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
DECEMBER 31, 1998
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 December 31, 1998, the registrant had issued and outstanding
1,420,900 shares of Common Stock, $1.00 par value.
<PAGE>
WATERSIDE CAPITAL CORPORATION
FORM 10-Q
Table of Contents
Page
Number
------
PART I. FINANCIAL INFORMATION:
ITEM 1. Balance Sheets as of June 30, 1998 and December 31, 1998
(unaudited)
Statements of Operations for the Three Months and Six Months
Ended December 31, 1997 and 1998 (unaudited)
Statement of Changes in Stockholders' Equity for the Six
Months Ended December 31, 1998 (unaudited)
Statements of Cash Flows for the Six Months Ended December 31,
1997 and 1998 (unaudited)
Notes to Financial Statements (unaudited)
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
SIGNATURES
<PAGE>
PART I. FINANCIAL INFORMATION:
ITEM 1. Financial Statements
WATERSIDE CAPITAL CORPORATION
Balance Sheets
June 30, 1998 and December 31, 1998 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1998 1998
--------------- ------------------
(Unaudited)
<S> <C> <C>
Assets:
Investments in portfolio companies, at fair value (note 3):
Equity securities $ 6,724,337 9,977,447
Loans 1,575,264 4,783,517
Warrants 206,624 162,800
------------- ------------------
Total investments, cost of $7,640,893 and $14,724,406 at
June 30, 1998 and December 31, 1998, respectively 8,506,225 14,923,764
------------- ------------------
Cash and cash equivalents 4,393,501 3,774,738
Dividends receivable 172,842 266,217
Interest receivable 21,272 191,483
Prepaid expenses and other current assets 45,137 38,297
------------- ------------------
Total current assets 4,632,752 4,270,735
Property and equipment, net 112,002 117,917
Other assets, net 123,750 266,925
------------- ------------------
Total assets $ 13,374,729 19,579,341
============= ==================
Liabilities and Stockholders' Equity:
Liabilities:
Current liabilities:
Accounts payable 15,616 39,629
Accrued expenses 66,825 147,396
Deferred revenue - 66,942
Income taxes payable - 21,979
------------- ------------------
Total current liabilities 82,441 275,946
Deferred income taxes 258,000 67,000
Notes payable (note 6) - 6,000,000
------------- ------------------
Total liabilities 340,441 6,342,946
------------- ------------------
Stockholders' Equity:
Common stock, $1 par value, 10,000,000 shares authorized,
1,420,900 issued and outstanding at June 30, 1998 and December 31, 1998 1,420,900 1,420,900
Preferred stock, $1 par value, 25,000 shares authorized,
no shares issued and outstanding - -
Additional paid-in capital 12,272,636 12,272,636
Net unrealized appreciation on investments 536,810 123,836
Undistributed accumulated earnings 258,942 874,023
Stockholders' notes receivable (1,455,000) (1,455,000)
------------- ------------------
Total stockholders' equity 13,034,288 13,236,395
Commitments and contingencies (note 4)
------------- ------------------
Total liabilities and stockholders' equity $ 13,374,729 19,579,341
============= ==================
Net asset value per common share $ 9.17 9.32
============= ==================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
WATERSIDE CAPITAL CORPORATION
Statements of Operations
For the three months and six months ended December 31, 1997 and 1998 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1997 1998 1997 1998
---------- ------------ --------- -----------
<S> <C> <C> <C> <C>
Operating income:
Interest on loans $ 1,921 168,747 $ 3,222 272,790
Dividends 63,616 258,192 86,479 483,960
Interest on cash equivalents 13,187 47,787 37,230 74,610
Fee income 35,030 117,865 40,380 439,499
---------- ------------ --------- -----------
Total operating income 113,754 592,591 167,311 1,270,859
---------- ------------ --------- -----------
Operating expenses:
Management fees 19,500 - 33,000 -
Salary and benefits 12,504 149,713 25,195 375,890
Legal and accounting 4,666 29,325 25,761 43,920
Interest expense - 104,526 - 104,526
Other operating expenses 19,518 110,139 35,596 191,655
---------- ------------ --------- -----------
Total operating expenses 56,188 393,703 119,552 715,991
---------- ------------ --------- -----------
Net operating income before income taxes 57,566 198,888 47,759 554,868
Income tax expense (benefit) (7,080) (22,400) (15,692) 27,000
---------- ------------ --------- -----------
Net operating income 64,646 221,288 63,451 527,868
Realized appreciation on investments, net of income taxes of $53,301 - - - 87,213
Change in unrealized appreciation on investments, net of provision for
income taxes of $115,600 and $(15,000) for the three months ended December
31, 1997 and 1998, respectively, and $38,892 and $(253,000)
for the six months ended December 31, 1997 and 1998, respectively 183,615 (23,989) 63,676 (412,974)
---------- ------------ --------- -----------
Net increase in stockholders' equity resulting from operations $ 248,261 197,299 $ 127,127 202,107
========== ============ ========= ===========
Net increase in stockholders' equity resulting from operations per share -
basic and diluted $ 0.44 0.14 $ 0.22 0.14
========== ============ ========= ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
WATERSIDE CAPITAL CORPORATION
Statements of Changes in Stockholders' Equity
For the six months ended December 31, 1998 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net unrealized Undistributed
Common Stock Additional appreciation accumulated Stockholders' Total
------------------ paid-in on earnings notes stockholders'
Shares Amount capital investments receivable equity
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1998 1,420,900 $1,420,900 $ 12,272,636 $ 536,810 $ 258,942 $(1,455,000) $ 13,034,288
Net operating income -- -- -- -- 527,868 -- 527,868
Realized appreciation on investment -- -- -- -- 87,213 -- 87,213
Decrease in net unrealized
appreciation on investments -- -- -- (412,974) -- -- (412,974)
--------- ---------- ------------ ---------- ------------ ------------ ------------
Balance, December 31, 1998 (Unaudited) 1,420,900 $1,420,900 $ 12,272,636 $ 123,836 $ 874,023 $(1,455,000) $ 13,236,395
========= ========== ============ ========== ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
WATERSIDE CAPITAL CORPORATION
Statements of Cash Flows
For the six months ended December 31, 1997 and 1998 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
December 31,
1997 1998
-------------- -------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net increase in stockholders' equity resulting from operations $ 127,127 202,107
Adjustments to reconcile net increase in stockholder's equity resulting from
operations to net cash provided by operating activities:
Decrease (increase) in unrealized appreciation on investments (102,568) 665,974
Realized gain on investments - (140,514)
Depreciation and amortization 7,285 15,225
Deferred income tax expense (benefit) 40,300 (191,000)
Changes in assets and liabilities increasing (decreasing) cash flows
from operating activities:
Dividends receivable 9,508 (93,375)
Interest receivable 2,508 (170,211)
Prepaid expenses (7,159) 6,840
Other assets (11,953) -
Accounts payable and accrued expenses 90,984 104,584
Deferred revenue - 66,942
Income taxes payable (2,101) 21,979
-------------- -------------
Net cash provided by operating activities 153,931 488,551
-------------- -------------
Cash flows from investing activities:
Investments made (1,125,890) (4,500,000)
Loans made (350,000) (3,475,000)
Principal collected on loans outstanding - 16,483
Proceeds from stockholder's notes receivable 451,000 -
Proceeds from investment liquidation - 1,015,518
Acquisition of property and equipment (1,045) (14,315)
-------------- -------------
Net cash used in investing activities (1,025,935) (6,957,314)
-------------- -------------
Cash flows from financing activities:
Proceeds from notes payable - 6,000,000
Payment of deferred financing costs (234,917) (150,000)
-------------- -------------
Net cash provided by (used in) financing activities (234,917) 5,850,000
-------------- -------------
Net decrease in cash and cash equivalents (1,106,921) (618,763)
Cash and cash equivalents, beginning of year 2,329,148 4,393,501
-------------- -------------
Cash and cash equivalents, end of period $ 1,222,227 3,774,738
============== =============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
WATERSIDE CAPITAL CORPORATION
Notes to Financial Statements
June 30, 1998 and December 31, 1998 (Unaudited)
- --------------------------------------------------------------------------------
(1) Unaudited Interim Financial Statements
In the opinion of management, the accompanying unaudited interim
financial statements of Waterside Capital Corporation (Waterside) are
prepared in accordance with generally accepted accounting principles
("GAAP") for interim financial information and pursuant to the
requirements for reporting on Form 10-Q and Article 10 of Regulation
S-X. Accordingly, certain disclosures accompanying annual financial
statements prepared in accordance with GAAP are omitted. In the opinion
of management, all adjustments, consisting of normal recurring
accruals, necessary for the fair presentation of financial statements
for the interim period, have been included. The current period's
results of operations are not necessarily indicative of results that
ultimately may be achieved for the year. The interim financial
statements and notes thereto should be read in conjunction with the
financial statements and notes thereto included in the Company's Form
N-30D, as filed with the Securities and Exchange Commission.
(2) Description of Business
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.
(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
Small Business Administration (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
45%. 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
(Continued)
<PAGE>
WATERSIDE CAPITAL CORPORATION
Notes to Financial Statements
- --------------------------------------------------------------------------------
(3) Continued
would have been used had a ready market for the securities existed, and
those differences could be material. Investments consist primarily of
preferred stock obtained from and loans made to portfolio companies
under SBIC investment and loan regulations. The financial statements
include securities valued at $8,506,225 and $14,923,764 at June 30,
1998 and December 31, 1998 (63.6% and 76.2% of assets) respectively.
The Company maintains custody of its investments as permitted by the
Investment Company Act of 1940.
(4) Financial Guarantee
As of September 30, 1998, the Company has issued a guarantee for
$800,000, through September 4, 1999, on borrowings by a company in
which it has invested. The Company earned a fee of $40,000 in
conjunction with the guarantee which will be recognized as fee income
over the life of the guarantee. The Company receives a maximum monthly
fee for providing the guarantee of 0.5% of the outstanding loan balance
at the end of each month.
(5) New Accounting Pronouncement
As of July 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income.
SFAS No. 130 established new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this
statement had no material impact on the Company's net increase in
stockholders' equity resulting from operations per share or
stockholders' equity.
(6) Notes Payable
On October 2, 1998, the Company borrowed $6,000,000 from the SBA under
10 year notes. The notes are due on October 2, 2008 and bear interest
at an interim rate of 5.716% plus a 1.35% fee on the outstanding
balance. The interest rate will be finalized on March 24, 1999. In
conjunction with the signing of the notes, the Company paid a 2.5%
origination fee in addition to the 1% commitment fee paid during fiscal
1998. The origination and commitment fee are amortized over the life of
the notes on a straight-line basis which approximates the amortization
if calculated using the interest method. The total amount of leverage
approved by the SBA and available for borrowing is $12,300,000,
including the $6,000,000 drawn in October 1998 described above.
<PAGE>
WATERSIDE CAPITAL CORPORATION
Schedule of Portfolio Investments
June 30, 1998 and December 31, 1998
- --------------------------------------------------------------------------------
The Company's investment portfolio at June 30, 1998, consisted of the
following:
<TABLE>
<CAPTION>
Coupon Cost or
Interest Contributed Fair
Loans: Maturity Rate Value Value
------ --------- -------- ------------ -----
<S> <C> <C> <C> <C>
Avery Communications,
Inc. Convertible Loan 12/10/02 12% $ 350,000 $ 600,264
Divaris Consolidated
Investments, Inc. 6/26/04 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 Companies:
Avery Communications, Inc. Common
Stock 245,000 $ 249,900 $ 568,033
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>
(Continued)
<PAGE>
WATERSIDE CAPITAL CORPORATION
Schedule of Portfolio Investments
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cost or Fair
Number of Percentage Contributed Market
Stock Warrants and Options: Shares Ownership Value Value
--------------------------- --------- ---------- ----------- -------
<S> <C> <C> <C> <C>
Publicly Traded Companies:
Avery Communications, Inc. 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>
The Company's investment portfolio at December 31, 1998, (unaudited)
consisted of the following:
<TABLE>
<CAPTION>
Coupon Cost or
Interest Contributed Fair
Loans: Maturity Rate Value Value
------ -------- -------- ----------- ------
<S> <C> <C> <C> <C>
Avery Communications,
Inc. Convertible Loan 12/10/02 12.0% $ 350,000 $ 350,000
Divaris Consolidated
Investments, Inc. 6/29/04 18.0% 1,100,000 1,100,000
Extraction Technologies
of VA, LLC 7/22/03 14.5% 650,000 650,000
JMS North America, Inc. 7/31/03 13.0% 1,000,000 1,000,000
Triangle Imaging Group, Inc. 10/15/03 14.0% 1,500,000 1,500,000
Diversified Telecom, Inc. Demand 13.0% 183,517 183,517
---------- ------------
Total loans 4,783,517 4,783,517
------------ -----------
</TABLE>
(Continued)
<PAGE>
<TABLE>
<CAPTION>
Cost or Fair
Number Contributed Market
Equity Interests: of Shares Value Value
----------------- --------- ----------- ------
<S> <C> <C> <C>
Publicly Traded Companies:
Avery Communications, Inc. Common
Stock 245,000 $ 249,900 $ 249,900
Netplex Group, Inc. Preferred Stock 1,500,000 1,500,000 1,500,000
Equity Investments in Private Companies:
Real Time Data Management Services, Inc.
Preferred Stock 700 585,000 712,247
Mid-Atlantic Small Business Finance, Inc.
Preferred Stock 500 140,000 140,000
Coddle Roasted Meats, Inc. Preferred
Stock 125 125,000 125,000
NKL Industries, Inc. Preferred Stock 900 900,000 900,000
NKL Industries, Inc. Common Stock 989 989 60,000
Delta Education Systems, Inc. Preferred
Stock 425 398,600 403,400
Mead-Higgs Company, Inc. Preferred
Stock 1,500 1,500,000 1,500,000
Crispies, Inc. Preferred Stock 400 397,200 397,500
Triangle Biomedical Sciences Preferred
Stock 1,000 1,000,000 1,000,000
JMS North America, Inc. Preferred
Stock 1,500 1,500,000 1,500,000
EPM Development Systems, Corp.
Preferred Stock 1,500 1,488,400 1,489,400
------------ ---------
Total equity investments 9,785,089 9,977,447
------------ ---------
</TABLE>
(Continued)
<PAGE>
<TABLE>
<CAPTION>
Cost or Fair
Number of Percentage Contributed Market
Stock Warrants and Options: Shares Ownership Value Value
--------------------------- --------- ---------- ----------- -------
<S> <C> <C> <C> <C>
Publicly Traded Companies:
Avery Communications, Inc. 126,000 0% $ - $ -
Netplex Group, Inc. 150,000 0% - -
Private Companies:
Real Time Data Management
Services, Inc. 125 29.41 115,000 122,000
Coddle Roasted Meats, Inc. 1,177 15.00 - -
NKL Industries, Inc. 224 2.00 - -
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 6.37 - -
Extraction Technologies of
VA, LLC - 15.00 - -
JMS North America, Inc. 199 5.00 - -
EPM Development Systems,
Corp. 87 8.00 11,600 11,600
----------- -----------
Total warrants and options 155,800 162,800
----------- -----------
Total investments $ 14,724,406 $ 14,923,764
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Condition
o General
Waterside Capital Corporation ("Waterside" or the
"Company") is a specialty finance company headquartered in
Norfolk, Virginia. The Company invests in equity and debt
securities to finance the growth, expansion and
modernization of small private businesses, primarily in
the Mid-Atlantic Region. The Company was formed in 1993 as
the Eastern Virginia Small Business Investment
Corporation. Through June 30, 1996 the Company operated as
a development stage company focused primarily on
preparation to commence operation. The Company was
licensed in 1996 by the Small Business Administration
(SBA) as a Small Business Investment Company (SBIC) under
the Small Business Investment Act of 1958. In October 1996
the Company made its first portfolio investment. In
January 1998 the Company completed its Initial Public
Offering (IPO) to raise additional equity to support its
growth strategy.
The majority of the Company's operating income is derived
from dividend and interest income on portfolio investments
and 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
operation. Waterside currently has 9 full time employees
and 3 offices from which it operates - Norfolk and
Richmond, Virginia and Charlotte, North Carolina.
o Results of Operations
Due to the successful completion of its IPO in January
1998 and the Company's initiation of its growth strategy
using the proceeds from its IPO, the three months ended
December 31, 1998 do not offer a meaningful comparison
with the performance for the three months ended December
31, 1997.
For the three months ended December 31, 1998, total
operating income was $593 thousand compared to the $114
thousand generated during the same period of 1997. The
increase in operating income is due to the growth in the
Company's investment portfolio. The 1998 operating income
consisted of dividends of $258 thousand, fee income of
$118 thousand, interest on loans of $169 thousand and
interest on cash equivalents of $48 thousand.
<PAGE>
Total operating expenses for the three months ended
December 31, 1998 were $394 thousand, consisting primarily
of salary and benefits of $150 thousand, interest expense
on SBA borrowings of $105 thousand, legal and accounting
expenses of $29 thousand and other operating expenses of
$75 thousand. These total operating expenses compared to
the $56 thousand expended during the three months ended
December 31, 1997. Net operating income of $221 thousand
for the quarter ended December 31, 1998 compared favorably
to the $65 thousand during the same quarter of 1997.
The reduction in the change in unrealized appreciation on
investments of $24 thousand, net of taxes, for the three
months ended December 31, 1998 and the increase in the
change in unrealized appreciation on investments of $184
thousand net of taxes for the three months ended December
31, 1997 was due to changing stock prices of a publicly
traded portfolio company.
For the six months ended December 31, 1998, total
operating income was $1.271 million compared to the $167
thousand generated during the same period of 1997. The
dramatic increase in operating income is due to the growth
in the Company's investment portfolio. Total operating
expense of $716 thousand for the six months ended December
31, 1998 compared to the $120 thousand expended during the
six months ended December 31, 1997. Net operating income
of $528 thousand for the six months ended December 31,
1998 compared favorably to the $63 thousand generated
during the six months ended December 31, 1997.
The reduction in the change in unrealized appreciation on
investments of $413 thousand, net of taxes, for the six
months ended December 31, 1998 and the increase in the
change in unrealized appreciation on investments of $64
thousand net of taxes for the six months ended December
31, 1997 was due to changing stock prices of a publicly
traded portfolio company.
o Financial Condition, Liquidity and Capital Resources
During the quarter ended December 31, 1998, the Company
originated $1,700,000 in new investments consisting of two
loans. To fund these investments and to fund future
originations the Company borrowed $6,000,000 from the SBA
on October 2, 1998 as its first draw on a leverage
commitment previously outstanding. The notes are due on
October 2, 2008 and bear interest at a rate of 5.7% plus a
1.35% fee annually on the outstanding balance. The Company
has additional approved leverage of $6.3 million, which it
anticipates will be sufficient to operate through
approximately March 31, 1999. The Company has an
additional two tiers of leverage (or approximately $28
million) that it may borrow from the SBA based on its
current regulatory capital position. These additional two
tiers of leverage are subject to approval by the SBA.
Management believes that these sources of capital will be
sufficient to fund the Company's operations and grow its
portfolio in fiscal 1999.
<PAGE>
During the six months ended December 31, 1998 cash
provided by operating activities was $489 thousand as
compared to the $154 thousand provided during the six
months ended December 31, 1997, primarily due to the
increase in net operating income before taxes. The Company
used $7.0 million in investing activities during the six
months ended December 31, 1998 as compared to the $1.0
million used in the comparable period of 1997. This
increase is primarily attributable to the growth in the
investment portfolio described above, net of the cash
generated from the liquidation of the Company's investment
in Election Products, Inc. The Company generated $5.9
million in cash from financing activities in the six
months ended December 31, 1998 primarily representing the
proceeds from the borrowings from the SBA described above.
o The Year 2000
State of readiness:
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 mid 1999. Due to the nature of the Company's
business, management does not expect a significant impact
associated with non-information technology systems.
Second, the Company is assessing its key relationship with
suppliers and other third parties, including its principal
bank, to determine the potential impact of Year 2000 on
these parties, and in turn on the Company. The Company
will continue to analyze this area in further detail in
1999. Finally, the Company 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. Because of the relatively small size of its
portfolio companies, their readiness represents the
Company's most significant risk with regards to the Year
2000. Although the Company is currently unaware of any
significant Year 2000 issues related to its portfolio
companies, the failure of one or more of the portfolio
companies to properly prepare for the Year 2000 could have
a material adverse impact on the Company's business,
results of operations and financial condition. The Company
plans to complete its initial assessment of the readiness
of its portfolio companies by the end of March 1999. Until
the Company completes its assessment, it cannot offer any
assurance that the Year 2000 issue will not adversely
affect the Company's business. Based upon its assessment,
contingency plans will be developed to mitigate the
potential risks by September 30, 1999. Based on the
assessment performed to date, the Company does not believe
that the cost of its Year 2000 remediation activities will
exceed $50,000.
<PAGE>
o Forward Looking Statements
Included in this Report and other written and oral
information by management from time to time, including
reports to shareholders, quarterly and semi-annual
shareholder letters, filings with the Commission, news
releases and investor presentations, are forward-looking
statements about business objectives and strategies,
market potential, the Company 's ability to expand the
geographic scope of its investments, the quality of the
Company's due diligence efforts, its financing plans, the
impact of Year 2000 issues on itself, its vendors,
suppliers, and portfolio companies, future financial
performance and other matters that reflect management's
expectations as of the date made. Without limiting the
foregoing, the words "believes", "anticipates", "plans",
"expects", "seeks" and similar expressions are intended to
identify forward-looking statements. Future events and the
Company's actual results could differ materially from the
results reflected in these forward-looking statements.
There are a number of important factors that could cause
the Company's actual results to differ materially from
those indicated by such forward-looking statements. Please
refer to a discussion of these and other factors in this
Report and the Company's other Commission filings. The
Company disclaims any intent or obligation to update these
forward-looking statements, whether as a result of new
information, future events, or otherwise.
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1998 Annual Meeting of Shareholders of Waterside Capital Corporation was
held on September 1, 1998 to consider four matters of business. The matters
brought before the shareholders and the voting results are as follows:
1. Election of Directors
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTES*
--- ------- ------- ----------
<S> <C> <C> <C> <C>
James E. Andrews 1,312,810 1,000 107,090 --
Donna C. Bennett 1,279,910 33,900 107,090 --
J. W. Whiting Chisman, Jr 1,312,310 1,500 107,090 --
Jeffrey R. Ellis 1,312,810 1,000 107,090 --
Eric L. Fox 1,312,810 1,000 107,090 --
Roger L. Frost 1,311,810 2,000 107,900 --
Ernest F. Hardee 1,312,810 1,000 107,900 --
Henry U. Harris, III 1,261,810 52,000 107,900 --
J. Alan Lindauer 1,312,810 1,000 107,090 --
Robert I. Low 1,312,810 1,000 107,090 --
Harold J. Marioneaux, Jr 1,312,810 1,000 107,090 --
Peter W. Meredith, Jr 1,310,010 3,800 107,090 --
Charles H. Merriman 1,311,810 2,000 107,090 --
Augustus C. Miller 1,312,810 1,000 107,090 --
Paul F. Miller 1,312,810 1,000 107,090 --
Juan M. Montero 1,312,810 1,000 107,090 --
R. Scott Morgan, Sr 1,312,810 1,000 107,090 --
James W. Noel, Jr 1,312,810 1,000 107,090 --
Richard G. Ornstein 1,312,810 1,000 107,090 --
Richard A. Schreiber 1,312,810 1,000 107,090 --
Jordan E. Slone 1,312,810 1,000 107,090 --
</TABLE>
2. To amend the Company's Articles of Incorporation to comply with changes
made by the Small Business Administration to certain regulations
applicable to the Company.
BROKER
FOR AGAINST ABSTAIN NON-VOTES*
---- ------- ------- ----------
1,011,191 1,000 110,390 298,319
The votes in favor were sufficient to so amend the Company's Articles of
Incorporation.
<PAGE>
3. To approve the Company's 1998 Employee Stock Option Plan
BROKER
FOR AGAINST ABSTAIN NON-VOTES*
--- ------- ------- ----------
989,791 16,400 116,390 298,319
4. Ratification of KPMG Peat Marwick LLP as auditors
BROKER
FOR AGAINST ABSTAIN NON-VOTES*
--- ------- ------- ----------
1,302,110 13,500 105,290 --
*"Broker Non-Votes" occur where a broker holding stock in street name does not
vote those shares.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K:
3 Amended Articles of Incorporation
27 Financial Data Schedule
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this Form 10-Q to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Norfolk, Commonwealth of
Virginia on the 11th day of February, 1999.
WATERSIDE CAPITAL CORPORATION
By /s/ J. Alan Lindauer
----------------------------------------
J. Alan Lindauer
President and Principal Executive Officer
By /s/ Gerald T. McDonald
-----------------------------------------
Gerald T. McDonald
Principal Financial Officer
EXHIBIT 3
ARTICLES OF AMENDMENT
OF
WATERSIDE CAPITAL CORPORATION
Pursuant to Section 13.1-710 of the Code of Virginia of 1950, as amended,
the following information is provided:
1. The name of the Corporation is Waterside Capital Corporation.
2. Article VIII, Section 8.1 is hereby deleted from the Articles of
Incorporation and replaced with the following section:
8.1 Upon the occurrence of any of the events specified in 13 C.F.R.
107.1810(d)(1)-(6), 107.1810(f)(1)-(3), 107.1820(b) or 107.1820(c) as determined
by the SBA, SBA shall have the right, and the corporation consents to, SBA's
exercise of such right:
(i) upon written notice, to require the corporation to replace, with
individuals approved by SBA, one or more of the Corporation's officers and/or
such number of members of the Corporation's Executive Committee as is sufficient
to constitute a majority of such Executive Committee; or
(ii) to obtain the appointment of SBA or its designee as receiver of the
corporation pursuant to ss. 311(c) of the SBIC Act for the purpose of continuing
to operate the Corporation.
3. Pursuant to Section 13.1-710 of the Code of Virginia of 1950, as
amended, the Board of Directors of the Corporation submitted this amendment to
the shareholders at the Annual Meeting of the shareholders on October 22, 1998.
4. Pursuant to Section 13.1-654 of the Code of Virginia of 1950, as
amended, the Shareholders of the Corporation adopted this amendment at the
Annual Meeting of the Shareholders. Holders of shares of common stock were
eligible to vote on the adoption of the amendment. At the close of business on
August 14, 1998, the date fixed by the Board of Directors as the record date for
the meeting of the shareholders, 1,420,900 shares of common stock were
outstanding. Of those shares, 1,011,191 were voted for the amendment, 1,000 were
voted against the amendment and 408,709 abstained. The number of shares of
common stock voted for the amendment was sufficient to approve the amendment.
Dated the 23rd day of November, 1998.
WATERSIDE CAPITAL CORPORATION
By /s/ Gerald T. McDonald
----------------------------------------
Gerald T. McDonald, Secretary/ CFO
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF WATERSIDE CAPITAL CORPORATION AS PRESENTED IN THE FORM
10-Q FOR THE QUARTER ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS' LEGEND.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,775
<SECURITIES> 14,924
<RECEIVABLES> 458
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,271
<PP&E> 118
<DEPRECIATION> 0
<TOTAL-ASSETS> 19,579
<CURRENT-LIABILITIES> 276
<BONDS> 6,000
0
0
<COMMON> 1,421
<OTHER-SE> 11,815
<TOTAL-LIABILITY-AND-EQUITY> 19,579
<SALES> 0
<TOTAL-REVENUES> 1,271
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 611
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 105
<INCOME-PRETAX> 555
<INCOME-TAX> 27
<INCOME-CONTINUING> 528
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (326)
<NET-INCOME> 202
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
