LP (c) 12/31/04 835,880 -
New Dominion Pictures LLC 4/30/06 784,103 784,103
(Continued)
10
WATERSIDE CAPITAL CORPORATION
Unaudited Schedule of Portfolio Investments
June 30, 2001 and September 30, 2001
-----------------------------------------------------------------------------------------------------------------------------------
Cost or
contributed
Maturity value Fair value
-------------- ------------- -------------
Mayfair Enterprises, Inc. 7/18/05 $ 243,519 $ 243,519
DigitalSquare.com (c) 9/15/05 289,250 289,250
Phoenix Fabrications, Inc. 9/8/05 348,830 348,830
Kotarides Baking Co. of VA (c) 6/5/01 577,336 577,336
Kotarides Baking Co. of VA Demand 200,000 200,000
AmeriComm Direct Marketing LLC 12/29/05 750,000 750,000
Triangle Biomedical Sciences 12/8/01 164,843 164,843
Tangent Solutions, Inc. (formerly Electronic Business
Systems, Inc.) (b) (c) - 2,038,287 92,284
------------- -------------
Total debt securities 11,229,040 6,514,395
------------- -------------
Cost or
Number of Percentage contributed Fair market
Stock Options and Warrants: shares ownership value value
--------------------------- ------------ -------------- ------------- -------------
Publicy Traded Companies:
Netplex Group, Inc. (a) 300,000 2.10 $ 900,000 $ -
Tangent Solutions, Inc. (formerly Electronic Business
Systems, Inc.) (a) (b) 98,000 0.63 - -
Private Companies:
Real Time Data Management Services, Inc. 125 29.41 115,000 157,270
Delta Education Systems, Inc. 639 39.00 48,200 75,413
Diversified Telecom, Inc. 8,998 15.00 - -
Crispies, Inc. 524 6.37 2,800 4,395
Triangle Biomedical Sciences 632,916 12.20 171,967 216,485
Extraction Technologies of VA, LLC (d) - 39.00 337,567 -
JMS Worldwide, Inc. 199 5.00 - -
EPM Development Systems Corp. 87 8.00 11,600 1,177,415
Fire King International 4 4.00 - -
CCT Holdings (formerly SECC) 150,000 3.15 - -
Eton Court Asset Management, Ltd. 14,943 13.00 34,700 34,700
Fairfax Publishing Co., Inc. 1,026 20.30 123,238 426,638
ISR Solutions, Inc. 588,334 5.90 12,936 12,936
DigitalSquare.com 150,000 - 75,000 75,000
Answernet, Inc. 69,837 16.50 268,615 268,615
TABET Manufacturing Co., Inc. 487,500 19.50 175,400 175,400
National Assisted Living, LP - 15.00 667,000 -
Capital Markets Group, Inc. 2,294,118 15.00 - -
Jubilee Tech International, Inc. 400,000 1.60 240,000 240,000
Signius Investment Corporation 12 11.67 - -
VentureCom, Inc. 38,943 0.37 - -
New Dominion Pictures LLC - 9.00 464,650 464,650
Mayfair Enterprises, Inc. - 15.00 214,400 214,400
Phoenix Fabrications, Inc. - 25.00 297,000 297,000
Kotarides Baking Co. of VA - 13.75 185,625 185,625
------------- -------------
Total options and warrants 4,345,698 4,025,942
------------- -------------
Total investments $ 41,702,728 $ 33,686,908
============= =============
(Continued)
11
Waterside Capital Corporation
Unaudited Schedule of Portfolio Investments
June 30, 2001 and September 30, 2001
------------------------------------------------------------------------------------------------------------------------------------
The Company's investment portfolio at September 30, 2001 consisted of the following:
Cost or
Number of contributed Fair market
Equity Securities: shares value value
------------------ --------------- --------------- ---------------
Publicly Traded Companies:
Avery Communications, Inc. Common Stock 245,000 $ 235,597 $ 41,160
Avery Communications, Inc. Common Stock (a) 190,167 95,084 27,194
Avery Communications, Inc. Preferred Stock 1,250,000 1,250,000 1,250,000
Netplex Group, Inc. Common Stock 66,400 464,800 4,781
Tangent Solutions, Inc. (formerly Electronic Business
Systems, Inc.) Common Stock (b) 500,000 225,000 -
Tangent Solutions, Inc. (formerly Electronic Business
Systems, Inc.) Common Stock (b) 1,423,821 60,484 -
Primal Solutions, Inc. Common Stock 400,167 8,003 15,607
Private Companies:
Real Time Data Management Services, Inc. Preferred Stock 300 299,179 525,204
Delta Education Systems, Inc. Preferred Stock 1,625 1,606,333 1,606,333
Diversified Telecom, Inc. Preferred Stock (c) 1,500 1,500,000 508,512
Crispies, Inc. Preferred Stock 400 399,020 399,020
Triangle Biomedical Sciences Preferred Stock (c) 2,100 2,120,341 2,120,341
EPM Development Systems Corp. Preferred Stock 1,500 1,495,747 1,495,747
Fire King International Preferred Stock 2,000 2,000,000 2,000,000
CCT Holdings (formerly SECC) Common Stock 840,000 60 60
Eton Court Asset Management, Ltd. Preferred Stock 1,000 982,072 982,072
Fairfax Publishing Co., Inc. Preferred Stock 1,100 1,671,587 1,671,587
DigitalSquare.com Convertible Preferred Stock 1,210,739 1,513,425 1,513,425
Answernet, Inc. Preferred Stock 550 341,412 341,412
Answernet, Inc. Preferred Stock 700 423,136 423,136
ISR Solutions, Inc. Preferred Stock 500 498,142 498,142
Capital Markets Group, Inc. Preferred Stock (c) 1,500 1,500,000 -
Jubilee Tech International, Inc. Convertible Preferred Stock (c) 2,200,000 2,017,532 2,017,532
VentureCom, Inc. Convertible Preferred Stock 278,164 2,000,000 2,000,000
Phoenix Fabrications, Inc. Preferred Stock (c) 400 283,229 283,229
AmeriComm Direct Marketing LLC Preferred Stock 27,696 28 28
Signius Investment Corporation Common Stock 2,059 332,595 586,815
Netplex Systems, Inc. Preferred Stock 1,000,000 1,187,107 1,000,000
--------------- ---------------
Total equity securities 24,509,913 21,311,337
--------------- ---------------
Cost or
contributed
Debt Securities: Maturity value Fair value
---------------- --------------- --------------- ---------------
Avery Communications, Inc. Convertible Note 12/10/02 $ 350,000 $ 350,000
Extraction Technologies of VA, LLC (c) (d) 7/22/03 900,000 -
Extraction Technologies of VA, LLC (c) (d) 8/31/04 202,316 -
Extraction Technologies of VA, LLC (c) (d) 11/2/04 373,711 -
Extraction Technologies of VA, LLC (c) (d) 2/7/05 263,742 -
Extraction Technologies of VA, LLC (c) (d) 2/25/05 97,409 -
Extraction Technologies of VA, LLC (c) (d) 3/14/05 95,584 -
JMS Worldwide, Inc. 7/31/03 2,350,000 2,350,000
Diversified Telecom, Inc. (c) Demand 84,250 84,250
Diversified Telecom, Inc. (c) 5/19/02 131,238 131,238
ISR Solutions, Inc. 6/30/04 719,667 719,667
Fire King International Demand 550,000 550,000
TABET Manufacturing Co., Inc. 12/31/04 310,913 310,913
National Assisted Living, LP (c) 12/31/04 835,880 -
New Dominion Pictures LLC 4/30/06 798,605 798,605
12
WATERSIDE CAPITAL CORPORATION
Unaudited Schedule of Portfolio Investments
June 30, 2001 and September 30, 2001
--------------------------------------------------------------------------------
Cost or
contributed
Maturity value Fair value
--------------- --------------- ---------------
Mayfair Enterprises, Inc. 7/18/05 $ 83,439 $ 83,439
DigitalSquare.com (c) 9/15/05 289,250 289,250
Phoenix Fabrications, Inc. (c) 9/8/05 354,038 354,038
Kotarides Baking Co. of VA (c) 6/5/01 556,345 556,345
Kotarides Baking Co. of VA Demand 200,000 200,000
AmeriComm Direct Marketing LLC 12/29/05 750,000 750,000
Triangle Biomedical Sciences 12/8/01 175,972 175,972
Jubilee Tech International, Inc. 3/21/02 125,000 125,000
Netplex Group, Inc. 12/31/01 154,697 154,697
Netplex Group, Inc. 1/28/02 1,068,397 900,000
------------ ---------------
Total debt securities 11,820,453 8,883,414
------------ ---------------
Cost or
Number of Percentage contributed Fair market
Stock Options and Warrants: shares ownership value value
--------------------------- -------------- ------------- ---------------- ---------------
Private Companies:
Real Time Data Management Services, Inc. 125 29.41 $ 115,000 $ 157,270
Delta Education Systems, Inc. 639 39.00 48,200 75,413
Diversified Telecom, Inc. 8,998 15.00 - -
Crispies, Inc. 524 6.37 2,800 4,395
Triangle Biomedical Sciences 632,916 12.20 171,967 216,485
Extraction Technologies of VA, LLC (d) - 39.00 337,567 -
JMS Worldwide, Inc. 199 5.00 - -
EPM Development Systems Corp. 87 8.00 11,600 1,177,415
Fire King International 4 4.00 - -
CCT Holdings (formerly SECC) 150,000 3.15 - -
Eton Court Asset Management, Ltd. 14,943 13.00 34,700 34,700
Fairfax Publishing Co., Inc. 1,026 20.30 123,238 426,638
ISR Solutions, Inc. 588,334 5.90 12,936 12,936
DigitalSquare.com 150,000 - 75,000 -
Answernet, Inc. 69,837 16.50 268,615 268,615
TABET Manufacturing Co., Inc. 487,500 19.50 175,400 175,400
National Assisted Living, LP - 15.00 667,000 -
Capital Markets Group, Inc. 2,294,118 15.00 - -
Jubilee Tech International, Inc. 400,000 1.60 240,000 -
Signius Investment Corporation 12 11.67 - -
VentureCom, Inc. 38,943 0.37 - -
New Dominion Pictures LLC - 9.00 464,650 464,650
Phoenix Fabrications, Inc. - 25.00 297,000 297,000
--------------- ---------------
Total options and warrants 3,045,673 3,310,917
--------------- ---------------
Total investments $ 39,376,039 $ 33,505,668
=============== ===============
(a) Rule 144A restricted securities.
(b) This entity filed Chapter 11 bankruptcy on September 1, 2000.
(c) Entity is in arrears with respect to dividend/interest payments.
(d) This entity filed Chapter 11 bankruptcy on December 26, 2000.
13
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
. General
Waterside Capital Corporation ("Waterside" or the "Company") is a
specialty finance company located in Norfolk, Virginia. The Company
invests in equity and debt securities to finance the growth, expansion
and modernization of small private businesses, primarily in the Mid-
Atlantic Region. The Company was formed in 1993 as the Eastern Virginia
Small Business Investment Corporation. Through June 30, 1996, the
Company operated as a development stage company focused primarily on
preparation to commence operation. The Company was licensed in 1996 by
the Small Business Administration (SBA) as a Small Business Investment
Company (SBIC) under the Small Business Investment Act of 1958. In
October 1996 the Company made its first portfolio investment. In January
1998 the Company completed its Initial Public Offering (IPO) to raise
additional equity to support its growth strategy.
The majority of the Company's operating income is derived from dividend
and interest income on portfolio investments and application and
processing fees related to investment originations. The remaining
portion of the Company's operating income comes from interest earned on
cash equivalents. The Company's operating expenses primarily consist of
interest expense on borrowings to fund its portfolio growth and payroll
and other expenses incidental to operations. Waterside currently has 6
full time employees.
. Results of Operations
Comparison of Three Months Ended September 30, 2001 and September 30,
2000
For the three months ended September 30, 2001, total operating income
was $1,182,000 compared to $1,093,000 reported during the same period of
2000. The increase in operating income is primarily attributed to the
collection of $75,000 in late fees on a delinquent investment that was
repaid during October 2001. The September 30, 2001 quarterly operating
income consisted of dividends of $601,000, interest on debt securities of
$406,000, fee income of $167,000 and interest on cash equivalents of
$8,000.
Total operating expenses were $840,000 for the three months ended
September 30, 2001, as compared to the $861,000 reported for the quarter
ended September 30, 2000. Total operating expenses for the three months
ended September 30, 2001 consisted of interest expense of $523,000,
salaries and benefits of $193,000, legal and accounting expenses of
$44,000, and other operating expenses of $80,000. These expenses
compared to the amounts reported for the three months ended September 30,
2000, of interest expense of $463,000, salaries and benefits of $251,000,
legal and accounting expenses of $42,000, and other operating expenses of
$105,000. The increase in interest expense for the quarter ended
September 30, 2001, compared to the quarter ended September 30, 2000 is
due to the increased borrowings necessary to fund the Company's
investment portfolio. The decrease in salaries and benefits for the
quarter ended September 30, 2001, compared to the quarter ended September
30, 2000, is due to the reduction in force of one business development
officer and one clerical position. Net operating income was $418,000 for
the three months ended September 30, 2001, compared to the $382,000
reported for the three months ended September 30, 2000.
14
The realized loss on investments, net of income taxes, of $1,095,000 for
the three months ended September 30, 2001, was primarily due to the
realization of the previously recorded unrealized loss related to Tangent
Solutions, Inc., (formerly named Electronic Business Systems, Inc., and
Triangle Imaging Group, Inc.). The realization was due to a bankruptcy
ruling. The increase in unrealized appreciation on investments, net of
taxes, of $1,331,000 for the three months ended September 30, 2001, was
due to a combination of the reversal of unrealized depreciation related
to Tangent Solutions, Inc., and the recognition of $540,000 of unrealized
appreciation related to The Netplex Group, Inc., investment.
The net increase in stockholders' equity resulting from operations of
$655,000 for the three months ended September 30, 2001, or $0.41 per
share compared favorably to a decrease of $328,000 or $0.21 per share for
the comparable period ended September 30, 2000.
. Financial Condition, Liquidity And Capital Resources
At September 30, 2001, the Company's investment portfolio totaled $33.5
million compared with the $33.7 million reported at June 30, 2001. For
the three months ended September 30, 2001, the Company funded $280,000 in
investments and received proceeds from sales of investments of $929,000.
For the comparable three months ended September 30, 2000, the Company
funded $2,083,000 in new investments.
Net asset value per common share increased to $8.00 per share at
September 30, 2001, from $7.59 per share reported at June 30, 2001.
During the three months ended September 30, 2001, net cash used in
operating activities was $358,000 compared to the $381,000 used during
the three months ended September 30, 2000. Cash provided by investing
activities was $674,000 during the three months ended September 30, 2001
as compared to the $1,612,000 used in investing activities for three
months ended September 30, 2000. There were no cash flows provided by
financing activities for the three months ended September 30, 2001,
compared to the $1,936,000 provided during the three months ended
September 30, 2000. The cash was provided by debenture borrowings from
the SBA during the three months ended September 30, 2000, necessary to
finance new investments. The cash provided by financing activities was
partially offset by repayments on the Company's lines of credit.
. Events of September 11, 2001
The Company does not have any investments in companies directly affected
by the tragic events of September 11, 2001. The Company does not believe
that it is possible to assess the indirect effects that these events may
have on its portfolio companies. As a result, the Company cannot offer
any assurance that direct or indirect consequences of these events will
not have an adverse impact on the Company's financial position or results
of operations or on the valuation of its portfolio investments.
15
. Quantitative and Qualitative Disclosure About Market Risk
The Company's business activities contain elements of risk. The Company
considers the principal types of market risk to be: risk of lending and
investing in small privately owned companies, valuation risk of
portfolio, risk of illiquidity of portfolio investments and the
competitive market for investment opportunities. The Company considers
the management of risk essential to conducting its business and to
maintaining profitability. Accordingly, the Company's risk management
systems and procedures are designed to identify and analyze the Company's
risks, to set appropriate policies and limits and to continually monitor
these risks and limits by means of reliable administrative and
information systems and other policies and programs.
The Company manages its market risk by maintaining a portfolio of
investments that is diverse by industry, geographic area, size of
individual investment and borrower. The Company is exposed to a degree
of risk of public market price fluctuations as three of the Company's
thirty investments are in thinly traded, small public companies, whose
stock prices have been volatile. The other twenty-seven 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 based on estimates made by
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 investments of $33.5 million at September 30, 2001, would
have resulted in unrealized gains or losses and would have changed net
increase in stockholders' equity resulting from operations for the
quarter by $335,000.
The Company's sensitivity to changes in interest rates is regularly
monitored and analyzed by measuring the characteristics of assets and
liabilities. The Company utilizes various methods to assess interest
rate risk in terms of the potential effect of interest income net of
interest expense, the market value of net assets and the value at risk in
an effort to ensure that the Company is insulated from any significant
adverse effects from changes in interest rates. Based on the model used
for the sensitivity of interest income net of interest expense, if the
balance sheet were to remain constant and no actions were taken to alter
the existing interest rate sensitivity, a hypothetical 100 basis point
change in interest rates would have a negligible effect on the net
increase in stockholders' equity resulting from operations over a three-
month horizon. Although management believes that this measure is
indicative of the Company's sensitivity to interest rate changes, it does
not adjust for potential changes in credit quality, size and composition
of the balance sheet and other business developments that could affect
operating results. Accordingly, no assurances can be given that actual
results would not differ materially from the potential outcome simulated
by this estimate.
16
. 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,
its available capital resources, including SBA leverage, 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.
When the Company used words such as "believes," "expects," "anticipates,"
"intends," "plans," "estimates," "should," "likely," or similar
expressions, the Company is making a forward-looking statement. It is
possible that the assumptions made by management - including, but not
limited to, the average maturity of our investments, the potential to
realize investment gains as these investments mature, investment
opportunities, results, performance or expectations - may not
materialize. Actual results may differ materially from those projected
or implied in any forward-looking statements. In addition to the above
factors, other important factors that may affect the company's
performance include: the risks associated with the performance of the
Company's portfolio companies, dependencies on key employees, interest
rates, the level of economic activity, and competition, as well as other
risks described from time to time in the Company's filings with the
Securities Exchange Commission, press releases, and other communications.
The Company disclaims any intent or obligation to update these forward-
looking statements, whether as a result of new information, future
events, or otherwise.
17
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 13th day of November 2001.
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