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, 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 March 31, 2001, the registrant had issued and outstanding
1,581,430 shares of Common Stock, $1.00 par value.
WATERSIDE CAPITAL CORPORATION
FORM 10-Q
Table of Contents
Page
Number
------
PART I. FINANCIAL INFORMATION:
ITEM 1. Balance Sheets as of June 30, 2000 and
March 31, 2001 (unaudited) 2
Statements of Operations for the Three Months and
Nine Months Ended March 31, 2000 and 2001 (unaudited) 3
Statement of Changes in Stockholders' Equity for the
Nine Months Ended March 31, 2000 and 2001 (unaudited) 4
Statements of Cash Flows for the Nine Months Ended
March 31, 2000 and 2001 (unaudited) 5
Notes to Financial Statements (unaudited) 6
ITEM 2. Management's Discussion and Analysis of Financial 13
Condition and Results of Operations
PART II. OTHER INFORMATION 17
SIGNATURES 18
WATERSIDE CAPITAL CORPORATION
Balance Sheets
June 30, 2000 and March 31, 2001
--------------------------------------------------------------------------------
June 30, March 31,
2000 2001
---- ----
(unaudited)
Assets:
Investments in portfolio companies, at fair value (note 3):
Equity securities $ 23,237,050 $ 22,837,090
Debt securities 8,877,766 7,917,438
Options and warrants 3,752,744 4,436,722
------------ ------------
Total investments, cost of $37,826,396 and $42,037,060
at June 30, 2000 and March 31, 2001, respectively 35,867,560 35,191,250
------------ ------------
Current assets:
Cash and cash equivalents 118,314 291,840
Dividends receivable 654,767 787,873
Interest receivable 222,517 94,202
Note receivable 237,550 237,550
Refundable income taxes 323,322 -
Prepaid expenses and other current assets 140,403 189,785
------------ ------------
Total current assets 1,696,873 1,601,250
Property and equipment, net 167,919 139,371
Deferred income taxes, net of valuation allowance of $1,689,000 at
March 31, 2001 650,000 1,232,000
Deferred financing costs, net 716,391 868,744
------------ ------------
Total assets $ 39,098,743 $ 39,032,615
============= =============
Liabilities and Stockholders' Equity:
Current liabilities:
Lines of credit $ 2,200,000 $ -
Accounts payable 31,310 136,204
Accrued expenses 733,042 283,809
------------ ------------
Total current liabilities 2,964,352 420,013
Debentures payable (note 4) 19,300,000 25,400,000
------------ ------------
Total liabilities 22,264,352 25,820,013
------------ ------------
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 (1,216,357) (5,935,330)
Undistributed accumulated earnings 1,850,599 2,947,783
------------ ------------
Total stockholders' equity 16,834,391 13,212,602
Commitments and contingencies
------------ ------------
Total liabilities and stockholders' equity $ 39,098,743 $ 39,032,615
============= =============
Net asset value per common share $ 10.65 $ 8.35
============= =============
See accompanying notes to financial statements.
2
WATERSIDE CAPITAL CORPORATION
Unaudited Statements of Operations
Three months and nine months ended March 31, 2000 and 2001
--------------------------------------------------------------------------------
Three Months ended Nine Months ended
March 31, March 31,
--------------------------- ----------------------------
2000 2001 2000 2001
---------- ------------ ---------- ------------
Operating income:
Dividends $ 676,760 $ 736,577 $ 1,717,036 $ 2,096,483
Interest on debt securities 313,819 301,112 707,452 759,775
Interest on cash equivalents 1,608 1,176 31,297 9,408
Fee and other income 222,649 110,203 579,149 315,430
---------- ------------ ---------- ------------
Total operating income 1,214,836 1,149,068 3,034,934 3,181,096
---------- ------------ ---------- ------------
Operating expenses:
Salaries and benefits 262,971 243,906 691,690 699,279
Legal and accounting 39,480 71,100 113,480 165,581
Interest expense 340,334 497,224 833,604 1,454,883
Other operating expenses 124,489 108,447 328,057 295,626
---------- ------------ ---------- ------------
Total operating expenses 767,274 920,677 1,966,831 2,615,369
---------- ------------ ---------- ------------
Net operating income before income taxes 447,562 228,391 1,068,103 565,727
Income tax benefit (56,000) (146,000) (185,000) (465,000)
---------- ------------ ---------- ------------
Net operating income 503,562 374,391 1,253,103 1,030,727
Realized gain on investments, net of income taxes of $469,000
and $40,000 for the three months ended March 31, 2000 and
2001, respectively, and $1,075,000 and $40,000 for the nine
months ended March 31, 2000 and 2001, respectively 765,821 66,457 1,751,974 66,457
Change in unrealized appreciation (depreciation) on investments,
net of income tax expense (benefit) of $(44,000) and $106,000
for the three months ended March 31, 2000 and 2001,
respectively, and $432,000 and $(168,000) for the nine months
ended March 31, 2000 and 2001, respectively (73,897) (2,639,937) 703,754 (4,718,973)
---------- ------------ ---------- ------------
Net increase (decrease) in stockholders' equity
resulting from operations $1,195,486 $ (2,199,089) $3,708,831 $ (3,621,789)
========== ============ ========== ============
Net increase (decrease) in stockholders' equity resulting from
operations per share - basic (note 5) $ 0.76 $ (1.39) $ 2.35 $ (2.29)
========== ============ ========== ============
Net increase (decrease) in stockholders' equity resulting from
operations per share - diluted (note 5) $ 0.75 $ (1.39) $ 2.34 $ (2.29)
========== ============ ========== ============
See accompanying notes to financial statements.
3
WATERSIDE CAPITAL CORPORATION
Unaudited Statements of Changes in Stockholders' Equity
Nine months ended March 31, 2000 and 2001
--------------------------------------------------------------------------------
Additional Net unrealized
Common stock paid-in appreciation
Shares Amount capital on investments
---------- ----------- ----------- -----------------
Balance at June 30, 1999 1,491,937 $ 1,491,937 $ 12,769,895 $ 298,434
6% stock dividend 89,493 89,493 648,824 -
Capitalization of undistributed accumulated earnings - - 1,200,000 -
Repayment of stockholders' notes receivable - - - -
Net operating income - - - -
Net realized gain on investments, net of income
taxes - - - -
Increase in net unrealized appreciation
on investments, net of income taxes - - - 703,754
---------- ------------ ------------ -----------
Balance at March 31, 2000 1,581,430 $ 1,581,430 $ 14,618,719 $ 1,002,188
========== ============ ============ ===========
Undistributed Stockholders' Total
accumulated notes stockholders'
earnings receivable equity
-------- ------------- ------------
Balance at June 30, 1999 $ 966,003 $ (1,455,000) $ 14,071,269
6% stock dividend (738,508) - (191)
Capitalization of undistributed accumulated earnings (1,200,000) - -
Repayment of stockholders' notes receivable - 1,455,000 1,455,000
Net operating income 1,253,103 - 1,253,103
Net realized gain on investments, net of income
taxes 1,751,974 - 1,751,974
Increase in net unrealized appreciation
on investments, net of income taxes - - 703,754
------------ ------------- --------------
Balance at March 31, 2000 $ 2,032,572 $ - $ 19,234,909
============ ============= ==============
Additional Net unrealized
Common stock paid-in depreciation
Shares Amount capital on investments
------ ------ ------- --------------
Balance at June 30, 2000 1,581,430 $ 1,581,430 $ 14,618,719 $ (1,216,357)
Net operating income - - - -
Net realized gain on investments, net of income
taxes - - - -
Increase in net unrealized depreciation on
investments, net of income taxes - - - (4,718,973)
---------- ------------ ------------- -------------
Balance at March 31, 2001 1,581,430 $ 1,581,430 $ 14,618,719 $ (5,935,330)
========== ============ ============= ==============
Undistributed Stockholders' Total
accumulated notes stockholders'
earnings receivable equity
-------- ---------- ------
Balance at June 30, 2000 $ 1,850,599 $ - $ 16,834,391
Net operating income 1,030,727 - 1,030,727
Net realized gain on investments, net of income
taxes 66,457 - 66,457
Increase in net unrealized depreciation on
investments, net of income taxes - - (4,718,973)
------------- -------- -------------
Balance at March 31, 2001 $ 2,947,783 $ - $ 13,212,602
============= ======== =============
See accompanying notes to financial statements.
4
WATERSIDE CAPITAL CORPORATION
Unaudited Statements of Cash Flows
Nine months ended March 31, 2000 and 2001
--------------------------------------------------------------------------------
2000 2001
---- ----
Cash flows from operating activities:
Net increase (decrease) in stockholders' equity resulting from operations $ 3,708,831 $ (3,621,789)
Adjustments to reconcile net increase (decrease) in stockholders' equity
resulting from operations to net cash provided by operating activities:
Change in unrealized appreciation/depreciation
on investments (1,135,754) 4,886,973
Realized gain on investments (2,826,974) (106,457)
Accretion of preferred stock and loan investments (254,333) (412,775)
Depreciation and amortization 51,369 73,474
Deferred income tax expense (benefit) 466,000 (582,000)
Loss on disposal of property and equipment 828 -
Changes in assets and liabilities increasing (decreasing) cash
flows from operating activities:
Dividends receivable (448,130) (133,106)
Interest receivable (14,002) 128,315
Refundable income taxes 43,322 323,322
Prepaid expenses and other current assets (54,917) (49,382)
Other assets - (935)
Accounts payable and accrued expenses (112,990) (344,339)
Deferred revenue (110,631) -
Income taxes payable 92,678 -
---------- ----------
Net cash provided by (used in) operating activities (594,703) 161,301
---------- ----------
Cash flows from investing activities:
Investments in equity securities made (8,618,225) (2,495,113)
Investments in debt securities made (4,764,786) (3,291,249)
Principal collected on debt securities 1,190,585 2,094,931
Proceeds from repayment of stockholders' notes receivable 1,455,000 -
Proceeds from sales of investments 3,615,927 -
Acquisition of property and equipment (13,254) (3,844)
Proceeds from sale of property and equipment 2,000 -
---------- ----------
Net cash used in investing activities (7,132,753) (3,695,275)
---------- ----------
Cash flows from financing activities:
Proceeds from (payments on) lines of credit 353,000 (2,200,000)
Proceeds from debentures payable 7,000,000 6,100,000
Payments in lieu of fractional shares associated with stock dividend (191) -
Payment of deferred financing costs (175,000) (192,500)
---------- ----------
Net cash provided by financing activities 7,177,809 3,707,500
---------- ----------
Net increase (decrease) in cash and cash equivalents (549,647) 173,526
Cash and cash equivalents, beginning of period 1,269,409 118,314
---------- ----------
Cash and cash equivalents, end of period $ 719,762 $ 291,840
============ ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 907,375 $1,735,867
============ ===========
Cash paid during the period for income taxes $ 720,000 $ -
============ ===========
See accompanying notes to financial statements.
5
WATERSIDE CAPITAL CORPORATION
Notes to Financial Statements
June 30, 2000 and March 31, 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, 2000, 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.
6
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 March 31, 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
$35,867,560 and $35,191,250 at June 30, 2000 and March 31, 2001 (91.7% and
90.2% of assets), respectively. The valuation process completed by
management includes estimates made by management and the Executive
Committee in the absence of readily ascertainable market values. These
estimated values may differ significantly from the values that would have
been used had a ready market for the securities existed, and those
differences could be material.
(4) Debentures Payable
During the third quarter of fiscal 2001, the Company has drawn an
additional $3,000,000 against the total available SBA debentures of
$10,000,000. The debentures bear interest at an interim rate of 6.602% and
mature on September 1, 2011. The interest rate will be fixed in September
2001.
7
WATERSIDE CAPITAL CORPORATION
Notes to Financial Statements
--------------------------------------------------------------------------------
(5) Net Increase (Decrease) in Stockholders' Equity Resulting from Operations
per Share
The following table sets forth the calculation of basic and diluted net
increase (decrease) in stockholders' equity resulting from operations per
share for the three months and nine months ended March 31, 2000 and 2001:
Three months ended Nine months ended
March 31, March 31,
------------------------ ----------------------
2000 2001 2000 2001
---------- ---------- ---------- ----------
Basic net increase (decrease) in
stockholders' equity resulting from
operations per share:
Net increase (decrease) in
stockholders' equity resulting
from operations $1,195,486 (2,199,089) 3,708,831 (3,621,789)
========== ========== ========== ==========
Weighted average number of
common shares outstanding 1,581,430 1,581,430 1,581,430 1,581,430
========== ========== ========== ==========
Basic net increase (decrease) in
stockholders' equity resulting from
operations per share $ 0.76 (1.39) 2.35 (2.29)
========== ========== ========== ==========
Diluted net increase (decrease) in
stockholders' equity resulting from
operations per share:
Net increase (decrease) in
stockholders' equity resulting
from operations $1,195,486 (2,199,089) 3,708,831 (3,621,789)
========== ========== ========== ==========
Weighted average number of
common shares outstanding 1,581,430 1,581,430 1,581,430 1,581,430
Dilutive effect of stock options
(as determined using the
treasury stock method) 2,236 - 5,676 -
---------- ---------- ---------- ----------
Adjusted weighted average
number of common shares
outstanding 1,583,666 1,581,430 1,587,106 1,581,430
========== ========== ========== ==========
Diluted net increase (decrease) in
stockholders' equity resulting from
operations per share $ 0.75 (1.39) 2.34 (2.29)
========== ========== ========== ==========
8
WATERSIDE CAPITAL CORPORATION
Schedule of Portfolio Investments
June 30, 2000 and March 31, 2001
--------------------------------------------------------------------------------
The Company's investment portfolio at June 30, 2000 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 $ 249,900 $ 156,310
Netplex Group, Inc. Common Stock (a) 66,400 464,800 129,281
Netplex Group, Inc. Preferred Stock 1,500,000 1,151,784 1,151,784
Electronic Business Systems, Inc. (formerly Triangle
Imaging Group, Inc.) Convertible Preferred Stock (b) (c) 700 2,046,004 1,346,004
Electronic Business Systems, Inc. (formerly Triangle
Imaging Group, Inc.) Common Stock (b) (c) 500,000 225,000 28,000
Electronic Business Systems, Inc. (formerly Triangle
Imaging Group, Inc.) Common Stock (b) (c) 1,423,821 60,484 60,484
Private Companies:
Real Time Data Management Services, Inc. Preferred Stock 300 286,859 463,500
Delta Education Systems, Inc. Preferred Stock 1,625 1,594,283 1,594,283
Diversified Telecom, Inc. Preferred Stock (c) 1,500 1,500,000 750,000
Crispies, Inc. Preferred Stock 400 398,320 398,320
Triangle Biomedical Sciences Preferred Stock 2,000 1,988,481 1,988,481
JMS Worldwide, Inc. Preferred Stock 1,500 1,500,000 1,500,000
EPM Development Systems Corp. Preferred Stock 1,500 1,492,847 1,492,847
Fire King International Preferred Stock 2,000 2,000,000 2,000,000
SECC (formerly MilleCom, Inc.) Common Stock 840,000 60 60
Eton Court Asset Management, Ltd. Preferred Stock 1,000 973,397 973,397
Fairfax Publishing Co., Inc. Preferred Stock 1,100 1,042,347 1,042,347
DigitalSquare.com Preferred Stock 1,210,739 1,513,425 1,513,425
Answernet, Inc. Preferred Stock 550 303,194 303,194
Answernet, Inc. Preferred Stock 700 376,926 376,926
ISR Solutions, Inc. Preferred Stock 500 497,407 497,407
Capital Markets Group, Inc. Preferred Stock 1,500 1,500,000 1,500,000
Jubilee Tech International, Inc. Convertible Preferred Stock 2,200,000 1,971,000 1,971,000
VentureCom, Inc. Preferred Stock 278,164 2,000,000 2,000,000
---------- ----------
Total equity securities 25,136,518 23,237,050
---------- ----------
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 7/22/03 900,000 900,000
Extraction Technologies of VA, LLC 8/31/04 202,316 202,316
Extraction Technologies of VA, LLC 11/2/04 373,711 373,711
Extraction Technologies of VA, LLC 2/7/05 263,742 263,742
Extraction Technologies of VA, LLC 2/25/05 97,409 97,409
Extraction Technologies of VA, LLC 3/14/05 95,584 95,584
JMS Worldwide, Inc. 7/31/03 950,000 950,000
Diversified Telecom, Inc. Demand 84,250 84,250
Diversified Telecom, Inc. 5/19/02 156,387 156,387
SECC (formerly MilleCom, Inc.) 3/31/04 900,000 900,000
SECC (formerly MilleCom, Inc.) 5/11/04 360,000 360,000
ISR Solutions, Inc. 6/30/04 742,167 742,167
Fire King International Demand 550,000 550,000
TABET Manufacturing Co., Inc. 12/31/04 283,230 283,230
National Assisted Living, LP 12/31/04 1,408,689 1,408,689
Electronic Business Systems, Inc. (formerly
Triangle Imaging Group, Inc.) (b) 1/31/05 424,931 424,931
New Dominion Pictures LLC 4/30/06 735,350 735,350
--------- ---------
Total debt securities 8,877,766 8,877,766
--------- ---------
9
WATERSIDE CAPITAL CORPORATION
Schedule of Portfolio Investments
June 30, 2000 and March 31, 2001 (Unaudited)
--------------------------------------------------------------------------------
Cost or
Number of Percentage contributed Fair market
Stock Options and Warrants: shares ownership value value
--------------------------- ----------- ---------- ------------- -------------
Publicly Traded Companies:
Avery Communications, Inc. 161,000 0.00 $ - $ -
Netplex Group, Inc. (a) 300,000 2.10 900,000 171,600
Electronic Business Systems, Inc. (formerly
Triangle Imaging Group, Inc.) (a) (b) 56,000 0.39 - -
Private Companies:
Real Time Data Management Services, Inc. 125 29.41 115,000 139,573
Delta Education Systems, Inc. 639 39.00 48,200 69,546
Diversified Telecom, Inc. 8,998 15.00 - -
Crispies, Inc. 524 6.37 2,800 3,235
Triangle Biomedical Sciences 50,743 11.70 127,449 127,449
Extraction Technologies of VA, LLC - 39.00 337,567 337,567
JMS Worldwide, Inc. 199 5.00 - -
EPM Development Systems Corp. 87 8.00 11,600 634,278
Fire King International 4 4.00 - -
SECC (formerly MilleCom, Inc.) 150,000 3.15 - -
Eton Court Asset Management, Ltd. 14,943 13.00 34,700 34,700
Fairfax Publishing Co., Inc. 526 16.50 73,600 73,600
ISR Solutions, Inc. 550,973 7.20 12,936 12,936
DigitalSquare.com 81,074 5.70 - -
Answernet, Inc. 69,837 17.64 268,615 268,615
TABET Manufacturing Co., Inc. 500,000 20.00 175,400 175,400
National Assisted Living, LP - 15.00 667,000 667,000
Capital Markets Group, Inc. 2,294,118 15.00 - -
Jubilee Tech International, Inc. 400,000 1.60 240,000 240,000
Signius Investment Corporation 12 11.67 332,595 332,595
VentureCom, Inc. 38,943 0.37 - -
New Dominion Pictures LLC - 9.00 464,650 464,650
----------- -----------
Total options and warrants 3,812,112 3,752,744
----------- -----------
Total investments $37,826,396 $35,867,560
=========== ===========
The Company's investment portfolio at March 31, 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 $ 99,470
Avery Communications, Inc. Common Stock (a) 190,167 95,084 65,608
Avery Communications, Inc. Preferred Stock 1,250,000 1,250,000 1,250,000
Netplex Group, Inc. Common Stock 66,400 464,800 9,960
Netplex Group, Inc. Preferred Stock 1,500,000 1,297,417 1,297,417
Electronic Business Systems, Inc. (formerly Triangle
Imaging Group, Inc.) Convertible Preferred Stock (b) (c) 700 2,046,004 100,000
Electronic Business Systems, Inc. (formerly Triangle
Imaging Group, Inc.) Common Stock (b) (c) 500,000 225,000 -
Electronic Business Systems, Inc. (formerly Triangle
Imaging Group, Inc.) Common Stock (b) (c) 1,423,821 60,484 -
Primal Solutions, Inc. Common Stock 715,167 14,303 14,303
10
WATERSIDE CAPITAL CORPORATION
Schedule of Portfolio Investments
June 30, 2000 and March 31, 2001 (Unaudited)
--------------------------------------------------------------------------------
Cost or
Number of contributed Fair market
shares value value
---------- ---------- ----------
Private Companies:
Real Time Data Management Services, Inc. Preferred Stock 300 $ 294,251 $ 499,705
Delta Education Systems, Inc. Preferred Stock 1,625 1,601,513 1,601,513
Diversified Telecom, Inc. Preferred Stock (c) 1,500 1,500,000 750,000
Crispies, Inc. Preferred Stock 400 398,740 398,740
Triangle Biomedical Sciences Preferred Stock 2,100 2,107,597 2,107,597
JMS Worldwide, Inc. Preferred Stock 1,500 1,500,000 1,500,000
EPM Development Systems Corp. Preferred Stock 1,500 1,494,587 1,494,587
Fire King International Preferred Stock 2,000 2,000,000 2,000,000
SECC (formerly MilleCom, Inc.) Common Stock 840,000 60 60
Eton Court Asset Management, Ltd. Preferred Stock 1,000 978,602 978,602
Fairfax Publishing Co., Inc. Preferred Stock 1,100 1,655,905 1,655,905
DigitalSquare.com Convertible Preferred Stock 1,210,739 1,513,425 1,513,425
Answernet, Inc. Preferred Stock 550 326,886 326,886
Answernet, Inc. Preferred Stock 700 402,425 402,425
ISR Solutions, Inc. Preferred Stock 500 497,848 497,848
Capital Markets Group, Inc. Preferred Stock 1,500 1,500,000 -
Jubilee Tech International, Inc. Convertible Preferred Stock 2,200,000 1,997,865 1,997,865
VentureCom, Inc. Preferred Stock 278,164 2,000,000 2,000,000
Phoenix Fabrications, Inc. Preferred Stock 400 275,146 275,146
AmeriComm Direct Marketing LLC Preferred Stock 27,696 28 28
---------- ----------
Total equity securities 27,733,567 22,837,090
---------- ----------
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) 7/22/03 900,000 104,011
Extraction Technologies of VA, LLC (c) (d) 8/31/04 202,316 23,979
Extraction Technologies of VA, LLC (c) (d) 11/2/04 373,711 43,760
Extraction Technologies of VA, LLC (c) (d) 2/7/05 263,742 31,155
Extraction Technologies of VA, LLC (c) (d) 2/25/05 97,409 11,026
Extraction Technologies of VA, LLC (c) (d) 3/14/05 95,584 11,069
JMS Worldwide, Inc. 7/31/03 900,000 900,000
Diversified Telecom, Inc. Demand 84,250 84,250
Diversified Telecom, Inc. 5/19/02 156,387 156,387
ISR Solutions, Inc. 6/30/04 743,667 743,667
Fire King International Demand 550,000 550,000
TABET Manufacturing Co., Inc. 12/31/04 298,666 298,666
National Assisted Living, LP 12/31/04 1,489,961 1,489,961
New Dominion Pictures LLC 4/30/06 770,592 770,592
Mayfair Enterprises, Inc. 7/18/05 240,443 240,443
DigitalSquare.com 9/15/05 289,250 289,250
Phoenix Fabrications, Inc. 9/8/05 343,933 343,933
Kotarides Baking Co. of VA 6/5/01 571,576 571,576
AmeriComm Direct Marketing LLC 12/29/05 750,000 750,000
Triangle Biomedical Sciences 12/8/01 153,713 153,713
---------- ----------
Total debt securities 9,625,200 7,917,438
---------- ----------
11
WATERSIDE CAPITAL CORPORATION
Schedule of Portfolio Investments
June 30, 2000 and March 31, 2001
Cost or
Number of Percentage contributed Fair market
Stock Options and Warrants: shares ownership value value
--------------------------- ------ --------- ----- -----
Publicly Traded Companies:
Netplex Group, Inc. (a) 300,000 2.10 $ 900,000 $ -
Electronic Business Systems, Inc. (formerly
Triangle Imaging Group, 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 3,235
Triangle Biomedical Sciences 632,916 12.20 171,967 171,967
Extraction Technologies of VA, LLC (d) - 39.00 337,567 -
JMS Worldwide, Inc. 199 5.00 - -
EPM Development Systems Corp. 87 8.00 11,600 634,278
Fire King International 4 4.00 - -
SECC (formerly MilleCom, Inc.) 150,000 3.15 - -
Eton Court Asset Management, Ltd. 14,943 13.00 34,700 34,700
Fairfax Publishing Co., Inc. 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 - 15.00 667,000 667,000
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 11.67 332,595 332,595
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 4,678,293 4,436,722
------------ ------------
Total investments $ 42,037,060 $ 35,191,250
============ ============
(a) Rule 144A restricted securities.
(b) This entity, which is considered an affiliate of the Company, 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.
12
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
o General
Waterside Capital Corporation ("Waterside" or the "Company") is a
specialty finance company 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.
o Results of Operations
Comparison of Three Months Ended March 31, 2001 and March 31, 2000
For the three months ended March 31, 2001, total operating income was
$1,149,000 compared to $1,215,000 reported during the same period of
2000. The decrease in operating income is due to a reduction in fee
income due to the origination of fewer investments during the quarter.
The March 31, 2001 quarterly operating income consisted of dividends of
$737,000, interest on debt securities of $301,000, fee income of $110,000
and interest on cash equivalents of $1,000.
Total operating expenses for the three months ended March 31, 2001, were
$921,000, consisting of interest expense of $497,000, salaries and
benefits of $244,000, legal and accounting expense of $71,000, and other
operating expenses of $109,000. These expenses compared to the $767,000
for the three months ended March 31, 2000, consisting of interest expense
of $340,000, salaries and benefits of $263,000, legal and accounting
expenses of $39,000, and other operating expenses of $125,000. The
significant increase in interest expense for the quarter ended March 31,
2001, compared to the quarter ended March 31, 2000 is due to the
increased borrowings made to fund the Company's investment portfolio.
Net operating income of $374,000 for the three months ended March 31,
2001, compared to the $504,000 reported for the three months ended March
31, 2000.
The realized gain on investments of $766,000 for the three months ended
March 31, 2000, was due to an after tax gain on the Company's holdings in
the publicly traded investment The Netplex Group. The increase in
unrealized depreciation on investments net of taxes of $2,640,000 for the
13
three months ended March 31, 2001 is primarily due to an additional write
down of a portfolio company (Extraction Technologies of Virginia) that
filed for bankruptcy protection under Chapter 11 of the U. S. Bankruptcy
Code in order to restructure contractual and debt obligations. The
remainder of the increase in unrealized depreciation for the three months
ended March 31, 2001 is attributable to the write down of $1.5 million
related to Capital Markets Group, Inc. due to its deteriorating financial
condition.
The net increase (decrease) in stockholders' equity resulting from
operations was a decrease of $2,199,000 or $1.39 per share for the
quarter ended March 31, 2001, compared to an increase of $1,195,000 or
$0.75 per share on a fully diluted basis, for the comparable period ended
March 31, 2000.
Comparison of Nine Months Ended March 31, 2001 and March 31, 2000
For the nine months ended March 31, 2001, total operating income was
$3,181,000 compared to $3,035,000 reported during the same period of
2000. The increase in operating income is due to the increase in
interest and dividend income as a result of the growth in the Company's
investment portfolio as compared to 2000, partially offset by the
reduction in fee income due to the origination of fewer investments
during the most recent nine-month period. The March 31, 2001 year-to-
date operating income consisted of dividends of $2,097,000, interest on
debt securities of $760,000, fee income of $315,000, and interest on cash
equivalents of $9,000.
Total operating expenses for the nine months ended March 31, 2001 were
$2,615,000, consisting of interest expense of $1,455,000, salaries and
benefits of $699,000, legal and accounting expense of $165,000, and other
operating expenses of $296,000. These expenses compared to the
$1,967,000 for the nine months ended March 31, 2000, consisting of
interest expense of $834,000, salaries and benefits of $692,000, legal
and accounting expenses of $113,000, and other operating expenses of
$328,000. The significant increase in interest expense for the nine
months ended March 31, 2001, compared to the nine months ended March 31,
2000 is due to the increased borrowings made to fund the growth in the
company's investment portfolio. For the nine months ended March 31,
2001, net operating income was $1,031,000 or $0.65 per share compared to
the $1,253,000 or $0.79 per share reported for the same nine-month period
of the previous fiscal year.
During the nine months ended March 31, 2000, Waterside realized an
aftertax gain of $1.8 million on its holdings in The Netplex Group. In
addition, Waterside had an increase in after tax unrealized gains on
investments of $0.7 million, primarily due to increases in the fair
values of its publicly traded investments. Net of taxes, total realized
and unrealized gains on investments added $2.5 million to total income
during the nine months ended March 31, 2000.
During the nine months ended March 31, 2001, Waterside recorded an
aftertax unrealized depreciation in the fair value of its investments of
$4.7 million, primarily due to the deteriorating financial condition of
three portfolio companies, two of which filed for bankruptcy protection
under Chapter 11 of the US Bankruptcy Code. The write downs for the
companies in bankruptcy were $1.3 million for Electronic Business
Systems, Inc., and $2.0 million for Extraction Technologies of Virginia,
LLC, with an additional write down of $1.5 million for Capital Markets
Group, Inc. In addition, during the nine months ended March 31, 2001,
the Company recorded a valuation allowance of $1,689,000 on its deferred
tax assets due to greater uncertainty as to the realization of these tax
benefits.
Stockholders' equity resulting from operations decreased $3,622,000 or
$2.29 per share for the March 31, 2001 nine-month period, compared to an
increase of $3,709,000 or $2.34 per share on a fully diluted basis, for
the comparable period ended March 31, 2000.
14
o Financial Condition, Liquidity And Capital Resources
At March 31, 2001 the Company's Investment portfolio totaled $35.2
million compared with the $35.9 million reported at June 30, 2000. For
the nine months ended March 31, 2001 the Company funded $5.8 million in
investments compared to the $13.4 million funded during the comparable
nine months of 2000. To fund these new investments, the company borrowed
$6.1 million from the SBA during the nine months ended March 31, 2001.
Net asset value per common share decreased to $8.35 per share at March
31, 2001, from $10.65 per share at June 30, 2000. This reduction in net
asset value is a result of the investment write downs previously
discussed.
During the nine months ended March 31, 2001, net cash provided by
operating activities was $161,000 as compared to the $595,000 used during
the nine months ended March 31, 2000. Refunded income taxes of $323,000
contributed significantly to the cash provided during the nine months
ended March 31, 2001. The Company used $3.7 million in investing
activities during the nine months ended March 31, 2001 as compared to the
$7.1 million used in investing activities for the nine months ended March
31, 2000, primarily due to the reduction in investment origination as
described above, partially offset by proceeds from sale of investments
and repayment of loans. Cash flows provided by financing activities for
the nine months ended March 31, 2001 were $3.7 million compared to the
$7.2 million provided during the nine months ended March 31, 2000. The
increases relate to net borrowings in 2000 as compared to 2001 to finance
investment origination.
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: 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.
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 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 four of the Company's
thirty investments are in thinly traded, small public companies, whose
stock prices have been volatile. The other twenty-six 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
securities of $35.2 million at March 31, 2001, 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
15
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 affected net increase in
stockholders' equity resulting from operations significantly 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
net income. Accordingly, no assurances can be given that actual results
would not differ materially from the potential outcome simulated by this
estimate.
o Forward-Looking Statements
Included in this report and other written and oral information by
management from time to time, including reports to shareholders,
quarterly and semi-annual shareholder letters, filings with the
Commission, news releases and investor presentations, are forward-looking
statements about business objectives and strategies, market potential,
the Company's ability to expand the geographic scope of its investments,
the quality of the Company's due diligence efforts, its financing plans,
its vendors, suppliers, and portfolio companies, future financial
performance and other matters that reflect management's expectations as
of the date made.
Except for historical information, all of the statements, expectations
and assumptions contained in the foregoing are "forward-looking
statements" (within the meaning of the Private Securities Litigation
Reform Act of 1995) that involve a number of risks and uncertainties. It
is possible that the assumptions made by management - including, but not
limited to, the average maturity of our investments, the potential to
realize investment gains as these investments mature, investment
opportunities, 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.
16