WATERSIDE CAPITAL CORPORATION
1998 ANNUAL REPORT
<PAGE>
TABLE OF CONTENTS
LETTER TO STOCKHOLDERS .................. 1
SUMMARY OF FINANCIAL INFORMATION ........ 2
MANAGEMENT'S DISCUSSION AND ANALYSIS .... 3
INDEPENDENT AUDITOR'S REPORT ............ 7
FINANCIAL STATEMENTS .................... 8
DIRECTORS AND OFFICERS .................. 22
SHAREHOLDER INFORMATION ................. 23
<PAGE>
LETTER TO STOCKHOLDERS
Fiscal 1998 marked the true beginning for Waterside Capital Corporation. We
successfully completed our initial public offering in February 1998 during a
very difficult IPO market. As a result of the IPO, we are very excited to be a
NASDAQ Stock Market listed company under the trading symbol WSCC.
With our emphasis on future growth, we added several professionals to our staff
during the year with diverse business and financial expertise. We added three
Business Development Officers: Robert P. Louthan, Michael C. Huffman, and Lex
W. Troutman with significant experience in venture capital funds, investment
banking, and commercial bank lending. These three individuals will be the
drivers of our growth strategy. We also added Gerald T. McDonald as Chief
Financial Officer, who brings years of experience to the financial management
of the company. In addition to the enhancement in our management team, we have
expanded our geographic scope from Norfolk by opening additional production
offices in Richmond, Virginia and Charlotte, North Carolina. With these
locations, we are strategically located to target investment opportunities in
the Mid-Atlantic region.
We are a specialty finance company that invests in equity and debt securities
of small businesses primarily to finance their growth and expansion. We
evaluate potential investments for quality through a due diligence process that
assesses traditional criteria such as profit history, cash flow, debt service
coverage, and collateral. As a Small Business Investment Corporation (SBIC)
which primarily invests in equity securities, our due diligence also includes a
thorough evaluation of the prospect's products, the market size, the growth
potential, a thorough review of management abilities and experience, and an
exit strategy. With the additional capital raised through the IPO, our typical
investment is now structured as a preferred stock security generally ranging in
size from $500,000 to $1,500,000.
The Company's financial performance for the year ended June 30, 1998 reflects
our continuing expansion. We originated $6.5 million in new financings compared
to $1.5 million the previous year. The net increase in stockholders' equity
resulting from operations of $543 thousand was 98% greater than the $274
thousand reported for the prior year. On a per share basis, the net increase in
stockholders'equity resulting from operations was $.60 for 1998 and $.49 for
1997, after reporting a 62% increase in the weighted average number of shares
outstanding due to the IPO.
Our accomplishments in 1998 have allowed us to build the foundation for a
growing investment company that provides growth-capital to small businesses.
Maximizing shareholder value is the guiding principle for all we do in managing
and operating your company. We thank our shareholders, portfolio companies, and
business associates for their continued interest in being actively and
enthusiastically involved with us.
J. Alan Lindauer
PRESIDENT AND CEO
1
<PAGE>
SUMMARY OF FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
INCEPTION (JULY 13, 1993) --------------------------------------------
TO JUNE 30, 1995(1) 1996(1) 1997 1998
-------------------------- ----------- ----------- ----------------
<S> <C> <C> <C> <C>
SUMMARY OF EARNINGS INFORMATION
Operating income:
Interest on cash equivalents ................. $ 8,955 $ 42,262 $ 166,573 $ 211,440
Dividends .................................... -- -- 51,425 299,080
Interest on loans ............................ -- -- 9,430 24,290
Fee and other income ......................... -- 17,255 37,450 271,714
--------- -------- --------- ----------
Total operating income ...................... 8,955 59,517 264,878 806,524
Total operating expenses ....................... 36,025 59,777 214,667 635,519
--------- -------- --------- ----------
Net operating income (loss) before
income taxes ................................ (27,070) (260) 50,211 171,005
Income tax expense (benefit) .................... 1,880 (7,346) (12,370) (47,220)
--------- -------- --------- ----------
Net operating income (loss) .................. (28,950) 7,086 62,581 218,225
Change in unrealized appreciation on
investments, net of income taxes (2) ......... -- -- 211,700 325,110
--------- -------- --------- ----------
Net increase in stockholders' equity
resulting from operations ................... $ (28,950) 7,086 $ 274,281 $ 543,335
========= ======== ========= ==========
Net operating income (loss) per share -
basic and diluted ............................ -- -- .11 .24
Net increase in stockholders' equity
resulting from operations per share -
basic and diluted ............................ -- -- .49 .60
Weighted average number of shares
outstanding .................................. -- -- 562,117 910,587(3)
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------------------------
1996 1997 1998
------------ ------------- -------------------
<S> <C> <C> <C>
BALANCE SHEET INFORMATION:
Investments in portfolio companies, at fair value (4):
Equity securities .................................... $ -- $1,142,410 $ 6,724,337
Loans ................................................ -- -- 1,575,264
Warrants ............................................. -- 338,890 206,624
---------- ---------- -------------
Total investments ................................. -- 1,481,300 8,506,225
Cash and cash equivalents ............................. 3,595,766 2,329,148 4,393,501
Total assets ....................................... 3,655,018 3,963,648 13,374,729
Total stockholders' equity ......................... 3,512,636 3,856,417 13,034,288(3)
</TABLE>
- ---------
(1) Through June 30, 1996, the Company operated as a development stage
enterprise. The Company made its first portfolio investment during the
year ended June 30, 1997.
(2) Amounts have been presented net of deferred income tax expense of $129,600,
and $198,920, respectively, for the years ended June 30, 1997 and 1998.
(3) In January 1998, the Company completed an initial public offering of
852,000 shares of common stock at $11 per share. The net proceeds from the
offering, after $1,228,464 of expenses, were $8,083,536.
(4) The Company's portfolio investments are presented at fair value, as
determined by the Executive Committee of the Board of Directors, using the
Model Valuation Policy as published by the Small Business Administration
(SBA). The valuation policy includes estimates made by management in the
absence of readily ascertainable market values. These estimated values may
differ from those that would have been used had a ready market for the
securities existed. See the Notes to the Company's Financial Statement
included elsewhere herein. The cost of the portfolio investments was
$1,140,000 and $7,640,899 at June 30, 1997 and 1998, respectively.
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following analysis of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
fiscal year 1998 financial statements and the notes thereto and the other
information included elsewhere in this report. Because of the very limited
operating results and history of the Company there can be no assurance that the
Company's historical financial performance is indicative of its future results
of operations.
OVERVIEW
Waterside Capital Corporation ("Waterside" or the "Company") is a
specialty finance company headquartered in Norfolk, Virginia. The Company
invests in equity and debt securities to finance the growth, expansion, and
modernization of small private businesses, primarily in the Mid-Atlantic region.
The Company was formed in 1993 as the Eastern Virginia Small Business Investment
Corporation. Through June 30, 1996, the Company operated as a development stage
company focused primarily on preparation to commence operations. The Company was
licensed in 1996 by the Small Business Administration (SBA) as a small business
investment company (SBIC) under the Small Business Investment Act of 1958. In
October 1996, the Company made its first portfolio investment. In January 1998,
the Company completed its initial public offering (IPO) to raise additional
equity to support its growth strategy.
As an SBIC, Waterside's dividend income is not taxable; therefore, the
Company has chosen to make most of its investments in the form of preferred
stock, bearing annual dividends yielding between 12% and 14%. In addition to
investing in preferred stock, the Company also provides long-term loans at
similar rates. Many of the Company's equity and debt financings include
warrants to acquire common stock of the portfolio company. As an SBIC,
Waterside is eligible to borrow at relatively attractive rates from the SBA.
The majority of the Company's operating income is derived from dividend
and interest income on portfolio investments and interest earned on cash
equivalents. The remaining portion of the Company's operating income comes from
application and processing fees related to investment originations. The
Company's operating expenses primarily consist of payroll and other expenses
incidental to operations. Waterside currently has eight full time employees and
three offices from which it operates: Norfolk and Richmond, Virginia and
Charlotte, North Carolina.
THE PORTFOLIO
The Company's investment portfolio is currently comprised of preferred
stock (71%), loans (19%), common stock (8%), and common stock warrants (2%). The
blended yield rate on the preferred stock is approximately 12% (or 19% on a
fully taxable equivalent basis) while the blended yield rate on the loan
portfolio is approximately 16%. The Company's investments in small businesses
are expected to continue to be direct equity investments and secured and
unsecured loans, generally with warrants to purchase common stock. The Company's
investment objective is to earn income from preferred stock dividends, interest
on loans, as well as through the appreciation of its holdings in portfolio
companies through direct ownership or warrant appreciation. The Company
structures its various investments with an average life ranging from 5 to 7
years, at which time it is anticipated that the investment will mature and the
Company will realize its investment through various exit strategies.
At June 30, 1998, the Company had not realized any of its investments in
portfolio companies. Accordingly, its financial statements do not reflect any
realized gains or losses on these investments. It has, however, recognized net
unrealized appreciation on certain investments. Unrealized appreciation or
depreciation on investments results when the Company adjusts the value of its
investments, on a quarterly basis, to reflect management's estimate of current
fair value as determined by the Executive Committee of the Board of Directors
in accordance with the SBA's Model Valuation Policy. Any change in the fair
value of loans and equity investments is reflected in unrealized
appreciation/depreciation on investments, but has no impact on net operating
income.
RESULTS OF OPERATIONS
OPERATING INCOME
During the fiscal year ended June 30, 1998, the Company generated $807
thousand in operating income compared to the $265 thousand generated during the
fiscal year ended June 30, 1997. The largest component of the change in
operating income relates to an increase in dividends earned to $299 thousand in
fiscal 1998 from $51 thousand in fiscal 1997. Another
3
<PAGE>
component of the change in operating income related to the increase in fee
income, consisting of a combination of application and closings fees, to $272
thousand in fiscal 1998 from $37 thousand in fiscal 1997. The increases in
dividends and fee income were derived from the new investments and loans made
during fiscal year 1998 of $6.5 million as compared to $1.5 million for fiscal
year 1997. The remainder of the increase in operating income can be primarily
attributed to an increase in interest income from cash equivalents due to the
investment of proceeds from the IPO.
OPERATING EXPENSES.
Operating expenses for the year ended June 30, 1998 were $636 thousand as
compared to the $215 thousand reported for the year ended June 30, 1997. The
significant increase in expenses is a function of the growth of the Company
through increased investment activity and the related accompanying increases in
payroll, legal and accounting costs, and other general operating expenses. The
work force grew from three employees at June 30, 1997 to eight full time
equivalents at June 30, 1998. The increase in employees primarily consisted of
three additional business development officers necessary to sustain the
Company's growth strategy. The remaining two additional employees handle
administrative and financial management functions.
CHANGE IN UNREALIZED APPRECIATION ON INVESTMENTS.
The Company reported $325 thousand, net of taxes, of unrealized
appreciation on investments for the year ended June 30, 1998 as compared to the
$212 thousand reported for the year ended June 30, 1997. The increase can be
primarily attributed to the growth in value of a publicly traded portfolio
company, as well as appreciation measured by the sale of one of its investments
in July 1998.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has funded its operations and the growth
of its investment portfolio primarily through: (i.) the private placement of
equity securities, (ii.) its initial public offering effected February 3, 1998,
and (iii.) cash flows from operating activities.
The Company generated cash flow from operating activities of $125 thousand
in fiscal 1998 as compared to the $125 thousand used in 1997, primarily due to
the increase in operating income described above. Cash flows used in investing
activities increased to $6.0 million in fiscal 1998 from $1.2 million in fiscal
1997. The increase is primarily attributed to a $5.4 million increase in
investments and loans made, partially offset by a $540 thousand increase in
repayments of stockholder loans. Cash flows provided by financing activities
for the year ended June 30, 1998 were $8.0 million as compared to the $41
thousand for the comparable period in 1997, primarily due to the $8.1 million
raised in conjunction with the IPO.
During fiscal 1999, the Company expects to utilize the remainder of the
IPO proceeds to continue to grow its investment portfolio. In addition, in July
1998, the Company's investment in one of its portfolio companies was sold for
proceeds of approximately $1.0 million. On June 8, 1998, the Company was
granted approval to draw on its first tier of leverage from the SBA of $12.3
million. The Company intends to begin to draw on this leverage during the first
quarter of fiscal year 1999. Management believes that these sources of capital
will be sufficient to fund the Company's operations and grow its portfolio in
fiscal 1999.
THE YEAR 2000
The Company is in the process of identifying and addressing 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 early 1999. Due to the nature of the
Company's business, management does not expect a significant impact associated
with non information technology systems. Secondly, the Company is assessing its
key relationship with suppliers and other third parties, including its
commercial bank, to determine the potential impact of Year 2000. The
Company will continue to analyze this area in further detail in 1999. Finally,
the Company has begun an investigation of 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. The readiness of its portfolio
companies represents the Company's most significant risk with regards to the
Year 2000. Although the Company is currently unaware of any significant
4
<PAGE>
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 an
adverse impact on the Company's results of operations and financial position,
and this impact could be material. The Company plans to complete its initial
assessment of the readiness of its portfolio companies by the end of 1998.
Based upon its assessment, contingency plans will be developed to mitigate the
potential risks. Based on the assessment performed to date, the Company does
not believe that the cost of its Year 2000 remediation activities will be
material to its results of operations or financial position.
FORWARD LOOKING STATEMENTS
Included in this Report and other written and oral information presented
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
its geographic scope, the quality of the Company's due diligence efforts, its
financing plans, the impact of Year 2000 issues, 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.
5
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report ............................................................. 7
Financial Statements: ....................................................................
Balance Sheets as of June 30, 1997 and 1998 ............................................. 8
Statements of Operations for the years ended June 30, 1997 and 1998 ..................... 9
Statements of Changes in Stockholders' Equity for the years ended June 30, 1997 and 1998 10
Statements of Cash Flows for the years ended June 30, 1997 and 1998 ..................... 11
Notes to Financial Statements ........................................................... 12
</TABLE>
6
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE STOCKHOLDERS AND BOARD OF DIRECTORS
WATERSIDE CAPITAL CORPORATION:
We have audited the accompanying balance sheets of Waterside Capital
Corporation, including the schedule of portfolio investments, as of June 30,
1997 and 1998 and the related statements of operations, changes in
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Waterside Capital
Corporation as of June 30, 1997 and 1998, and the results of its operations and
cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Norfolk, Virginia
August 5, 1998
7
<PAGE>
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30
----------------------------------
1997 1998
--------------- ----------------
<S> <C> <C>
ASSETS:
Investments in portfolio companies, at fair value (note 2):
Equity securities ............................................... $ 1,142,410 $ 6,724,337
Loans ........................................................... -- 1,575,264
Warrants ........................................................ 338,890 206,624
------------ ------------
Total investments, cost of $1,140,000 and $7,640,893 at
June 30, 1997 and 1998, respectively ......................... 1,481,300 8,506,225
------------ ------------
Cash and cash equivalents (note 1) .............................. 2,329,148 4,393,501
Dividend receivable ............................................. 51,425 172,842
Interest receivable ............................................. 5,730 21,272
Refundable income taxes ......................................... 16,752 --
Prepaid expenses ................................................ -- 45,137
------------ ------------
TOTAL CURRENT ASSETS .......................................... 2,403,055 4,632,752
Property and equipment, net (note 4) ............................ 49,959 112,002
Other assets, net ............................................... 29,334 123,750
------------ ------------
TOTAL ASSETS .................................................. $ 3,963,648 $ 13,374,729
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Accounts payable ................................................ 931 15,616
Accrued expenses (note 5) ....................................... -- 66,825
------------ ------------
TOTAL CURRENT LIABILITIES ..................................... 931 82,441
Deferred income taxes (note 6) ................................... 106,300 258,000
------------ ------------
TOTAL LIABILITIES ............................................. 107,231 340,441
------------ ------------
STOCKHOLDERS' EQUITY (NOTE 8):
Common stock, $1 par value, 10,000,000 shares authorized, 568,900
issued and outstanding at June 30, 1997 and 1,420,900 shares
issued and outstanding at June 30, 1998 ....................... 568,900 1,420,900
Preferred stock, $1 par value, 25,000 shares authorized,
no shares issued and outstanding .............................. -- --
Additional paid-in capital ...................................... 5,041,100 12,272,636
Net unrealized appreciation on investments ...................... 211,700 536,810
Undistributed accumulated earnings .............................. 40,717 258,942
Stockholders' notes receivable (note 3) ......................... (2,006,000) (1,455,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY .................................... 3,856,417 13,034,288
Commitments, contingencies and subsequent events
(notes 2, 10, 11, 12, 14 and 15) ................................
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .................... $ 3,963,648 $ 13,374,729
============ ============
Net asset value per common share .............................. $ 6.78 $ 9.17
============ ============
</TABLE>
See accompanying notes to financial statements.
8
<PAGE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
JUNE 30,
--------------------------
1997 1998
------------ -----------
<S> <C> <C>
OPERATING INCOME:
Interest on loans ............................................................. $ 9,430 $ 24,290
Dividends ..................................................................... 51,425 299,080
Interest on cash equivalents .................................................. 166,573 211,440
Fee income .................................................................... 37,450 271,714
--------- ---------
TOTAL OPERATING INCOME ...................................................... 264,878 806,524
--------- ---------
OPERATING EXPENSES:
Management fees ............................................................... 52,000 39,000
Salary and benefits ........................................................... 41,965 326,261
Legal and accounting .......................................................... 41,128 90,592
Other operating expenses ...................................................... 79,574 179,666
--------- ---------
TOTAL OPERATING EXPENSES .................................................... 214,667 635,519
--------- ---------
Net operating income before income taxes .................................... 50,211 171,005
Income tax benefit (note 6) .................................................... (12,370) (47,220)
--------- ---------
NET OPERATING INCOME ........................................................ 62,581 218,225
Change in unrealized appreciation on investments, net of
provision for income taxes of $129,600 and $198,920
for 1997 and 1998, respectively ............................................... 211,700 325,110
--------- ---------
Net increase in stockholders' equity resulting from operations .............. $ 274,281 $ 543,335
========= =========
Net increase in stockholders' equity resulting from operations per share --
basic and diluted ............................................................. $ 0.49 $ 0.60
========= =========
</TABLE>
See accompanying notes to financial statements.
9
<PAGE>
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------------------------------
SHARES SHARES
------------------------ --------------------------
SUBSCRIBED AMOUNT ISSUED AMOUNT
------------ ----------- ------------ -------------
<S> <C> <C> <C> <C>
BALANCE JUNE 30, 1996 26,000 $ 26,000 537,400 $ 537,400
Common stock issued
pursuant to private
placement ................... (26,000) (26,000) 31,500 31,500
Repayment of
stockholders' notes
receivable .................. -- -- -- --
Net operating income ......... -- -- -- --
Increase in net unrealized
appreciation on
investments ................. -- -- -- --
------- --------- ------- ----------
BALANCE JUNE 30, 1997 ......... -- -- 568,900 568,900
Common stock issued
pursuant to initial
public offering ............. -- -- 852,000 852,000
Repayment of
stockholders' notes
receivable ..................
Net operating income ......... -- -- -- --
Increase in net unrealized
appreciation on
investments ................. -- -- -- --
------- --------- ------- ----------
BALANCE JUNE 30, 1998 ......... -- $ -- 1,420,900 $1,420,900
======= ========= ========= ==========
<CAPTION>
NET UNREALIZED UNDISTRIBUTED
ADDITIONAL APPRECIATION ACCUMULATED STOCKHOLDERS' TOTAL
PAID-IN ON EARNINGS NOTES STOCKHOLDERS'
CAPITAL INVESTMENTS (DEFICIT) RECEIVABLE EQUITY
-------------- ---------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE JUNE 30, 1996 $ 4,987,100 $ -- $ (21,864) $ (2,016,000) $ 3,512,636
Common stock issued
pursuant to private
placement ................... 54,000 -- -- -- 59,500
Repayment of
stockholders' notes
receivable .................. -- -- -- 10,000 10,000
Net operating income ......... -- -- 62,581 -- 62,581
Increase in net unrealized
appreciation on
investments ................. -- 211,700 -- -- 211,700
------------ -------- --------- ------------- -----------
BALANCE JUNE 30, 1997 ......... 5,041,100 211,700 40,717 (2,006,000) 3,856,417
Common stock issued
pursuant to initial
public offering ............. 7,231,536 -- -- -- 8,083,536
Repayment of
stockholders' notes
receivable .................. 551,000 551,000
Net operating income ......... -- -- 218,225 -- 218,225
Increase in net unrealized
appreciation on
investments ................. -- 325,110 -- -- 325,110
------------ -------- --------- ------------- -----------
BALANCE JUNE 30, 1998 ......... $ 12,272,636 $536,810 $ 258,942 $ (1,455,000) $13,034,288
============ ======== ========= ============= ===========
</TABLE>
See accompanying notes to financial statements.
10
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
JUNE 30,
---------------------------------
1997 1998
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in stockholders' equity resulting from operations ................. $ 274,281 $ 543,335
Adjustments to reconcile net income to net cash used in operating activities:
Increase in unrealized appreciation on investments ........................... (341,300) (524,030)
Depreciation and amortization ................................................ 15,346 38,634
Deferred income tax expense .................................................. 117,230 151,700
Changes in assets and liabilities increasing (decreasing) cash flows from
operating activities:
Dividend receivable ......................................................... (51,425) (121,417)
Interest receivable ......................................................... (5,730) (15,542)
Refundable income taxes ..................................................... (16,752) 16,752
Prepaid expenses ............................................................ -- (45,137)
Other assets ................................................................ (390) (750)
Accounts payable and accrued expenses ....................................... (114,058) 81,510
Income taxes payable ........................................................ (1,823) --
------------ ------------
Net cash provided by (used in) operating activities ........................ (124,621) 125,055
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans made ..................................................................... (400,000) (1,325,000)
Principal collected on loans made .............................................. 400,000 --
Investments made ............................................................... (1,140,000) (5,175,893)
Proceeds from repayment of stockholders' notes receivable ...................... 10,000 551,000
Acquisition of property and equipment .......................................... (52,997) (71,345)
------------ ------------
Net cash used in investing activities ...................................... (1,182,997) (6,021,238)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock ..................................... 59,500 8,083,536
Payment of deferred financing costs ............................................ -- (123,000)
Repayment of short term debt ................................................... (18,500) --
------------ ------------
Net cash provided by financing activities .................................. 41,000 7,960,536
------------ ------------
NET INCREASE (DECREASE) in cash and cash equivalents ............................ (1,266,618) 2,064,353
CASH AND CASH EQUIVALENTS, beginning of year .................................... 3,595,766 2,329,148
------------ ------------
CASH AND CASH EQUIVALENTS, end of year .......................................... $ 2,329,148 $ 4,393,501
============ ============
</TABLE>
See accompanying notes to financial statements.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Waterside Capital Corporation (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.
The Company operated as a development stage company through its fiscal
year ended June 30, 1996. The Company made its first loan to a small business
concern in October 1996 and its first equity investment in November 1996.
On March 21, 1994, the Company authorized the issuance of 1,000,000 shares
of its common stock in a private placement. As of June 30, 1996, the Company
closed the offering, ultimately issuing 568,900 shares of common stock, after
adjustment for the stock split described below, with aggregate net cash
proceeds of $3,594,000, after $79,000 of offering costs.
On July 28, 1995, the Company submitted its application to the SBA and on
May 14, 1996 was granted a license to operate as a SBIC.
On September 10, 1997, the Company authorized a common stock split of 100
to 1. This increased the authorized number of common shares to 10,000,000 and
the issued and outstanding common shares to 568,900.
In January 1998, the Company completed an Initial Public Offering ("IPO")
of 852,000 shares of common stock at a price of $11.00 per share. The net
proceeds, after $1,288,464 of offering costs, were $8,083,536.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid securities purchased with
insignificant interest rate risk and original maturities of three months or
less at the acquisition date to be cash equivalents. Cash and cash equivalents
consisted of the following at June 30, 1997 and 1998:
1997 1998
-------------- --------------
Cash ............................ $ 19,678 $ 193,501
Certificate of deposit .......... 100,000 --
Repurchase agreements ........... 2,209,470 4,200,000
----------- -----------
Total ..................... $ 2,329,148 $ 4,393,501
=========== ===========
The repurchase agreements reflected above consist of overnight agreements
collateralized by U.S. government securities. Due to the short-term nature of
the agreements, the securities are held for the Company by a bank.
INVESTMENT VALUATION
Investments are carried at fair value, as determined by the Executive
Committee of the Board of Directors. The Company, through its Board of
Directors, has adopted the Model Valuation Policy, as published by the SBA, in
Appendix III to Part 107 of Title 12 of the Code of Federal Regulations (the
"Policy"). The Policy, among other things, presumes that loans and investments
are acquired with the intent that they are to be held until maturity or
disposed of in the ordinary course of business. Except for interest-bearing
securities which are convertible into common stock, interest-bearing securities
are valued in an amount not greater than cost, with unrealized depreciation
being recognized when value is impaired. Equity securities of private companies
are presumed to represent cost unless the performance of the portfolio company,
positive or negative, indicates otherwise in accordance with the Policy
guidelines. The fair value of equity securities of publicly traded companies
are generally valued at their quoted market price discounted for the effect of
restrictions on the sale of such securities. Discounts range from 0% to 40%.
The Company maintains custody of its investments as permitted by the Investment
Company Act of 1940.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
REALIZED AND UNREALIZED GAIN OR LOSS ON INVESTMENTS
Realized gains or losses are recorded upon disposition of investments,
calculated on the difference between the proceeds and the cost basis determined
using the specific identification method. All other changes in the value of
investments, including any provision for losses, are included as changes in the
unrealized appreciation or depreciation in the statement of operations.
RECOGNITION OF INTEREST AND DIVIDEND INCOME
Interest income is recorded on the accrual basis. In the case of dividends
on preferred stock investments where the Company has an agreement stipulating
dividends payable, the Company accrues the dividends in income on a pro-rata
basis during the year. Otherwise, dividends are recorded as income on the
ex-dividend date.
FEE INCOME
Portfolio investment processing fees are recognized as income upon
consummation of the related investment transaction.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation and amortization of
property and equipment is calculated on the straight-line method over the
estimated useful lives of the assets ranging from 5 to 7 years. Property and
equipment held under leasehold improvements are amortized on a straight-line
basis over the shorter of the lease term or estimated useful life of the asset.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
OTHER ASSETS
At June 30, 1997, other assets consisted of organization and startup
costs. The Company adopted the provisions of Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities," as of July 1, 1997. The SOP
requires that costs incurred during start-up activities, including organization
costs, be expensed as incurred. The impact of the change of $29,334 has been
reflected in operating expenses for the year ended June 30, 1998 due to the
immateriality of the impact.
Other assets at June 30, 1998 consist primarily of a 1% processing fee
paid to the Small Business Administration (SBA) to secure debentures totaling
up to $12,300,000 for a ten year period. The Company plans to begin to draw
down available amounts in fiscal 1999. The processing fee will be amortized
over the life of the debentures using the effective interest method.
NET INCREASE IN SHAREHOLDERS' EQUITY RESULTING FROM OPERATIONS PER SHARE
As required, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 128, EARNINGS PER SHARE, for the year ended
June 30, 1998. Basic earnings per share as calculated in accordance with SFAS
No. 128 has been computed by dividing net increase in stockholders' equity
resulting from operations by the weighted average number of common shares
outstanding. Diluted earnings per share reflects the potential dilution that
could occur assuming the inclusion of common share equivalents and has been
computed by dividing net increase in stockholders' equity resulting from
operations by the weighted average number of common shares and common share
equivalents outstanding. Common share equivalents include all outstanding stock
options and warrants after applying the treasury stock method. All share and
per share data in the financial statements and the accompanying notes have been
retroactively adjusted to reflect the implementation of SFAS No. 128.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
STOCK OPTION PLAN
The Company accounts for stock options issued to employees and members of
the Board of Directors under the provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION,
which permits entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS No.
123 also allows entities to continue to apply the provisions of Accounting
Principles Board (APB) Opinion No. 25 and provide pro forma net income and pro
forma net income per common share disclosures for employee stock option grants
made in 1995 and future years as if the fair-value-based method defined in SFAS
No. 123 had been applied. The Company has elected to apply the provisions of
APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No.
123.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 financial statements
to conform to 1998 financial statement presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
EFFECT OF UNADOPTED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 130, REPORTING
COMPREHENSIVE INCOME, has been issued for fiscal years beginning after December
15, 1997 and requires restatement of earlier financial statements for
comparative purposes. SFAS No. 130 requires that changes in the amounts of
certain items, including gains and losses on certain securities, be shown in
the financial statements. The Company does not anticipate the adoption of SFAS
No. 130 to have a material effect on the Company's financial statements.
2. INVESTMENTS
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 $1,481,300 and $8,506,225 at
June 30, 1997 and 1998 (37.4% and 63.6% of assets), respectively. Investments
are recorded at fair value as determined by the Executive Committee of the
Board of Directors or by current market prices, if available, in accordance
with the Company's valuation policy. 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. See
schedule of portfolio investments.
3. STOCKHOLDERS' NOTES RECEIVABLE
In connection with the Company's private placement, the Company sold
shares of common stock to accredited investors for 50% of the subscription
price paid in cash and the balance financed by a non-interest bearing demand
recourse promissory note. The Company holds the issued shares as collateral for
the note until the note is paid in full. Other investors that purchased shares
in this private placement elected to pay all cash for their shares at the time
of issuance. As of June 30, 1997 and 1998, $2,006,000 and $1,455,000,
respectively, of these notes were outstanding.
On December 3, 1997, the Board of Directors of the Company authorized the
officers of the Company to demand that the shareholders repay the notes on or
before December 31, 1999. Notice of this demand was sent to the shareholders on
December 31, 1997.
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
4. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 1997 and 1998 consists of the
following:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Furniture and fixtures .................................. $ 17,472 $ 66,189
Computer equipment ...................................... 14,759 30,226
Leasehold improvements .................................. 20,766 27,927
-------- ---------
52,997 124,342
Less accumulated depreciation and amortization .......... 3,038 12,340
-------- ---------
Property and equipment, net ........................... $ 49,959 $ 112,002
======== =========
</TABLE>
5. ACCRUED EXPENSES
Accrued expenses at June 30, 1998 consists of the following:
<TABLE>
<S> <C>
Accrued accounting and legal expense ......... $ 45,500
Accrued salaries and benefits ................ 21,325
--------
Total accrued expenses .................... $ 66,825
========
</TABLE>
6. INCOME TAXES
The Company's provision for income taxes for the years ended June 30, 1997
and 1998 was allocated as follows:
<TABLE>
<CAPTION>
1997 1998
-------------- --------------
<S> <C> <C>
Deferred tax benefit attributable to operations .......... $ (12,370) $ (47,220)
Deferred tax expense attributable to change in unrealized
appreciation on investments ............................ 129,600 198,920
---------- ----------
Total tax provision ................................... $ 117,230 $ 151,700
========== ==========
</TABLE>
The Company's deferred tax benefit attributable to operations for the year
ended June 30, 1997 and 1998 is as follows:
1997 1998
-------------- --------------
Federal .............................. $ (10,370) $ (39,720)
State ................................ (2,000) (7,500)
---------- ----------
Total income tax benefit .......... $ (12,370) $ (47,220)
========== ==========
The 1997 and 1998 actual tax benefit attributable to operations differs
from the amount which would be provided by applying the statutory federal rate
to operating income before income taxes as follows:
<TABLE>
<CAPTION>
1997 1998
-------------- -------------
<S> <C> <C>
Computed "expected" tax expense ............. $ 17,000 $ 58,000
State taxes, net of Federal impact .......... (1,320) (5,000)
Dividend income ............................. (17,500) (102,000)
Other ....................................... (10,550) 1,780
---------- ----------
$ (12,370) $ (47,220)
========== ==========
</TABLE>
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
6. INCOME TAXES -- Continued
The Company's deferred tax assets and liabilities at June 30, 1997 and
1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
--------------- ---------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward ........................ $ 4,600 $ 53,000
Organization costs, due to the differing amortization
methods and implementation of SOP 98-5 ................ 19,700 23,000
----------- -----------
Total deferred tax assets ............................. 24,300 76,000
----------- -----------
Deferred tax liabilities:
Property and equipment, due to differing
depreciation methods .................................. (1,000) (5,000)
Investments, due to recognition of unrealized
appreciation for financial statement purposes ......... (129,600) (329,000)
----------- -----------
Total deferred tax liabilities ........................ (130,600) (334,000)
----------- -----------
Net deferred tax liabilities .......................... $ (106,300) $ (258,000)
=========== ===========
</TABLE>
Based on management's projections for future taxable income over the
periods in which the deferred tax assets are available for use or will reverse,
management believes that it is more likely than not that the deferred taxes
will be realized.
7. STOCK OPTION PLAN
During 1998, the Company adopted the Waterside Capital Corporation 1998
Employee Stock Option Plan (the "Employee Plan") and the Waterside Capital
Corporation Non-Employee Director Stock Option Plan (the "Director Plan")
pursuant to which the Company may grant stock options to directors, officers
and key employees. The Employee Plan and Director Plan authorized the grants of
options to purchase up to 100,000 and 25,000 shares, respectively, of
authorized but unissued common stock. Stock options are granted with an
exercise price equal to the stock's fair market value at the date of grant. All
stock options have ten year terms, and vest on a graded schedule, at which time
they become fully exercisable. There were no plans in effect at June 30, 1997.
During 1998, 77,500 and 14,000 shares were granted under the Employee Plan and
the Director Plan, respectively. At June 30, 1998, there were 22,500 additional
shares available for future grant under the Employee Plan and 11,000 additional
shares available for future grant under the Director Plan.
The per share weighted-average fair value of stock options granted on
January 29, 1998 and June 30, 1998 were $3.21 and $3.30, respectively. The fair
value of each grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: expected life of five
years, expected volatility of 18.2%, expected dividend yield of 0%, and
risk-free interest rate of 5.55%.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123, the
Company's net income would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
JUNE 30, 1998
--------------
<S> <C> <C>
Net increase in stockholders' equity resulting from operations ...... As reported $ 543,335
Pro forma 514,102
Net increase in stockholders' equity resulting from operations
per share -- basic and diluted .................................... As reported $ 0.60
Pro forma 0.56
</TABLE>
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
7. STOCK OPTION PLAN -- Continued
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
----------- -----------------
<S> <C> <C>
Balance at June 30, 1997 ......... -- $ --
Granted .......................... 91,500 11.01
Exercised ........................ -- --
Forfeited ........................ -- --
Expired .......................... -- --
------ -------
Balance at June 30, 1998 ......... 91,500 $ 11.01
====== ========
</TABLE>
The remaining contractual life of the options at June 30, 1998 is 9.7
years.
8. NET INCREASE IN STOCKHOLDERS' EQUITY RESULTING FROM OPERATIONS PER SHARE
The following table sets forth the calculation of basic and diluted net
increase in stockholders' equity resulting from operations per share for the
years ended June 30, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
-------------- --------------
<S> <C> <C>
Basic net increase in stockholders' equity resulting from
operations per share:
Net increase in stockholders' equity resulting from operations $ 274,281 $ 543,335
========== ==========
Weighted average number of common shares outstanding .......... 562,117 910,237
========== ==========
Basic net increase in stockholders' equity resulting from
operations per share ........................................ $ 0.49 $ 0.60
========== ==========
Diluted net increase in stockholders' equity resulting from
operations per share:
Net increase in stockholders' equity resulting from operations $ 274,281 $ 543,335
========== ==========
Weighted average number of common shares outstanding .......... 562,117 910,237
Dilutive effect of stock options (as determined by using the
treasury stock method) ....................................... -- 350
---------- ----------
Adjusted weighted average number of common shares
outstanding .................................................. 562,117 910,587
========== ==========
Diluted net increase in stockholders' equity resulting from
operations per share ........................................ $ 0.49 $ 0.60
========== ==========
</TABLE>
9. RELATED PARTY TRANSACTIONS
During the fiscal years ended June 30, 1997 and 1998, the Company paid
management fees and expenses to a company owned by an officer and director of
the Company of $52,000 and $39,000, respectively.
On February 1, 1997, the Company entered into a sublease agreement with a
company in which it has invested. The sublease agreement provides for the same
term as the prime lease, except that the sublease may be terminated by either
party on 90 days notice.
10. LEASES
The Company has three noncancelable operating leases, primarily for office
space, that expire over the next five years. The Company nets rent expense with
sublease income.
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
10. LEASES -- Continued
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of June 30, 1998
are:
YEAR ENDING JUNE 30,
1999 ................................. $ 68,395
2000 ................................. 62,907
2001 ................................. 64,241
2002 ................................. 65,370
2003 ................................. 33,326
---------
Total minimum lease payments ........ $ 294,239
=========
Net rental expense for operating leases for the years ended June 30, 1997
and 1998 is $20,919 and $34,834, respectively. Sublease income for the years
ended June 30, 1997 and 1998 is $3,500 and $10,900, respectively.
11. COMMITMENTS AND CONTINGENCIES
SIGNED TERM SHEETS
The Company completed signed term sheets during the year ended June 30,
1998 for two investment agreements which closed in July 1998. These investments
included a loan and an equity investment in preferred stock for $900,000 and
$1,500,000, respectively.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with five active members of
management. These agreements provide for a specified annual base salary and
certain discretionary and performance-based bonuses. The contracts also provide
for stock options to be granted to the executives, where the executives may
purchase common shares of the Company at the fair value of the Company's common
stock at the time of grant. Annual base salaries under these agreements range
from $65,000 to $130,000. The terms for these agreements range from one year to
five years and expire between December 1998 and December 2002. The Company's
remaining commitment for salaries, excluding bonuses, under these agreements is
approximately $940,000. If the employees are terminated by the Executive
Committee due to disability or without cause, their compensation will be paid
for a period of 90 days from the termination date.
FINANCIAL GUARANTEE
As of June 30, 1998, the Company has issued a guarantee for $50,000,
through April 30, 1999, on borrowings by a company in which it has invested.
The Company receives a maximum monthly fee for providing the guarantee of $125.
12. CONCENTRATION OF CREDIT RISK
Most of the Company's portfolio investment companies are located primarily
in Virginia. As a result, any adverse impact on the economy of that region
could impact the Company's results of operations and financial position.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following summary disclosures are made in accordance with the
provisions of SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL
INSTRUMENTS. Fair value is defined in the Statement as the amount at which an
instrument could be exchanged in a current transaction between willing parties.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments at June 30, 1997 and 1998:
CASH AND CASH EQUIVALENTS, DIVIDEND RECEIVABLE, INTEREST RECEIVABLE,
ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
The carrying amounts approximate fair value because of the short maturity
of these instruments.
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
13. FAIR VALUE OF FINANCIAL INSTRUMENTS -- Continued
INVESTMENTS IN PORTFOLIO COMPANIES:
The Company's investments are reflected at fair value in the Company's
balance sheets. The fair value of portfolio investments is determined by the
Executive Committee of the Board of Directors or by current market prices, if
available, in accordance with the Company's valuation policy (see note 2).
STOCKHOLDERS' NOTES RECEIVABLE:
The carrying amounts approximate the fair value because there are no
repayment terms. The notes have been recalled for payment in-full by December
31, 1999 (see note 3).
FINANCIAL GUARANTEE:
The fair value of the Company's guarantee of the debt of one of its'
investees could not be estimated without incurring unreasonable cost.
14. EMPLOYEE BENEFIT PLAN
Effective July 1, 1998, the Company adopted the Waterside Capital
Corporation Defined Contribution Plan and Trust. The plan is available to all
employees of the Company regardless of age, who have completed at least three
months of service. Eligible employees may contribute up to 14% of their
compensation annually with the Company providing contributions of 50% of the
first 6% of participating employees' contributions. In addition, the Company
has the ability to make discretionary contributions which will be determined by
a resolution of the Board of Directors.
15. SUBSEQUENT EVENTS
Subsequent to year end, the Company's investment in the equity securities
of Election Products, Inc. was sold. As a result, the Company recorded an
unrealized gain of approximately $141,000 for the year ended June 30, 1998.
19
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1997 AND 1998
The Company's investment portfolio at June 30, 1997 consisted of the
following:
<TABLE>
<CAPTION>
COST OR FAIR
NUMBER CONTRIBUTED MARKET
EQUITY INTERESTS IN PRIVATE COMPANIES: OF SHARES VALUE VALUE
- ------------------------------------------------------------------- ----------- ------------- ------------
<S> <C> <C> <C>
Real Time Data Management Services, Inc. Preferred Stock .......... 700 $ 585,000 $ 702,410
Mid-Atlantic Small Business Finance, Inc. Preferred Stock ......... 500 140,000 140,000
Coddle Roasted Meats, Inc. Preferred Stock ........................ 125 125,000 125,000
Election Products, Inc. Preferred Stock ........................... 100 175,000 175,000
---------- ----------
Total equity investments ....................................... 1,025,000 1,142,410
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
COST OR FAIR
NUMBER PERCENTAGE CONTRIBUTED MARKET
STOCK WARRANTS AND OPTIONS: OF SHARES OWNERSHIP VALUE VALUE
- --------------------------------------------------- ----------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
Publicly Traded Companies:
Avery Communications, Inc. -- Restricted ......... 301,100 0% $ -- $ 208,890
Private Companies:
Real Time Data Management Services, Inc. ......... 125 29.41 115,000 130,000
Coddle Roasted Meats, Inc. ....................... 1,177 15.00 -- --
----------- -----------
Total warrants and options ..................... 115,000 338,890
----------- -----------
Total investments .............................. $ 1,140,000 $ 1,481,300
=========== ===========
</TABLE>
The Company's investment portfolio at June 30, 1998 consisted of the
following:
<TABLE>
<CAPTION>
COUPON COST OR FAIR
INTEREST CONTRIBUTED MARKET
LOANS MATURITY RATE VALUE VALUE
- ------------------------------------------------ ---------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
Avery Communications, Inc. ..................... 12/10/02 12% $ 350,000 $ 600,264
Divaris Consolidated Investments, Inc. ......... 06/29/04 18% 975,000 975,000
---------- ----------
Total loans ................................. 1,325,000 1,575,264
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
COST OR FAIR
NUMBER CONTRIBUTED MARKET
EQUITY INTERESTS: OF SHARES VALUE VALUE
- -------------------------------------------------------------------- ----------- ------------- ------------
<S> <C> <C> <C>
Publicly Traded Investments:
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
Mead-Higgs Company, 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
---------- ----------
</TABLE>
20
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS - continued
The Company's investment portfolio at June 30, 1998 consisted of the
following (continued):
<TABLE>
<CAPTION>
COST OR FAIR
NUMBER PERCENTAGE CONTRIBUTED MARKET
STOCK WARRANTS AND OPTIONS: OF SHARES OWNERSHIP VALUE VALUE
- --------------------------------------------------- ----------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
Publicly Traded Companies:
Avery Communications, Inc. -- Restricted ......... 91,000 0% $ -- $ 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
Mead-Higgs Company, 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
=========== ===========
</TABLE>
21
<PAGE>
DIRECTORS AND OFFICERS
DIRECTORS
Peter M. Meredith, Jr. (1,3)
Chairman of the Board
President
Meredith Construction Co. Inc.
J. Alan Lindauer (1)
President and Chief Executive Officer
James E. Andrews
Principal Owner
Anzell Automotive, Inc.
Donna C. Bennett (2)
Vice President
First Union National Bank
J.W. Whiting Chisman, Jr. (1,3)
President
Dare Investment Company
Jeffrey R. Ellis
Private Investor
Eric L. Fox (1)
Portfolio Manager
Paine Webber
Roger L. Frost (2)
Retired
Ernest F. Hardee (1,3)
President and Chief Executive Officer
Hardee Realty Corporation
Henry U. Harris, III
President
Virginia Investment Counselors, Inc.
Matthew James
Director of Economic Development
City of Portsmouth
Robert I. Low (1,2)
Senior Partner
Goodman & Company
Harold J. Marioneaux, Jr.
Dental Surgeon
Charles H. Merriman, III (1)
Manager, Corporate Finance Department
Scott & Stringfellow, Inc.
Augustus C. Miller
President and Chief Executive Officer
Miller Oil Co., Inc.
Paul F. Miller
Director of Planning and Development
City of Newport News
Juan M. Montero, II
General and Thoracic Surgery
R. Scott Morgan, Sr.
Executive Vice President
Branch Bank & Trust Corp.
James W. Noel, Jr.
Executive Director
York County Industrial Dev. Authority
Richard G. Ornstein (1)
Real Estate Management and Development
Richard A. Schreiber
President and Chief Executive Officer
Virginia Eastern Shore Corporation
Jordan E. Slone
Chairman and Chief Executive Officer
Harbor Group Companies
OFFICERS
J. Alan Lindauer
President and Chief Executive Officer
Robert P. Louthan
Vice President and Business Development Officer
Gerald T. McDonald
Secretary and Chief Financial Officer
Michael C. Huffman
Business Development Officer
Mark A. Sommer, III
Controller
Lex W. Troutman
Business Development Officer
(1) Executive Committee
(2) Audit Committee
(3) Compensation/Stock Option Committee
22
<PAGE>
SHAREHOLDER INFORMATION
CORPORATE OFFICES
Norfolk,Virginia -- Headquarters
300 E. Main Street, Suite 1380
Norfolk, VA 23510
Telephone: 757-626-1111
Facsimile: 757-626-0114
RICHMOND, VIRGINIA
707 E. Main Street, Suite 700
Richmond, VA 23219
Telephone: 804-225-5500
Facsimile: 804-225-5501
CHARLOTTE, NORTH CAROLINA
212 South Tryon Street,
Suite 1680
Charlotte, NC 28281
Telephone: 704-377-4085
Facsimile: 704-377-2417
STOCK TRANSFER AGENT AND
REGISTRAR
Investors with questions
concerning account
information, replacing
lost or stolen certificates,
transferring securities
or processing a change
of address should contact:
RELIANCE TRUST COMPANY
3295 Northcrest Road N.E.
Atlanta, GA 30340-4099
Telephone: 770-938-6400
Facsimile: 770-908-7066
INVESTOR RELATIONS
Investors requiring
information about
the Company should
contact:
GERALD T. MCDONALD
Chief Financial Officer
Telephone: 757-626-1111
Facsimile: 757-626-0114
ANNUAL MEETING OF
SHAREHOLDERS
The annual shareholder's
meeting will be held
Thursday, October 22, 1998
at 10:00 a.m. at the
Chesapeake Conference
Center, 900
Greenbrier Circle,
Chesapeake, Virginia.
All shareholders are invited to attend.
STOCK LISTING
WATERSIDE CAPITAL CORPORATION
common stock is traded on the
NASDAQ Stock Market under the symbol WSCC.
INDEPENDENT PUBLIC ACCOUNTS
KPMG PEAT MARWICK, LLP
Norfolk, Virginia
CORPORATE COUNSEL
CLARK & STANT, P.C.
Virginia Beach, Virginia
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