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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
COMMISSION FILE NO.: 333-36709
WATERSIDE CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1694665
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
300 EAST MAIN STREET
SUITE 1380
NORFOLK, VIRGINIA 23510
(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code: - (757) 626-1111
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $ 1.00 PAR VALUE PER SHARE
Indicate by check mark whether the registrant (1) 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 (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of
the registrant as of August 24, 1999: Common Stock - $7,645,000.
The number of shares outstanding of the registrant's common stock as of
August 24, 1999: 1,491,937.
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WATERSIDE CAPITAL CORPORATION
1999 FORM 10-K
TABLE OF CONTENTS
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PART I............................................................................................................1
Item 1. Business.............................................................................................1
Item 2. Properties..........................................................................................16
Item 3. Legal Proceedings...................................................................................17
Item 4. Submission of Matters to a Vote of Security Holders.................................................17
PART II..........................................................................................................17
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...............................17
Item 6. Selected Financial Data.............................................................................17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...............17
Item 7A. Quantitative and Qualitative Disclosure About Market Risk...........................................17
Item 8. Financial Statements and Supplementary Data.........................................................18
Item 9. Changes in and Disagreements with Accountants.......................................................18
PART III.........................................................................................................18
Item 10. Directors and Executive Officers of the Registrant; Section 16(a) Beneficial Ownership Reporting
Compliance..........................................................................................18
Item 11. Executive Compensation..............................................................................19
Item 12. Security Ownership of Certain Beneficial Owners and Management......................................19
Item 13. Certain Relationships and Related Transactions......................................................19
PART IV..........................................................................................................19
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................19
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders (the "Annual
Report") are incorporated by reference in Part II of this Form 10-K and portions
of the definitive Proxy Statement (the "1999 Proxy Statement") to be used in
connection with the 1999 Annual Meeting of Shareholders are incorporated by
reference in Part III of this Form 10-K.
PART I
This Report contains "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995. Any statements contained in
this Report that are not statements of historical fact are forward-looking
statements. Without limiting the foregoing, the words "believes," "anticipates,"
"plans," "expects" and similar expressions are intended to identify
forward-looking statements. The important factors discussed below in "Risk
Factors," among others, could cause actual results to differ materially from
those indicated by forward-looking statements made in this Report and those
presented elsewhere by management from time to time. Please refer to the
cautionary statement that appears at the end of "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Annual Report
for more information.
ITEM 1. BUSINESS
THE COMPANY
Waterside Capital Corporation (the "Company") is a closed-end
investment company licensed by the Small Business Administration (the "SBA") as
a small business investment company (an "SBIC") under the Small Business
Investment Act of 1958, as amended (the "SBA Act"). The Company invests in
equity and debt securities of small businesses to finance their growth,
expansion and modernization. Its equity investments have generally been in the
form of preferred stock bearing current-pay dividends. The weighted average
dividend on its preferred stock investments is currently 12.48%. The Company
also provides long-term loans at similar rates. The weighted average annual
interest rates on its loans is currently 13.31%. To date, the Company has made
most of its investments in preferred stock because, as an SBIC, its dividend
income is non-taxable. Its equity and debt financings are generally coupled with
warrants to acquire common stock representing a minority interest in its
portfolio companies. The Company seeks to achieve current income from
origination fees, preferred stock dividends and interest on loans, as well as
long-term growth in the value of its net assets through the appreciation of its
common stock positions in portfolio companies.
The Company began business operations in July 1996 after receiving its
SBA license and closing its initial private placement of Common Stock. The
Company made its first portfolio investment in October 1996 and, as of the date
of this Report, has approximately $23.9 million in investments in 20 portfolio
companies.
The Company targets potential portfolio companies that meet certain
investment criteria including potential for significant growth, product, market
size, experienced management teams and financial history with significant
ownership. The Company believes that the market for financing small businesses,
either through equity or debt, is underserved by traditional sources of capital
and that many of its potential competitors are burdened with overhead,
administrative and regulatory structures that hinder them from competing more
effectively in this market.
The Company expects to make future investments ranging from $500,000 to
$2,500,000 in equity and debt securities of small businesses, although under
special circumstances, its investments may be less than or exceed this range.
The Company believes that investments of this size will be appropriate given the
size of its Private Capital (defined as eligible capital paid for capital stock
and additional paid-in capital) base and that non-traditional lenders and
investors often focus on larger investments and reject attractive companies with
funding needs in this range.
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To expand its investment opportunities, the Company is also
investigating the possibility of restructuring its operations to enable it to
pursue investment opportunities not available to SBICs because of regulatory
constraints, as well as seeking to acquire SBIC-eligible investments from other
investment funds.
The Company raised its Private Capital through private investments by
individuals, businesses, financial institutions and governmental entities
located primarily in eastern Virginia and through its January 1998 public
offering. Its Private Capital includes approximately $1.5 million invested by
certain "accredited" investors in the form of recourse promissory notes
representing the balance of the unpaid purchase price of Common Stock, payable
on or before December 31, 1999.
To fund its equity investments and debt financings, the Company has
used the cash portion of its Private Capital as well as borrowed funds from the
SBA ("SBA Debentures") which are available to the Company for up to 10 years. At
June 30, 1999, the Company had drawn down debentures totaling $12,300,000
payable to the SBA. The $6,000,000 drawn during the second quarter of 1999 bears
interest at a fixed interest rate of 7.240% including an annual servicing fee of
1.0%, and matures March 1, 2009. Interest on the $6,300,000 drawn down in the
fourth quarter of 1999 is payable at an interim interest rate of 6.535%,
including an annual servicing fee of 1.0%, which is expected to be fixed in
September 1999, and matures on September 1, 2009. The debentures require
semi-annual payments of interest only, with all principal due upon maturity. The
SBA Debentures are subject to a prepayment penalty. In addition to the periodic
interest rate described above, the Company pays a 1.0% one-time fee on all SBA
Debentures at the time of approval by the SBA and a 2.5% one-time fee on amounts
actually drawn by the Company.
In June 1999, the Company was granted approval for additional SBA
Debentures totaling up to $16,100,000. In conjunction with this approval, the
Company paid a $161,000 fee. The debentures will accrue interest at an interim
rate to be set at the time of each draw against the facility. The interest rate
on any outstanding amounts is fixed in the March or September following each
draw. At June 30, 1999, none of these debentures had been drawn upon. In
addition to the $28.4 million that the Company has drawn, or has obtained
approval to draw, the Company has an additional tier of leverage representing
approximately $15.0 million that it may draw from the SBA based on its current
regulatory capital position.
Incorporated in Virginia on July 13, 1993, the Company is registered
under the Investment Company Act of 1940 (the "Investment Act"). Its main office
is located at 300 East Main Street, Suite 1380, Norfolk, Virginia 23510, and its
telephone number is (757) 626-1111). The Company also maintains an office at 707
E. Main Street, Suite 700, Richmond, Virginia 23219.
STRATEGY
The Company seeks to provide growth capital financing to small
businesses. Primarily through their experience in business and with financial
institutions, management and members of the Executive Committee have developed a
level of expertise in identifying and developing new investment opportunities in
this market. The Company targets portfolio companies that meet certain criteria,
including potential for significant growth, experienced management teams and
financial history with a significant ownership interest. The Company believes
the market for small commercial loans is underserved by traditional lending
sources. Traditionally, small businesses have relied on commercial banks and the
savings and loan industry to provide debt financing to fund growth. In the
latter half of the 1980's and the early 1990's, funds from these traditional
lending sources diminished as commercial banks consolidated market share and
sought to limit both credit exposure and administrative expense associated with
monitoring numerous small company loans. Concurrently, the savings and loan
industry experienced significant structural and regulatory changes that greatly
reduced the funds previously available as debt financing for small, privately
owned businesses. The Company also believes that many of its competitors are
also burdened with overhead, regulatory and administrative structures that
hinder them from competing more effectively in this market. As a result of these
fundamental changes, a significant opportunity has developed for nontraditional
lenders to provide not only debt financing to, but also equity infusions in,
small companies, creating the potential for attractive risk-adjusted returns.
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To expand its investment opportunities, the Company is also
investigating the possibility of restructuring its operations to enable it to
pursue investment opportunities not available to SBICs because of regulatory
constraints, as well as seeking to acquire SBIC-eligible investments from other
investment funds.
INVESTMENT OBJECTIVES
The investing formats of SBIC's can range from making long-term secured
and unsecured loans to providing equity capital. The Company has utilized, and
anticipates continuing to utilize, both types of investments to achieve a
balanced portfolio of both equity and debt investments structured to meet the
individual needs of, and the investment opportunities associated with, its
portfolio companies.
The Company seeks to achieve current income through origination fees,
preferred stock dividends and loan interest and long-term growth in the value of
its assets through appreciation of its common stock interests in portfolio
companies. The Company prefers to invest in preferred stock of portfolio
companies, as opposed to debt instruments, because, as an SBIC, it receives a
100% deduction for dividends received from taxable domestic corporations. The
Company attempts to structure its asset portfolio for relative safety and
soundness, while, at the same time, provide for equity features that will permit
it to achieve returns commensurate with its risks.
Management believes that an attractive return can be obtained on
investments in small businesses, provided that their principals contribute the
requisite skill and dedication and the investment is appropriately structured.
SELECTION OF INVESTMENT OPPORTUNITIES
The Company has invested, and expects to continue investing, in a wide
range of businesses -- from technology companies to manufacturing and service
firms. Since making its first investment in late 1996, the Company has
identified certain key elements for investing in emerging growth small
businesses. The Company initiates its investment decisions by analyzing
traditional criteria for making any equity investment or granting any credit:
character, collateral, growth potential, capacity to repay, financial and credit
history and other factors. After an initial screening based on these factors,
management recommends to the Executive Committee investments in those small
businesses it believes will succeed and contribute to the profitability of the
Company. In general, although obviously involving substantially more risk,
providing growth capital to small businesses can generate a higher return on
investment because these companies often have higher growth rates of revenues
and profits than larger, more established firms. The Company generally avoids
loans to or investments in start-up and early stage companies that may have
difficulty making current dividends or interest payments although under certain
limited circumstances, it has invested in early stage companies.
Traditional lenders require certain standards before affirmatively
considering a loan. Among others, these standards include debt service coverage
ratios, profit history, adequate working capital and collateral security. The
Company includes these factors in its decision-making process, but also
attributes significant weight to product, market size, growth potential,
capability of management and exit strategies for the equity portion of its
investment. To identify an exit strategy, management carefully studies the
portfolio company's growth potential, as well as historical financial
performance.
REALIZATIONS OF GAIN ON EQUITY INVESTMENTS AND REPAYMENT OF LOANS
The Company makes its equity investments with the intention of
liquidating for cash within five to seven years, although situations may arise
in which it may hold equity securities for a longer period. Its loans are made
for a minimum of five years as required by SBA regulations. The Company expects
that a successful investment will result in the redemption of preferred stock
with dividends or the repayment of a loan with interest, and a gain on the sale
of the portfolio company's common stock, generally through the exercise of
warrants acquired in connection with the investment.
Preferred stock purchased by the Company generally bears a "put
option," exercisable after five years, requiring the portfolio company to
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repurchase the shares at par, together with any unpaid dividends. The warrants
it acquires often carry a similar put option, also exercisable generally after
five years, requiring a repurchase of the underlying common stock at fair market
value. The warrants also contain anti-dilution provisions and are detachable and
transferable.
Before making any investment, the Company analyzes the potential for
the portfolio company to experience a liquidity event that will allow the
Company to recover the purchase price of its preferred stock investments or to
have its loan repaid and to realize appreciation in its common stock positions.
Liquidity events include, not only the exercise of put options or loan maturity,
but an initial public offering or the sale, merger or recapitalization of the
portfolio company.
ASSET/RISK MANAGEMENT
Investment in a small business, whether by debt or equity, necessarily
involves the risk that the debt will not be repaid or that the equity component
will remain illiquid even if the portfolio company performs and underlying value
is present. The Company expects that losses will occur in its investments.
Management attempts to minimize any such losses through several strategies.
LIMITATION ON INVESTMENTS IN ONE BORROWER. Except with prior SBA
approval, SBA regulations allow only up to 20% of an SBIC's Regulatory Capital
(defined as Private Capital less certain non-cash assets) to be committed to one
portfolio company. Currently, this would allow the Company to only invest $2.85
million in one portfolio company. The Company has adopted a policy allowing an
investment to approach this outside limit only in rare circumstances. The
Company's largest investment in any one portfolio company is currently $2.5
million.
APPROPRIATE UNDERWRITING STANDARDS. Management analyzes each proposed
transaction. If analysis does not reveal an investment meeting the Company's
underwriting standards, management promptly notifies the applicant business of
the denial of its funding request. Management examines numerous applications for
every one recommended to the Executive Committee.
EXECUTIVE COMMITTEE APPROVAL. If the investment appears to management
to meet Company underwriting standards, it must be presented to the Executive
Committee for additional evaluation and approval. The Executive Committee
rejected a number of investments in 1999.
BOARD REPRESENTATION. The Company generally requires portfolio
companies to have a majority of the members of its boards of directors who are
not shareholders or employees. The Company also requires that it have the right
to designate one or more members.
MONITORING. Management closely and frequently monitors the performance
of each portfolio company through its board representation and otherwise. The
Company requires the submission of financial statements on a periodic basis, but
it understands that such submission alone does not provide the timely
information necessary to evaluate current performance. The Company believes
that, by the time financial statements are submitted and analyzed, many problems
may be out of control and beyond solution. Accordingly, it attempts to stay in
contact with its portfolio companies on a regular basis.
DEFAULT COVENANTS. Typically, the Company's investment documents
contain covenants allowing the Company to acquire control of the board of
directors of the portfolio company and replace its management, if necessary, in
the event certain financial standards are not met or maintained.
PORTFOLIO COMPANIES
As of the date of this Report, the Company has approximately $23.9
million invested in 20 portfolio companies.
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SBA LEVERAGE
The SBA raises capital to enable it to provide funds to SBICs by
guaranteeing certificates or bonds that are pooled and sold to purchasers of
government-guaranteed securities. The amount of funds that SBA may lend is
determined by annual Congressional appropriations of amounts necessary to cover
anticipated losses in the program (the "Subsidy Rate"). If the Subsidy Rate is
reduced, the same level of Congressional appropriations will support higher
levels of SBA Leverage available to SBICs. Congress authorizes appropriations to
the extent it determines to fund SBIC borrowings from the SBA.
To be eligible to use funds provided by the SBA, an SBIC must obtain a
license and satisfy other requirements. The need for SBA Leverage must be
established. To establish need, an SBIC must invest 50% of its Leverageable
Capital (defined as Regulatory Capital less unfunded commitments and federal
funds) and any outstanding SBA Leverage. Other requirements include compliance
with SBA regulations, adequacy of capital and meeting liquidity standards. An
SBIC's license entitles an SBIC to apply for SBA Leverage, but does not assure
it will be available. Availability depends on the SBIC's continued regulatory
compliance and sufficient SBA Leverage being available when the SBIC applies to
draw down SBA Leverage.
SBIC's may obtain up to $90 million in SBA Leverage in the following
ratios:
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LEVERAGEABLE CAPITAL MATCHING RATIO SBA LEVERAGE
First $15 million 3:1 $45 million
Second $15 million 2:1 $30 million
Third $15 million 1:1 $15 million
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SBA Debentures are issued with 10-year maturities. Interest only is
payable semi-annually until maturity. Ten-year SBA Debentures may be prepaid
with a penalty during the first 5 years, and then are prepayable without
penalty.
TEMPORARY INVESTMENTS
Pending investment in portfolio company securities, the Company will
invest its otherwise uninvested cash in (i) federal governmental or agency
issued or guaranteed securities that mature in 15 months or less, (ii)
repurchase agreements with banks, deposits of which are insured by the Federal
Deposit Insurance Corporation (the "FDIC") (an "insured bank"), with maturities
of seven days or less, the underlying instruments of which are securities issued
or guaranteed by the federal government, (iii) certificates of deposit in an
insured bank with maturities of one year or less, up to the amount of the
deposit insurance, (iv) deposit accounts in an insured bank subject to
withdrawal restrictions of one year or less, up to the amount of deposit
insurance or (v) certificates of deposit or deposit accounts in an insured bank
in amounts in excess of the insured amount if the insured bank is deemed
"well-capitalized" by the FDIC.
INVESTMENT ADVISER
The Company has no investment adviser.
COMPETITION
The Company competes with so-called "angel" investors, venture capital
investment firms, other SBICs and non-traditional investors that, like the
Company, take equity positions in small businesses. Some of its competitors
invest in earlier stage companies that typically cannot pay dividends and
interest on a current basis. These types of investments do not generally fit
within the Company's investment guidelines, but can offer attractive investment
returns to the Company's competitors who provide this type of financing. The
Company also competes, to a limited extent, with commercial banks and commercial
finance companies. Most of its competitors have substantially greater assets,
capital and personnel resources. The Company believes that because of its size
and structure it can tailor equity investment or loan terms to a portfolio
company's needs and circumstances better than many of its larger competitors.
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The Company also believes that it competes effectively on the basis of its
reputation, responsiveness and the quality of its service in its timely analysis
and decision-making processes.
EMPLOYEES
The Company has 8 full-time employees. The Company has maintained, and
intends to continue to maintain, low personnel overhead by extensively
utilizing, in particular, the members of the Executive Committee and the members
of its Board of Directors, for business referrals, marketing, investment
analysis and due diligence reviews.
INVESTMENT POLICIES
The following policies of the Company with respect to the activities
described below are matters of fundamental policy in accordance with Sections
8(b) and 13(a) of the Investment Act. These policies may not be changed without
the approval of the lesser of (i) 67% of the Company's shares present or
represented at a shareholders' meeting at which the holders of more than 50% of
such shares are present or represented or (ii) more than 50% of the outstanding
shares of the Company.
(a) The Company is permitted to issue the maximum amount of SBA
Debentures permitted by the SBA Act and SBA regulations.
(b) The Company is permitted to borrow money only for the purpose of
investing in, and making loans to, Small Business Concerns, as defined below. It
is, however, permitted to finance the acquisition of capital assets used in its
ordinary business operations.
(c) The Company is not permitted to engage in the business of
underwriting the securities of other issuers. It anticipates that substantially
all of its investments in Small Business Concerns will be in securities that may
not be sold to the public without registration, or an exemption from
registration, under the Securities Act. The vast majority of the Company's
current equity investments in Small Business Concerns are so restricted.
(d) The Company is prohibited from concentrating more than 25% of the
value of its assets, determined at the time an investment is made, exclusive of
U.S. government securities, in securities issued by companies engaged primarily
in the same industry.
(e) The Company is prohibited from engaging in the business of
purchasing or selling real estate. The Company may bring mortgage foreclosure
actions and take title to and possession of property with respect to which it is
the mortgagee in accordance with applicable mortgage foreclosure laws.
Additionally, the Company may purchase office facilities, although, at present,
it leases its office facilities.
(f) The Company is not permitted to engage in the purchase or sale of
commodities or commodity contracts.
(g) The Company is permitted to make loans and loans with equity
features to, as well as equity investments in, Small Business Concerns to the
extent allowed by the SBA Act and SBA regulations. The Company is also permitted
to extend credit to shareholders to finance the purchase of its or their capital
stock.
(h) So long as the Company is licensed as an SBIC, it may only conduct
those activities permitted by the SBA Act and SBA regulations and policies.
The Company's policies with respect to the following matters are not
fundamental policies and may be changed, subject to the SBA Act and SBA
regulations, by the Company's Executive Committee without shareholder approval.
(a) The Company may make investments in equity and debt securities of
Small Business Concerns as approved by the Executive Committee.
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(b) The Company has no strict policy regarding the percentage of its
assets that may be invested in any specific type of security. The Company
follows SBA regulations prohibiting investment in any single Small Business
Concern and its affiliates exceeding 20% of the Company's Regulatory Capital
except with prior SBA approval.
(c) The Company does not invest in companies for the purpose of
exercising control of management and does not intend to do so in the future.
Except where necessary to protect an investment, where there has been a breach
of the financing agreements, where there has been a substantial change in the
Small Business Concerns' operation or when financing a start-up company, SBA
regulations prohibit SBICs from controlling a Small Business Concern.
(d) The Company does not invest in securities of other investment
companies and does not intend to do so in the future.
(e) The Company intends to hold its portfolio debt securities for a
minimum of five years, to the extent required by SBA regulations or until
maturity. It anticipates retaining its equity investments from five to seven
years.
DETERMINATION OF NET ASSET VALUE
The Board of Directors has delegated to the Executive Committee the
sole responsibility for determining the asset value of each of the Company's
equity investments and loans and of its portfolio in the aggregate. The
Executive Committee determines the value of its portfolio companies quarterly,
as soon as practicable after and as of the end of each calendar quarter.
Investments are carried at fair value, as determined by the Executive Committee
of the Board of Directors. The Company, through its Board of Directors, has
adopted the Model Valuation Policy, as published by the SBA, in Appendix III to
Part 107 of Title 12 of the Code of Federal Regulations (the "Policy"). The
Policy, among other things, presumes that loans and investments are acquired
with the intent that they are to be held until maturity or disposed of in the
ordinary course of business. Except for interest-bearing securities which are
convertible into common stock, interest-bearing securities are valued at an
amount not greater than cost, with unrealized depreciation being recognized when
value is impaired. Equity securities of private companies are presumed to
represent cost unless the performance of the portfolio company, positive or
negative, indicates otherwise in accordance with the Policy guidelines. The fair
value of equity securities of publicly traded companies are generally valued at
their quoted market price discounted due to the investment size or market
liquidity concerns and for the effect of restrictions on the sale of such
securities. Discounts range from 0% to 40% for investment size and market
liquidity concerns. Discounts for restriction on the sale of the investments are
15% in accordance with the provisions of the Policy. The Company maintains
custody of its investments as permitted by the Investment Company Act of 1940.
Pursuant to SBA regulations, investments are deemed to be "fair value" if such
values are determined by the Executive Committee in accordance with SBA
valuation policy. This requirement is consistent with the procedure for
determining fair value contained in the Investment Act. The Company's policy is
that equity investments be held for five to seven years and loans for a minimum
of five years (as required by SBA regulations) or until maturity.
The Executive Committee determines the value of its portfolio companies
quarterly, as soon as practicable after and as of the end of each calendar
quarter. In making its valuation determination, the Executive Committee adheres
to the valuation policy of the SBA. In calculating the value of the Company's
total assets, securities traded in the over-the-counter market or on a stock
exchange are valued at the average bid at close or closing price, as the case
may be, for the valuation date and the preceding two days, unless the investment
is subject to a restriction that requires a discount from such price, as
determined by the Executive Committee. Discounts typically range from 10% to
40%, but may be more or less, depending on resale restrictions under securities
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laws or contractual agreements. In valuing equity securities for which there
exists no public trading market, investment cost is presumed to represent fair
value except when the valuation policy provides that the Executive Committee may
determine fair value on the basis of financings by unaffiliated investors or
when a company has been self-financing and has had positive cash flow from
operations for at least the past two fiscal years. Asset value may be increased
based on price/earnings ratios, cash flow multiples and other appropriate
financial measures of any similar publicly-traded companies, discounted for
illiquidity. If the chosen valuation ceases to be meaningful, it may be restored
to a cost basis or, in the event of significant deterioration in performance or
potential, to a valuation below cost to reflect impairment. With respect to
portfolio companies likely to face bankruptcy or discontinue operations for some
other reason, liquidating value may be employed. This value is determined by
estimating the realizable value (often through professional appraisals or firm
offers to purchase) of all assets and then subtracting all liabilities and all
associated liquidation costs.
All other investments are valued at fair value as determined in good
faith by the Executive Committee. In making its determination, the Executive
Committee values loans and nonconvertible debt securities for which there exists
no public trading market at cost plus amortized original issue discount, if any,
unless adverse factors lead to a determination of a lesser value when unrealized
depreciation is recognized. The valuation of loans and associated interest
receivables on interest-bearing securities reflects the portfolio company's
current and projected financial condition and operating results, its payment
history and its ability to generate sufficient cash flow to make payments when
due.
When a valuation relies more heavily on assets than earnings,
additional criteria are considered, including, the value of the collateral, the
priority of the Company's security interest, if any, the net liquidation value
of collateral and the personal integrity and overall financial condition of the
owners of the business. An appropriate writedown is recognized when collection
is doubtful. A write-down for impairment is considered when one or both of the
following conditions occur (i) interest or dividend payments are more than 120
days past due or (ii) the portfolio company is in bankruptcy, is insolvent or
substantial doubt exists about its ability to continue as a going concern. The
carrying value of interest-bearing securities is not adjusted for changes in
interest rates. The valuation of convertible debt may be adjusted to reflect the
value of the underlying equity security net of the conversion price. Convertible
debt securities and warrants are valued to reflect the value of the underlying
equity security less the conversion or exercise price.
Valuation is reduced if a portfolio company's performance has
significantly deteriorated. If the factors that led to the reduction in
valuation are overcome, the valuation may be restored. Warrants are valued at
the excess of the value of the underlying security over the exercise price. The
Executive Committee may also consider recent operating results of a portfolio
company or offers to purchase its securities when valuing a warrant.
MANAGEMENT
POWERS OF THE EXECUTIVE COMMITTEE. The Company's Articles of
Incorporation provide for the appointment by the Board of Directors of an
Executive Committee comprised of not less than five nor more than nine members,
all of whom must be a member of the Board of Directors. The Executive Committee
was constituted by the Board of Directors in December 1993 and, under Virginia
law, may exercise all the authority of the Board of Directors except that it may
not (i) approve or recommend to shareholders action that Virginia law requires
to be approved by shareholders, (ii) fill vacancies on the Board of Directors or
any committee, (iii) amend the Articles of Incorporation, (iv) adopt, amend or
repeal the Bylaws, (v) approve a plan of merger, (vi) authorize or approve a
distribution, except according to a general formula or method prescribed by the
Board of Directors or (vii) authorize or approve the issuance or sale or
contract for sale of shares, or determine the designation of relative rights,
preferences and limitations of a class or series of shares except within limits
specifically prescribed by the Board of Directors.
MEMBERS OF THE EXECUTIVE COMMITTEE AND EXECUTIVE OFFICERS. The
following table sets forth the names, addresses, ages and positions with the
Company of all members of the Executive Committee (who also are directors of the
Company) and Executive Officers of the Company. Information concerning their
principal occupation and background follows.
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<TABLE>
<CAPTION>
Name and Address Age Position and Offices with the Company
<S> <C>
J. W. Whiting Chisman, Jr. 58 Member of Executive
226 Creekview Lane Committee and Director
Hampton, VA 23669
Ernest F. Hardee 59 Member of Executive
100 E. 15th Street Committee and Director
Norfolk, VA 23510
J. Alan Lindauer 60 Chairman of Executive
300 East Main Street Committee, Director, President And
Suite 1380 Chief Executive Officer
Norfolk, VA 23510
Robert P. Louthan 39 Vice President
300 East Main Street
Suite 1380
Norfolk, VA 23510
Robert I. Low 62 Member of Executive
P. O. Box 3297 committee and Director
Norfolk, VA 23514
Gerald T. McDonald 52 Chief Financial Officer
1501 Layden Cove Way And Assistant Secretary
Virginia Beach, VA 23454
Peter M. Meredith, Jr. 47 Member of Executive Committee
P. O. Box 11265 Chairman of the Board of Directors
Norfolk, VA 23517
Charles H. Merriman, III 65 Member of Executive Committee and Director
5507 Cary Street Road
Richmond, VA 23226
R. Scott Morgan 54 Member of Executive
316 Court Street Committee and Director
Portsmouth, VA 23704
Richard G. Ornstein 57 Member of Executive
524 Fisherman's Bend Committee And Director
Virginia Beach, VA 23451
Martin N. Speroni 34 Director of Research
300 East Main Street
Suite 1380
Norfolk, VA 23510
Lex W. Troutman 46 Vice President
300 East Main Street
Suite 1380
Norfolk, VA 23510
</TABLE>
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J. W. Whiting Chisman, Jr. has served as a director of the Company
since February 1994. Since 1988, he has been President of Dare Investment
Company, a land developer and investor in equities.
Ernest F. Hardee has served as a director of the Company since
September 1997. Since 1963, he has been President and Chief Executive Officer of
Hardee Realty Corporation, a real estate brokerage firm. He has also served as a
director of Branch Bank & Trust Corp. since 1995.
J. Alan Lindauer has served as a director since July 1993 and as
Chairman of the Executive Committee of the Company since December 1993 and since
March 1994 as its President and Chief Executive Officer. Since 1986, Mr.
Lindauer has been President of JTL, Inc., a business consulting firm. Mr.
Lindauer is a Certified Management Consultant.
Robert P. Louthan has served as Vice President of the Company since
January 1998. From February 1990 through November 1994, he was Operation
Services Manager of American Filtrona Company, a manufacturer of bonded fiber
products. From December 1994 through November 1997, he was a Vice President with
affiliates of VEDCORP, a venture capital fund.
Robert I. Low has served as a director of the Company since July 1993.
Mr. Low is a senior partner of Goodman & Company, a firm of Certified Public
Accountants. He has been with that firm since 1969.
Gerald T. McDonald serves as Assistant Secretary, Treasurer and Chief
Financial Officer of the Company effective February 1, 1998. During 1997, Mr.
McDonald was Virginia Financial Manager of Branch Bank & Trust Corp. From 1987
through July 1996, Mr. McDonald was Chief Financial Officer of Commerce Bank.
Peter M. Meredith, Jr. has served as a director of the Company and as
Chairman of the Board of Directors since May 1994. Since 1978, he has served in
various executive capacities with Meredith Construction Company, Inc. Since
1995, he has been the Chairman of the Board of Directors of Heritage Bank.
Charles H. Merriman, III, has served as a director of the Company since
March 1998. He is currently a Managing Director with Scott & Stringfellow, an
investment banking firm, where he has served in various capacities since 1972.
R. Scott Morgan, Sr. has served as a director of the Company since
September 1997. Since 1995, Mr. Morgan has been Executive Vice President and
Corporate Banking Manager with the Corporate Banking Group of Branch Bank &
Trust Corp. Between 1992 and 1995, he was employed in various capacities with
Commerce Bank.
Richard G. Ornstein has served as a director of the Company and a
member of the Executive Committee since September 1997. Since 1964, Mr. Ornstein
has been privately engaged in real estate management and development.
Martin N. Speroni has served as Director of Research since November,
1998. Between 1993 and 1997 Mr. Speroni traded fixed income securities for
Raymond James & Associates. Before that he was a financial analyst with
Continental Grain Company, a New York based international conglomerate. Mr.
Speroni holds an MBA from Columbia University and an M.A. from the University of
South Florida.
Lex W. Troutman has served as a Business Development Officer since
May 1998. From 1981 to 1992, he served as a Senior Vice President of Crestar
Bank. From July 1992 to May 1998, he served as Principal of Meridian Investment
Company, Inc., a business consulting firm. Mr. Troutman is a Certified Public
Accountant.
OTHER MEMBERS OF THE BOARD OF DIRECTORS. The Company's existing Board
of Directors has 22 members of which 21 will be nominated for re-election at the
Company's 1999 Annual Meeting. Directors hold office until expiration of their
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respective terms and until their successors are elected, or until death,
resignation or removal. Officers of the Company serve at the discretion of the
Board of Directors, subject to any employment contract rights. The following
table sets forth the names, addresses and ages of all directors of the Company
who are not members of the Executive Committee. Information concerning their
principal occupation and background follows.
<TABLE>
<CAPTION>
Name and Address Age Position and Offices With the Company
<S> <C>
James E. Andrews 61 Director
109 East 40th Street
Norfolk, VA 23504
Donna C. Bennett 38 Director
500 East Plume Street
Norfolk, VA 23510
Jeffrey R. Ellis 55 Director
513 Kerry Lane
Virginia Beach, VA 23451
Eric L. Fox 52 Director
1412 Whittier Road
Virginia Beach, VA 23454
Marvin S. Friedberg 56 Director
8204 Ocean Front
Virginia Beach, VA 23451
Roger L. Frost 67 Director
1700 Grove Court
Norfolk, VA 23503
Henry U. Harris, III 46 Director
500 E. Main Street, Suite 1500
Norfolk, VA 23510
Harold J. Marioneaux, Jr. 43 Director
504 Mill Stone Road
Chesapeake, VA 23320
Augustus C. Miller 65 Director
1000 E. City Hall Avenue
Norfolk, VA 23504
Paul F. Miller 67 Director
2400 Washington Avenue
Newport News, VA 23607
Juan M. Montero, II 57 Director
2147 Old Greenbrier Road
Chesapeake, VA 23320
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
James W. Noel, Jr. 43 Director
224 Ballard Street
P. O. Box 612
Yorktown, VA 23690
Richard A. Schreiber 57 Director
36076 Lankford Highway
P. O. Box 395
Belle Haven, VA 23306
Jordan E. Slone 37 Director
555 E. Main Street
Norfolk, VA 23510
</TABLE>
James E. Andrews has served as a director of the Company since May
1997. Since 1974, Mr. Andrews has been the principal owner of Anzell Automotive,
Inc., an automotive repair firm and franchisor of automotive repair shops.
Donna C. Bennett has served as a director of the Company since
September 1996. She is a Vice-President of First Union Bank and has been
employed since 1985 with First Union Bank, or its predecessors, in various
capacities.
Jeffrey R. Ellis has served as a director of the Company since August
1997. Between 1973 and 1986, Mr. Ellis was the President and Chief Executive
Officer of Ridgewell Caterers, Inc. Since 1986, he has been a private investor.
Marvin S. Friedberg, has served as a director since May 1999. Since
1989, he has served as a chief executive officer of Virginia Commonwealth
Trading Company, a firm engaged in international trading.
Roger L. Frost has served as a director of the Company since May 1997.
Between 1956 and 1997, he was an accountant with Goodman & Company, a firm of
Certified Public Accountants, from which he retired as a senior partner in 1997.
Henry U. Harris, III has served as a director of the Company since
September 1997. Since 1980, he has been Portfolio Manager of Virginia Investment
Counselors, Inc., a financial consulting firm, of which he is now President.
Since 1991, he has been the vice-chairman of the Board of Directors of Heritage
Bank & Trust.
Harold J. Marioneaux, Jr. has served as a director of the Company
since November 1994. Since 1990, he has practiced as a dental surgeon and since
1993 has acted as a certified financial planner.
Augustus C. Miller has served as a director of the Company since August
1994. Since 1977, he has been President and Chief Executive Officer of Miller
Oil Co., Inc., a distributor of fuels.
Paul F. Miller has served as a director of the Company since May 1994.
Since 1987, he has served as Director of Planning and Development for the City
of Newport News, Virginia.
Juan M. Montero, II has served as a director of the Company since July
1995. Since 1972, he has engaged in the private practice of general and thoracic
surgery.
James W. Noel, Jr. has served as a director of the Company since August
1994. Since 1993, Mr. Noel has been the Executive Director of the York County
Industrial Development Authority. Between 1991 and 1993, he served in various
capacities with the City of Portsmouth, Virginia.
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<PAGE>
Richard A. Schreiber has served as a director of the Company since May
1995. Since 1994, he has been President and Chief Executive Officer of the
Virginia Eastern Shore Corporation, which is engaged in development of business
for the Eastern Shore of Virginia. Between 1980 and 1993, he was Vice President
and Chief Executive Officer of Colonial Williamsburg Hotel Properties, Inc. Mr.
Schreiber has informed the Company that he will resign from the Board effective
as of the Company's 1999 Annual Meeting.
Jordan E. Slone has served as a director of the Company since July
1995. Since 1987, Mr. Slone has been Chairman and Chief Executive Officer of the
Harbor Group Companies, a diversified real estate and financial services firm.
AUDIT COMMITTEE AND COMPENSATION/STOCK OPTION COMMITTEE. The Board
of Directors has established a Compensation/Stock Option Committee and an Audit
Committee.
The Members of the Compensation/Stock Option Committee are Messrs.
Meredith, Chisman and Hardee. The Compensation/Stock Option Committee reviews
compensation arrangements for management and key employees and makes
recommendations concerning compensation to the Executive Committee. It also
administers the Company's 1998 Employee Stock Option Plan (the "Stock Option
Plan"). It also grants options to officers and key employees and sets the
exercise price, terms and other provisions of the options granted.
The Members of the Audit Committee are Ms. Bennett and Messrs. Low
and Frost. The Audit Committee recommends selection of the Company's independent
accountants and reviews the scope of the annual audit and the results of the
audit with management and the independent accountants.
RISK FACTORS
Prospective investors in the Company's Common Stock should consider
carefully the specific factors set forth below as well as the other information
included in this Report before deciding to invest in the Shares of Common Stock.
All statements and information in this Report, other than statements of
historical fact, are forward-looking statements based on a number of assumptions
concerning future conditions that ultimately may prove to be inaccurate. These
forward-looking statements may be identified by the use of words like "believe,"
"expect," "intend," "target" and "anticipate" and concern, among other things,
the Company's ability to identify profitable investments in small businesses,
manage payment defaults, value its portfolio accurately and realize value from
its investments in the securities of small businesses. Many phases of the
Company's operations are subject to influences outside its control. Any one or
any combination of factors could have a material adverse effect on the Company's
business, financial condition and results of operations. These factors include
competitive pressures, local, regional and national economic conditions,
governmental regulation and policies and other conditions affecting capital
markets. The following factors should be carefully considered, together with
other information in this Report.
INVESTMENTS IN SMALL, PRIVATELY OWNED COMPANIES. The Company's
portfolio consists of equity and debt securities issued by small, privately
owned businesses that, under SBA regulations, must have a tangible net worth of
less than $18 million and average net income after federal income tax for the
preceding two years of $6 million or less (computed without benefit of any
carryover loss). Furthermore, 20% of the Company's portfolio must consist of
investments in smaller enterprises with a net worth of not more than $6 million
and average net income after federal income tax for the preceding two years of
$2 million or less (computed without benefit of any carryover loss). See
"Regulation." The Company's equity investments in these small businesses have
primarily been in the form of preferred stock, coupled with warrants to acquire
shares of common stock. There is generally no publicly available information
about such companies, so the Company must rely on the diligence of its employees
and agents to obtain information in connection with the Company's investment
decisions. Typically, small businesses depend for their success on the
management talents and efforts of one person or a small group of persons, and
the death, disability or resignation of one or more of these persons could have
a material adverse impact on the Company's business, financial condition and
results of operations. Moreover, small businesses frequently have smaller
product lines and market shares than their competitors, may be more vulnerable
to economic downturns and often need substantial additional capital to expand or
compete. Such companies may also experience substantial variations in operating
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results. Investment in small businesses therefore involves a high degree of
business and financial risk, can result in substantial losses and should be
considered highly speculative. See "Investment Policies."
PAYMENT DEFAULTS. Generally, the Company makes current-pay,
dividend-bearing preferred stock investments in, and nonamortizing, five-year
term loans with fixed or variable rates of interest to, small businesses that
have limited financial resources and are able to obtain only limited financing
from traditional sources. Its loans may or may not be secured by the assets of
the borrower. A portfolio company's ability to pay preferred stock dividends or
to repay its loan may be adversely affected by numerous factors, including the
failure to meet its business plan, the death, disability or resignation of
senior management, a downturn in its industry or negative economic conditions. A
deterioration in a portfolio company's financial condition and prospects usually
will be accompanied by a deterioration in the value of its preferred stock or
any collateral for a loan. As a holder of preferred stock, the Company is always
subordinate to any indebtedness of the portfolio company and, when the Company
is not the senior lender, any collateral for a loan will be subordinate to
another lender's security interest.
LIMITED OPERATING HISTORY. The Company obtained its license from the
SBA in May 1996 and made its first portfolio investment in October 1996. The
vast majority of its investments have been made since the closing of its initial
public offering in February 1998. Accordingly, its operating history is
extremely limited. Since that time, it has made only 10 loans and 14 equity
investments. The Company continues to hold its equity positions, and anticipates
holding them for an extended period of time. See "Investment Policies." The
Company has a very limited history of realized profits in its investments. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Determination of Net Asset Value." The Company has not operated
in recessionary economic periods when the operating results of small business
companies like those in the Company's portfolio often are adversely affected.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company has
experienced, and expects to continue experiencing, quarterly variations in net
operating income as a result of many factors. Accordingly, it is possible that
the Company's results of operations, including quarter to quarter results, will
be below the expectations of public market analysts and investors. In addition,
the Company plans its operating expenditures based on operating income
forecasts, and an operating income shortfall below its forecasts in any quarter
would likely adversely affect the Company's business, financial condition and
results of operations for the year. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
VALUATION OF PORTFOLIO. Typically, no public market exists for the
equity or debt securities of small, privately owned companies. As a result, in
the absence of readily ascertainable market values, the valuation of securities
in the Company's portfolio is made by the good faith determination of the
Company's Executive Committee in accordance with the SBA's model valuation
policy, which the Company has adopted. The estimated values may differ
significantly from the values that would have been established had a ready
market for the securities existed, and the differences could be material. Unlike
commercial lending institutions, the Company does not establish reserves for
investment losses, but revalues its portfolio on a quarterly basis to reflect
the Company's estimate of the current fair value of the investment portfolio.
There can be no assurance that this estimate is accurate and that the Company
will not ultimately suffer losses on its investments. See "Determination of Net
Asset Value."
ILLIQUIDITY OF PORTFOLIO INVESTMENTS. Most of the Company's investments
are, and will continue to be, securities acquired directly from small, privately
owned companies. The Company's portfolio securities are, and will continue to
be, subject to restrictions on resale or otherwise have no established trading
market. The illiquidity of most of the Company's portfolio securities may
adversely affect its ability to dispose of such securities in a timely manner
and at a fair price when necessary or advantageous.
LIMITED PUBLIC MARKET; VOLATILITY OF STOCK PRICE. The Company's Common
Stock is listed on The Nasdaq SmallCap Market under the symbol "WSCC." Continued
inclusion requires that the Company satisfy a minimum tangible net worth or net
income standard and that the Common Stock satisfy minimum standards of public
float, bid price and market makers.
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<PAGE>
The Common Stock has been, and is expected to continue to be thinly
traded with a significant differential between the bid and ask price and a
highly volatile trading price that will be subject to wide fluctuations in
response to factors, many of which are beyond the Company's control. These may
include fluctuations in the operating results of its portfolio companies, sales
of the Common Stock in the marketplace, shortfalls in revenues, earnings or
other operating results of the Company, general financial conditions and other
factors. There can be no assurance that the market price of the Common Stock
will not experience significant fluctuations that are material, adverse and
unrelated to the Company's performance.
In addition, the stock market has from time to time experienced extreme
price and volume fluctuations that often have been unrelated to the operating
performance of particular companies. Changes in earnings estimates by analysts
and economic and other external factors and period-to-period fluctuations in
financial results of the Company may have a significant impact on the market
price of the Common Stock. Fluctuations or decreases in its trading price may
adversely affect the liquidity of the trading market for the Common Stock.
RELIANCE ON MANAGEMENT. Management is a key factor in the successful
development and operation of an SBIC. The Company depends for the selection,
structuring, closing and monitoring of its loans and investments on the
diligence and skill of management and members of the Executive Committee,
particularly J. Alan Lindauer, the loss of whose services could have a material
adverse effect on the operations of the Company. Mr. Lindauer serves as
President and Chief Executive Officer, and as a Director and Chairman of the
Executive Committee of the Company. Although Mr. Lindauer is a Certified
Management Consultant and has experience in business evaluation and small
business investing, until his election as President of the Company in March
1994, he had never served as an executive officer of an SBIC prior to joining
the Company. See "Management." The Company does not maintain key man life
insurance on Mr. Lindauer.
EXPANSION. The Company intends to expand substantially its small
business investment activities, both in size, and geographic scope. In addition,
it is investigating the possibility of restructuring its operations to enable it
to pursue investment opportunities not available to SBICs because of regulatory
constraints, as well as seeking to acquire SBIC-eligible investments from other
investment funds. No assurance can be given that the Company will restructure
its operations in this manner, or that if it does, that the restructuring will
benefit shareholders. If the Company accomplishes these objectives, no assurance
can be given that it will be able to develop sufficient administrative
personnel, management and operating systems to manage its expansion effectively.
COMPETITION. A large number of institutions and individuals compete to
make the types of investments made by the Company. There can be no assurance
that the Company will be able to identify and make investments that satisfy its
investment objectives or that it will be able to invest fully its available
capital. The Company competes with other SBICs, other non-bank financial
companies and, to a limited extent, commercial banks and venture capital
investors and venture capital investment firms. Most of its competitors have
greater resources and significantly more operating history.
LEVERAGE. An important aspect of the Company's long term strategy in
achieving investment returns is the use of SBA Debentures. Obtaining a license
as an SBIC does not insure that the Company will be able to obtain funds from
the SBA ("SBA Leverage") in the amounts and at times required to optimize
investment returns. The amount of available SBA Leverage is determined by annual
Congressional appropriations. While the Company's management believes that
adequate SBA Leverage will be available, there can be no assurance that there
will be sufficient SBA Leverage available to satisfy the demands of the Company
and other SBICs.
The Company has currently issued $12.3 million of SBA Debentures. This
issuance involves associated fixed costs. SBA Debentures require that interest
be paid on a current basis and the income from the Company's investments may not
be sufficient to make the required payments. Leverage increases the risk of loss
because increased operating revenues are needed to make required payments of
principal and interest on loans. As such, losses on a small percentage of the
Company's investments and loans can result in a much larger percentage reduction
in shareholders' equity. See "Business -- SBA Leverage."
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REGULATION AS AN SBIC. As an SBIC, the Company is subject to a variety
of regulations concerning, among other things, the size and nature of the
companies in which it may invest and the structure of those investments. SBA
regulations provide a variety of remedies if an SBIC fails to comply with these
regulations. These remedies are graduated in severity depending on the severity
of the SBIC's financial condition or misconduct. In certain circumstances, the
SBA may prohibit an SBIC from making new investments or distributions to
shareholders, require the removal of one or more officers or directors or obtain
the appointment of a receiver for the SBIC. It is likely that new regulations
governing SBICs will be adopted in the future and the Company cannot offer any
assurance that any such new regulations will not have a material adverse effect
on the Company's business and results of operations. Although the Company is not
aware of any pending legislation to eliminate the SBA or restrict or terminate
the specific program of the SBA in which the Company participates, any
significant restrictions on funds available to the Company from the SBA may
adversely affect the Company's plans for future operations and growth.
SHARES ELIGIBLE FOR FUTURE SALE. 597,345 shares of Common Stock
currently outstanding were offered and sold by the Company in private
transactions in reliance on exemptions from registration under the Securities
Act of 1933 (the "Securities Act"). Accordingly, all of such shares are
"restricted securities," as defined by Rule 144 ("Rule 144") under the
Securities Act and cannot be resold without registration, except in reliance on
Rule 144 or another applicable exemption from registration. Certain shares of
Common Stock are eligible for resale under Rule 144, depending on their date of
issue (assuming the other requirements of Rule 144 are met).
No prediction can be made as to the effect, if any, that future sales
of restricted shares of Common Stock, or the availability of such Common Stock
for sale, will have on the market price of the Shares prevailing from time to
time. Sales of substantial amounts of formerly restricted Common Stock in the
public market, or the perception that such sales may occur, could adversely
affect the then prevailing market price of the Common Stock.
In addition, in the future the Company may issue additional shares of
Common Stock. No prediction can be made as to the effect, if any, that future
issuances of Common Stock may have on the market price of the Common Stock
prevailing from time to time. Sales of substantial amounts of such Common Stock,
or the perception that such sales may occur, could adversely affect the then
prevailing market price of the Common Stock.
ABSENCE OF DIVIDENDS. The Company has not declared or paid any cash
dividends in the past and does not expect to pay cash dividends in the
foreseeable future. The Company currently intends to retain its future earnings,
if any, to finance the development and expansion of its business. Any future
dividend policy will be determined by the Board of Directors in light of
conditions then existing, including the Company's earnings and its financial
condition and requirements.
POSSIBLE ISSUANCE OF PREFERRED SHARES; ANTI-TAKEOVER PROVISIONS. The
Company's Articles of Incorporation authorize the Board of Directors to issue,
without shareholder approval, 25,000 shares of preferred stock with voting,
conversion and other rights and preferences that could materially and adversely
affect the voting power or other rights of the holders of Common Stock. The
Company presently has no plans or commitments to issue any shares of preferred
stock. The issuance of preferred stock or of rights to purchase preferred stock,
as well as certain provisions of the Company's Articles of Incorporation and
Virginia law, could delay, discourage, hinder or preclude an unsolicited
acquisition of the Company, make it less likely that shareholders receive a
premium for their shares as a result of any such attempt and adversely affect
the market price, and voting and other rights of the holders of Common Stock.
ITEM 2. PROPERTIES
The Company believes that its Norfolk and Richmond offices are adequate
for its current and near-term future requirements.
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ITEM 3. LEGAL PROCEEDINGS
The Company is a party to several legal actions which are ordinary,
routine litigation incidental to its business. The Company believes that none of
those actions, either individually or in the aggregate, will have a material
adverse effect on the results of operations or financial position of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the year ended June 30, 1999.
PART II
The information required by Part II, Items 5, 6, 7 and 8 has been
incorporated herein by reference to the Waterside Capital Corporation 1999
Annual Report as set forth below, in accordance with General Instruction G(2) of
Form 10-K.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since February 2, 1998, Waterside Capital Corporation Common Stock has
traded on the Nasdaq Market under the symbol "WSCC." Share price information
with respect to the Common Stock is set forth in the "Selected Quarterly Data"
table included in the Waterside Capital Corporation 1999 Annual Report, which is
incorporated herein by reference.
As of August 1, 1999, there were approximately 650 holders of the
Common Stock, including approximately 120 holders of record. No cash dividends
have been paid with respect to the Common Stock since issuance. The Company has
no current plans to pay any cash dividends relating to the Common Stock in the
foreseeable future, although any dividends on the Common Stock will be at the
sole discretion of the Company's Board of Directors and will depend upon the
Company's profitability and financial condition, capital requirements, statutory
restrictions, requirements of the Small Business Administration, future
prospects and other factors deemed relevant by the Company's Board of Directors.
If any dividends are paid to the holders of Common Stock, all holders will share
equally on a per share basis.
The Company has not issued any of its authorized preferred stock.
ITEM 6. SELECTED FINANCIAL DATA
Information included in the section entitled "Five-Year Summary of
Selected Financial Data" in the Waterside Capital Corporation 1999 Annual Report
is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information included in the section entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Waterside
Capital Corporation 1999 Annual Report is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's business activities contain elements of risk. The Company
considers the principal types of market risk to be interest rate risk and
valuation risk. The Company considers the management of risk essential to
conducting its businesses and to maintaining profitability. Accordingly, the
Company's risk management systems and procedures are designed to identify and
analyze the Company's risks, to set appropriate policies and limits and to
continually monitor these risks and limits by means of reliable administrative
and information systems and other policies and programs.
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The Company manages its market risk by maintaining a portfolio of
equity interests that is diverse by industry, geographic area, property type,
size of individual investment and borrower. The Company is exposed to a degree
of risk of public market price fluctuations as three of the Company's 20
investments are in thinly traded, small public companies, whose stock prices
have been volatile. The other 17 investments are in private business
enterprises. Since there is typically no public market for the equity interests
of the small companies in which the Company invests, the valuation of the equity
interests in the Company's portfolio of private business enterprises is subject
to the estimate of the Company's Executive Committee. In the absence of a
readily ascertainable market value, the estimated value of the Company's
portfolio of equity interests may differ significantly from the values that
would be placed on the portfolio if a ready market for the equity interests
existed. Any changes in estimated value are recorded in the Company's statement
of operations as "Net unrealized gains (losses)." Each hypothetical 1% increase
or decrease in value of the Company's portfolio of equity interests of $23.9
million at June 30, 1999 would have resulted in unrealized gains or losses and
would have changed net increase in stockholders' equity resulting from
operations in 1999 by less than 15%.
The Company's sensitivity to changes in interest rates is regularly
monitored and analyzed by measuring the characteristics of assets and
liabilities. The Company utilizes various methods to assess interest rate risk
in terms of the potential effect on interest income net of interest expense, the
market value of net assets and the value at risk in an effort to ensure that the
Company is insulated from any significant adverse effects from changes in
interest rates. Based on the model used for the sensitivity of interest income
net of interest expense, if the balance sheet were to remain constant and no
actions were taken to alter the existing interest rate sensitivity, a
hypothetical immediate 100 basis point change in interest rates would have
affected net increase in stockholders' equity resulting from operations by less
than 4% over a six month horizon. Although management believes that this measure
is indicative of the Company's sensitivity to interest rate changes, it does not
adjust for potential changes in credit quality, size and composition of the
balance sheet and other business developments that could affect net income.
Accordingly, no assurances can be given that actual results would not differ
materially from the potential outcome simulated by this estimate.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of Waterside Capital Corporation,
including notes thereto, are presented in the Waterside Capital Corporation 1999
Annual Report and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
PART III
The information required by Part III, Items 10, 11, 12, and 13 has been
incorporated herein by reference to the Company's 1999 Proxy Statement as set
forth below, in accordance with General Instruction G(3) of Form 10-K.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; SECTION 16(A)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Information relating to directors of the Company and compliance with
Section 16(a) of the Exchange Act is set forth in the sections entitled
"Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's 1999 Proxy Statement and is incorporated herein by
reference. Pursuant to General Instruction G(3) of Form 10-K, certain
information concerning the executive officers of the Company is set forth under
the caption entitled "Executive Officers of the Company" in Part I, Item 1, of
this Form 10-K.
-18-
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Information regarding compensation of officers and directors of the
Company is set forth in the section entitled "Executive Compensation" in the
Company's 1999 Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding ownership of certain of the Company's securities
is set forth in the section entitled "Security Ownership of Management and
Certain Beneficial Owners" in the Company's 1999 Proxy Statement and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions
with the Company is set forth in the section entitled "Certain Relationships and
Related Transactions" in Waterside's 1999 Proxy Statement and is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
(1) Financial Statements
The Consolidated Financial Statements of Waterside
Capital Corporation and the Auditor's Report thereon, are incorporated
herein by reference. Applicable pages in the Waterside Capital
Corporation 1999 Annual Report are as follows:
PAGE
Financial Statements:
Independent Auditors Report of KPMG LLP 8
Balance Sheets at June 30, 1998 and 1999 9
Statements of Operations for the Years ended
June 30, 1997, 1998 and 1999 10
Statements of Changes in Stockholders' Equity for
the Years ended June 30, 1997, 1998 and 1999 11
Statements of Cash Flows for the Years ended
June 30, 1997, 1998 and 1999 12
Notes to Financial Statements 13
(2) Financial Statement Schedule
This information required by Schedule I - Investments
in Securities of Unaffiliated Issurers is included in the schedule of
Portfolio Investments which is an integral part of the financial
statements.
All other schedules for which provision is made in
the applicable accounting regulations of the Securities and Exchange
Commission are not required under the related instructions or are
inapplicable and therefore have been omitted.
-19-
<PAGE>
(3) Exhibits
The exhibits listed on the accompanying Exhibit Index
are filed or incorporated by reference as part of this Form 10-K and
such Exhibit Index is incorporated herein by reference.
(b) Reports on Form 8-K (filed during the fourth quarter of 1999):
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
WATERSIDE CAPITAL CORPORATION
By: /s/ J. Alan Lindauer, Jr.
-----------------------------------
J. Alan Lindauer, Jr.
President and Chief Executive Officer
Dated September 24, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date:
<S> <C>
/s/ J. Alan Lindauer, Jr. Director, President September 24, 1999
- ------------------------------------ And Chief Executive Officer
J. Alan Lindauer, Jr.
/s/ James E. Andrews Director September 24, 1999
- ------------------------------------
James E. Andrews
/s/ Donna C. Bennett Director September 24, 1999
- ------------------------------------
Donna C. Bennett
/s/ J. W. Whiting Chisman, Jr. Director September 24, 1999
- ------------------------------------
J. W. Whiting Chisman, Jr.
/s/ Jeffrey R. Ellis Director September 24, 1999
- ------------------------------------
Jeffrey R. Ellis
/s/ Eric L. Fox Director September 24, 1999
- ------------------------------------
Eric L. Fox
/s/ Roger L. Frost Director September 24, 1999
- ------------------------------------
Roger L. Frost
</TABLE>
-20-
<PAGE>
<TABLE>
<S> <C>
/s/ Marvin S. Friedberg Director September 24, 1999
- -----------------------------------
Marvin Friedberg
/s/ Ernest F. Hardee Director September 24, 1999
- -----------------------------------
Ernest F. Hardee
/s/ Henry U. Harris, III Director September 24, 1999
- -----------------------------------
Henry U. Harris, III
/s/ Robert L. Low Director September 24, 1999
- -----------------------------------
Robert L. Low
/s/ Harold J. Marioneaux, Jr. Director September 24, 1999
- -----------------------------------
Harold J. Marioneaux, Jr.
/s/ Peter J. Meredith, Jr. Chairman of the Board and Director September 24, 1999
- -----------------------------------
Peter J. Meredith
/s/ Charles H. Merriman, III Director September 24, 1999
- -----------------------------------
Charles H. Merriman, III
/s/ Augustus C. Miller Director September 24, 1999
- -----------------------------------
Augustus C. Miller
/s/ Paul F. Miller Director September 24, 1999
- -----------------------------------
Paul F. Miller
/s/ Juan M. Montero, II Director September 24, 1999
- -----------------------------------
Juan M. Montero, II
/s/ R. Scott Morgan, Sr. Director September 24, 1999
- -----------------------------------
R. Scott Morgan, Sr.
/s/ James W. Noel, Jr. Director September 24, 1999
- -----------------------------------
James W. Noel, Jr.
/s/ Richard G. Ornstein Director September 24, 1999
- -----------------------------------
Richard G. Ornstein
</TABLE>
-21-
<PAGE>
<TABLE>
<S> <C>
/s/ Jordan E. Slone Director September 24, 1999
- ------------------------------------
Jordan E. Slone
/s/ Gerald T. McDonald Chief Financial Officer September 24, 1999
- ------------------------------------ (Principal Accounting and Financial
Gerald T. McDonald Officer)
</TABLE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
<S> <C>
* 1 Amended and Restated Articles of Incorporation of the Registrant
* 2 Amended and Restated Bylaws of the Registrant
* 8 The Registrant's License From the Small Business Administration
* 9.1 Employment Agreement, dated as of December 1, 1997, between the Registrant
and J. Alan Lindauer, Jr.
* 9.4 1998 Employee Stock Option Plan
**13 Annual Report to Shareholders 23
**27 Financial Data Schedule 31
**99.1 The Financial Statements and notes thereto which appear on
pages 8 through 22 of Waterside Capital Corporation 1999
Annual Report to Shareholders (filed as Exhibit 13 to this Form
10-K) are incorporated herein by reference.
</TABLE>
* (Not filed herewith. In accordance with Rule 12b-32 of the General
Rules and Regulations under the Securities Exchange Act of 1934, the
exhibit is incorporated by reference).
** Filed herewith.
-22-
WATERSIDE CAPITAL CORPORATION
1999 ANNUAL REPORT
<PAGE>
<TABLE>
<S> <C>
TABLE OF CONTENTS
LETTER TO STOCKHOLDERS .................
FIVE-YEAR SUMMARY OF SELECTED
FINANCIAL DATA .........................
MANAGEMENT'S DISCUSSION AND ANALYSIS ...
INDEPENDENT AUDITORS' REPORT ...........
FINANCIAL STATEMENTS ...................
CORPORATE INFORMATION .................. Inside Back Cover
</TABLE>
WATERSIDE CAPITAL CORPORATION
A Small Business Investment Company
Letter to Stockholders
Fiscal 1999 marked the first full year of operations subsequent to our
successful IPO in February 1998. We feel we made tremendous progress in 1999 and
look forward to continuing to grow in 2000.
We are a specialty finance company that invests in equity and debt securities of
small primarily privately held businesses to finance their growth and expansion.
We evaluate potential investments for credit 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, market size, growth
potential, a thorough review of management abilities and experience and
determination of the best and most likely exit strategy. Our typical investment
is currently structured as a preferred stock security generally ranging in size
from $500,000 to $1,500,000 although we have invested as much as $2.5 million in
one company.
To enhance the overall due diligence process necessary with our emphasis on
future growth we added Mr. Martin N. Speroni as Director of Research during
fiscal 1999. Mr. Speroni has extensive experience as a trader in fixed income
securities as well as being a Financial Analyst with a New York based
international conglomerate. Mr. Speroni also holds a MBA from Columbia
University. With our current professional staff we believe that we are now
positioned for solid growth. We aggressively monitor the status and quality of
the investments in our current portfolio, which enables us to take quick
responsive action when necessary to protect any of our investments.
The theme for the Company's financial performance has been continuing growth and
diversification. Due to the successful completion of its IPO and the Company's
initiation of its growth strategy using those proceeds, results for the year
ended June 30, 1999 do not offer a meaningful comparison with the financial
performance for fiscal 1998. We originated $18.5 million in new financing during
fiscal 1999 compared to $6.5 million during 1998. We currently have investments
in 20 companies compared to 11 companies the previous year. Net operating income
reflected tremendous growth to $1.0 million for fiscal 1999 compared to the $218
thousand for fiscal 1998 reflecting a 377% increase. Per share net operating
income of $.70 for 1999 compared to the $.23 generated during fiscal 1998. This
significant growth in per share earnings is extremely gratifying in light of the
56% increase in average number of shares outstanding due to the IPO completed in
February 1998. We paid our first 5% stock dividend in March 1999.
Our only significant disappointment during 1999 was a stock price that we do not
believe reflects the true value of our company given our earnings growth and
potential. We believe market perceptions and valuations often tend to lag
underlying realities and true valuations especially in small capitalization
stocks. With our current infrastructure and growth potential, we believe total
returns can improve dramatically. Our job is to tell our story to the market so
that our stock price can better approach its true value.
For fiscal 2000, we will continue the course currently established with quality
controlled growth. We will continue diversification of the investment portfolio
and emphasize current pay income instruments. Our top priority will be to
continue to leverage our return on equity, which should equate to a positive
driver for our stock market valuation.
We are grateful for the loyalty of our staff and their dedication to the
achievement of our goals. We thank our shareholders for their continued interest
and support.
/s/ J. Alan Lindauer
- ---------------------
J. Alan Lindauer
President & CEO
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 1999 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.
o General
Waterside Capital Corporation ("Waterside" or the "Company") is a
specialty finance company headquartered in Norfolk, Virginia. The
Company invests in equity and debt securities to finance the
growth, expansion and modernization of small private businesses,
primarily in the Mid-Atlantic Region. The Company was formed in
1993 as the Eastern Virginia Small Business Investment
Corporation. Through June 30, 1996 the Company operated as a
development stage company focused primarily on preparation to
commence operation. The Company was licensed in 1996 by the Small
Business Administration (SBA) as a Small Business Investment
Company (SBIC) under the Small Business Investment Act of 1958. In
October 1996 the Company made its first portfolio investment. In
January 1998 the Company completed its Initial Public Offering
(IPO) to raise additional equity to support its growth strategy.
The majority of the Company's operating income is derived from
dividend and interest income on portfolio investments and
application and processing fees related to investment
originations. The remaining portion of the Company's operating
income comes from interest earned on cash equivalents. The
Company's operating expenses primarily consist of payroll and
other expenses incidental to operation. Waterside currently has 8
full time employees and 2 offices from which it operates - Norfolk
and Richmond, Virginia.
o Portfolio Composition
The Company's primary business is investing in and lending to
privately owned businesses through investments in subordinated
debt with detachable common stock warrants, preferred stock and
common stock. The portfolio composition at June 30, 1999 and 1998
is shown in the following table at fair value:
JUNE 30,
-----------------------------------
1999 1998 1999 1998
% % $ $
---- ---- ------- -----
Subordinated debt 28.3% 18.5% $ 6,894 $1,575
Preferred stock 66.3 70.7 16,146 6,014
Common stock warrants 1.6 2.4 377 207
Common stock 3.8 8.4 925 710
----- ---- --------- --------
Total 100% 100% $24,342 $8,506
The weighted average effective interest rate on the Investment
Portfolio was 11.26% at June 30, 1999 and 11.45% at June 30, 1998.
<PAGE>
The following tables show the Portfolio Composition by geographic
region and industry grouping:
JUNE 30,
-------------
GEOGRAPHIC REGION 1999 1998
---- ----
Mid-Atlantic 66% 86%
Midwest 16 14
Southeast 9 0
Northeast 7 0
West 2 0
--------------------------------------------
Total 100% 100%
JUNE 30,
-------------
INDUSTRY 1999 1998
---- ----
Business Services 44% 23%
Manufacturing 25 35
Telecommunications 15 32
Education 7 5
Publishing 5 0
Retail 2 5
High Tech (software) 2 0
--------------------------------------------
Total 100% 100%
Management intends to continue to diversify the portfolio and will
explore new investment opportunities in a variety of industries as
market conditions permit.
o Results of Operations
1999 Compared to 1998
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, results from the year ended June 30, 1999 do not
offer a meaningful comparison with the performance for the year
ended June 30, 1998.
For the year ended June 30, 1999, total operating income was $2.9
million compared to the $807 thousand generated during the same
period of 1998. The increase in operating income is due to the
growth in the Company's investment portfolio. The 1999 operating
income consisted of dividends of $1.1 million, fee income of $947
thousand, interest on loans of $717 thousand and interest on cash
equivalents of $161 thousand.
Total operating expenses for the year ended June 30, 1999 were
$1.8 million, consisting primarily of salary and benefits of $914
thousand, interest expense on SBA borrowings of $418 thousand,
legal and accounting expenses of $122 thousand and other operating
expenses of $352 thousand. These total operating expenses compared
to the $636 thousand expended during 1998. Net operating income of
$1.0 million for the year ended June 30, 1999 compared favorably
to the $218 thousand generated during 1998.
The realized appreciation on investments net of taxes of $234
thousand for the year ended June 30, 1999 was due to the sale of
our equity investments in four private companies. There were no
realized gains during 1998. The decrease in unrealized
appreciation on investments net of taxes of $238 thousand for the
year ended June 30, 1999 was due primarily to the changing stock
price of two publicly traded portfolio companies. The increase in
unrealized appreciation on investments, net of taxes, was $325
thousand for the year 1998 due primarily to the change in stock
price of our publicly traded portfolio company.
The Company declared and paid a 5% stock dividend during the
quarter ended March 31, 1999.
<PAGE>
1998 Compared to 1997
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 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 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.
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.
o Financial Condition, Liquidity And Capital Resources
During the year ended June 30, 1999, the Company made $12.9
million in new equity investments and $5.6 million in loans as
compared to the $5.2 million of equity investments and $1.3
million of loans made during the fiscal year ended June 30, 1998.
To fund these investments and loans, the Company borrowed $12.3
million from the SBA from a leverage commitment previously granted
on June 8, 1998. The notes are due on March 1, 2009 for the $6
million draw and on September 1, 2009 for the $6.3 million draw
and bear interest at a blended rate of 5.879% plus a 1.35% fee
annually on the outstanding balance. The Company received a
commitment letter on May 26, 1999 from the SBA reserving
additional leverage in an amount equal to $16.1 million that will
expire on September 30, 2003. The Company anticipates drawing the
entire $16.1 million in leverage during fiscal year 2000. The
Company has an additional tier of leverage (representing
approximately $15 million) that it may borrow from the SBA based
on its current regulatory capital position. Management believes
that these sources of capital will be sufficient to fund the
company's operations and grow its portfolio in fiscal 2000.
During the year ended June 30, 1999, cash provided by operating
activities was $988 thousand as compared to the $125 thousand
provided during the year ended June 30, 1998, primarily due to the
growth in the Company's net operating income. The Company used
$15.9 million in investing activities during the year ended June
30, 1999 as compared to the $6.0 million used in the comparable
period of 1998. This increase is primarily attributable to the
growth in the investment portfolio described above, net of the
cash generated from the liquidation of the Company's investment in
four portfolio companies. The Company generated $11.8 million in
cash from financing activities for the year ended June 30, 1999
primarily representing the proceeds from the borrowings from the
SBA described above. The Company generated $8.0 million in cash
from financing activities during the year ended June 30, 1998
primarily representing the proceeds from the IPO consummated in
January 1998.
o The Year 2000
State of readiness:
The Company has identified and addressed the potential impact of
the Year 2000 issue on its operations. This process has identified
three primary areas in which the Company could be affected:
financial and administrative programs, service providers, and
portfolio companies.
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. Due to the nature of the
Company's business, management does not expect a significant
impact associated with non-information technology systems.
Second, the Company is assessing its key relationships with
suppliers and other third parties, including its principal bank,
to determine the potential impact of Year 2000 on these parties,
and in turn on the Company. The Company is not aware of any
critical service provider that will not be Year 2000 compliant.
However, the Company cannot give any assurance that the service
providers will be Year 2000 compliant and that no interruption of
business will occur as a result of their non-compliance.
<PAGE>
Finally, the Company is investigating the impact of Year 2000
issues on its portfolio companies. Because of the relatively small
size of its portfolio companies and their lack of sophisticated
operating systems, their readiness represents the Company's most
significant risk with regards to the Year 2000. The Company sent
Year 2000 questionnaires to each of its portfolio companies to
assess their awareness and to evaluate their Year 2000 readiness.
The Company is not aware of any significant deficiencies in the
Year 2000 readiness of its portfolio companies. In addition, the
Company evaluates each new portfolio company's Year 2000 readiness
as part of the due diligence process when making a new investment.
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.
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. This includes time allocated to this task by
Company personnel and costs incurred in the testing phase.
The Company believes it has taken the necessary steps to be Year
2000 compliant; however, it is difficult to fully predict the
impact on the Company of non-compliance in any of the above
mentioned areas. Significant non-compliance could result in a
material adverse effect on the Company's financial condition and
results of operations. The Company believes that the worst-case
Year 2000 scenarios may include the inability of the Company to
access or transfer cash needed to pay its bills or fund new
investments or a disruption of a portfolio company's business that
results in a loss of the Company's investment.
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. 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>
WATERSIDE CAPITAL CORPORATION
FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
<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, 1998 and 1999 and the related
statements of operations, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended June 30,
1999. 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, 1998 and 1999, and the
results of its operations and cash flows for each of the years in
the three-year period ended June 30, 1999 in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
August 5, 1999
Norfolk, Virginia
<PAGE>
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
INCEPTION (JULY 13, 1993) ------------------------------------------------
TO JUNE 30, 1995(1) 1996(1) 1997 1998 1999
------------------------- ------- ---- ---- ----
<S> <C>
SUMMARY OF EARNINGS INFORMATION:
Operating Income:
Interest on loans $ -- $ -- $ 9,430 $ 24,290 $ 717,437
Dividends -- -- 51,425 299,080 1,071,899
Interest on cash equivalents 8,955 42,262 166,573 211,440 160,889
Fee and other income -- 17,255 37,450 271,714 947,013
-------- ------- -------- -------- ----------
Total operating income 8,955 59,517 264,878 806,524 2,897,238
Total operating expenses 36,025 59,777 214,667 635,519 1,805,130
-------- ------- -------- -------- ----------
Net operating income (loss) before
income taxes (27,070) (260) 50,211 171,005 1,092,108
Income tax expense (benefit) 1,880 (7,346) (12,370) (47,220) 51,000
-------- ------- -------- -------- ----------
Net operating income (loss) (28,950) 7,086 62,581 218,225 1,041,108
Realized gain on investments, net of
income taxes(2) -- -- -- -- 234,312
Change in unrealized appreciation on
investments, net of income taxes (3) -- -- 211,700 325,110 (238,376)
Net increase (decrease) in stockholders' equity
resulting from operations $(28,950) $ 7,086 $274,281 $543,335 $1,037,044
-------- ------- -------- -------- ----------
Net operating income per share -
basic and diluted -- -- $ .11 $ .23 $ .70
Net increase in stockholders' equity
resulting from operations per share -
basic and diluted -- -- $ .46 $ .57 $ .70
Weighted average number of shares
outstanding -- -- 590,223 955,749 1,491,937
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
1995(1) 1996(1) 1997 1998 1999
------- ------- ---- ---- ----
<S> <C>
BALANCE SHEET INFORMATION:
Investments in portfolio companies, at fair value(5):
Equity securities $ -- $ -- $1,142,410 $ 6,724,337 $17,070,782
Loans -- -- -- 1,575,264 6,894,468
Options and warrants -- -- 388,890 206,624 377,000
------- ---------- ---------- ----------- -----------
Total investments -- -- 1,481,300 8,506,225 24,342,250
Cash and cash equivalents 409,869 3,595,766 2,329,148 4,393,501 1,269,409
Total assets 420,012 3,655,018 3,963,648 13,374,729 27,109,870
Debentures payable -- -- -- -- 12,300,000
Total stockholders' equity 319,850 3,512,636 3,856,417 13,034,288(4) 14,071,269
</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) Amount presented net of income tax expense of $144,000.
(3) Amounts have been presented net of deferred income tax expense (benefit) of
$129,600, $198,920 and (145,000), respectively, for the years ended
June 30, 1997, 1998 and 1999.
(4) In January 1998, the Company completed an initial public offering of
852,000 shares of common stock at $11 per share. The net proceeds for the
offering, after $1,288,464 of expenses, were $8,083,536.
(5) 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 Statements
included elsewhere herein. The cost of the portfolio investments was
$1,140,000, $7,640,893 and $23,860,295 at June 30, 1997, 1998 and 1999,
respectively.
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is quoted on the NASDAQ Stock Market under the symbol
WSCC. As of August 23, 1999 the Company had 120 stockholders of record and
approximately 650 beneficial owners. The following table sets forth the range of
high and low bid prices of the Company's common stock as reported on the NASDAQ
stock market for the period from February 2, 1998, when public trading of the
common stock commenced pursuant to the IPO, through June 30, 1999.
Bid Price
Net Asset ---------------------------------
Value Per Share(1) High Low Close
------------------ ------- -------- -------
1998
Third Quarter $8.67 $ 11.750 $ 10.750 $10.875
Fourth Quarter 8.74 11.375 10.125 11.125
1999
First Quarter $8.74 $ 11.375 $ 9.000 $ 9.250
Second Quarter 8.87 10.620 7.500 8.500
Third Quarter 9.24 8.750 6.500 7.250
Fourth Quarter 9.43 7.875 6.000 6.750
- -----------------
1. Net asset value per share is determined as of the last day in the calendar
quarter and therefore may not reflect the net asset value per share on the
date of the high or low sales prices for that specific quarter. The net
asset values shown are based on outstanding shares at the end of each
quarter and the previously reported values have been restated to reflect
the 5% stock dividend declared on February 5, 1999 and paid on March 15,
1999.
<PAGE>
WATERSIDE CAPITAL CORPORATION
Balance Sheets
June 30, 1998 and 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1999
---------------- ----------------
<S> <C>
Assets:
Investments in portfolio companies, at fair value (notes 2 and 16):
Equity securities $ 6,724,337 17,070,782
Loans 1,575,264 6,894,468
Options and warrants 206,624 377,000
---------------- ----------------
Total investments, cost of $7,640,893 and $23,860,295
at June 30, 1998 and 1999, respectively 8,506,225 24,342,250
---------------- ----------------
Current assets:
Cash and cash equivalents 4,393,501 1,269,409
Dividend receivable 172,842 311,737
Interest receivable 21,272 228,438
Note receivable (note 3) - 150,000
Refundable income taxes - 43,322
Prepaid expenses and other current assets 45,137 77,916
---------------- ----------------
Total current assets 4,632,752 2,080,822
Property and equipment, net (note 4) 112,002 118,961
Deferred financing costs, net 123,750 567,837
---------------- ----------------
Total assets $ 13,374,729 27,109,870
================ ================
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable $ 15,616 57,142
Accrued expenses (note 5) 66,825 372,828
Deferred revenue - 113,631
---------------- ----------------
Total current liabilities 82,441 543,601
Deferred income taxes (note 7) 258,000 195,000
Debentures payable (note 6) - 12,300,000
---------------- ----------------
Total liabilities 340,441 13,038,601
---------------- ----------------
Stockholders' equity (note 8):
Common stock, $1 par value, 10,000,000 shares authorized,
1,420,900 and 1,491,937 issued and outstanding at
June 30, 1998 and 1999, respectively 1,420,900 1,491,937
Preferred stock, $1 par value, 25,000 shares authorized,
no shares issued and outstanding - -
Additional paid-in capital 12,272,636 12,769,895
Net unrealized appreciation on investments, net of income taxes 536,810 298,434
Undistributed accumulated earnings 258,942 966,003
Stockholders' notes receivable (1,455,000) (1,455,000)
---------------- ----------------
Total stockholders' equity 13,034,288 14,071,269
Commitments and contingencies (notes 2, 11, 12 and 13)
---------------- ----------------
Total liabilities and stockholders' equity $ 13,374,729 27,109,870
================ ================
Net asset value per common share (note 8) $ 8.74 9.43
================ ================
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
WATERSIDE CAPITAL CORPORATION
Statements of Operations
Years ended June 30, 1997, 1998 and 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1998 1999
--------------- -------------- --------------
<S> <C>
Operating income:
Interest on loans $ 9,430 24,290 717,437
Dividends 51,425 299,080 1,071,899
Interest on cash equivalents 166,573 211,440 160,889
Fee and other income 37,450 271,714 947,013
--------------- -------------- --------------
Total operating income 264,878 806,524 2,897,238
--------------- -------------- --------------
Operating expenses:
Management fees (note 10) 52,000 39,000 -
Salary and benefits 41,965 326,261 913,786
Legal and accounting 41,128 90,592 122,080
Interest expense - - 417,605
Other operating expenses (note 10) 79,574 179,666 351,659
--------------- -------------- --------------
Total operating expenses 214,667 635,519 1,805,130
--------------- -------------- --------------
Net operating income before income taxes 50,211 171,005 1,092,108
Income tax expense (benefit) (note 7) (12,370) (47,220) 51,000
--------------- -------------- --------------
Net operating income 62,581 218,225 1,041,108
Realized gain on investments, net of income taxes of $144,000 - - 234,312
Change in unrealized appreciation on investments, net of income
tax expense (benefit) of $129,600, $198,920 and $(145,000)
for 1997, 1998 and 1999, respectively (note 16) 211,700 325,110 (238,376)
--------------- -------------- --------------
Net increase in stockholders' equity resulting from operations $ 274,281 543,335 1,037,044
=============== ============== ==============
Net increase in stockholders' equity resulting from operations per share -
basic and diluted (notes 8 and 9) $ 0.46 0.57 0.70
=============== ============== ==============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
WATERSIDE CAPITAL CORPORATION
Statements of Changes in Stockholders' Equity (Note 8)
Years ended June 30, 1997, 1998 and 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional
--------------------------------------------------------------
Shares Shares paid-in
------------------------------ ------------------------------
Subscribed Amount Issued Amount capital
---------------------------------------------------------------------------
<S> <C>
Balance at June 30, 1996 26,000 $ 26,000 537,400 $ 537,400 4,987,100
Common stock issued pursuant to
private placement (26,000) (26,000) 31,500 31,500 54,000
Repayment of stockholders' notes receivable - - - - -
Net operating income - - - - -
Increase in net unrealized appreciation on
investments - - - - -
-------- ---------- ----------- ----------- ------------
Balance at June 30, 1997 - - 568,900 568,900 5,041,100
Common stock issued pursuant to
initial public offering - - 852,000 852,000 7,231,536
Repayment of stockholders' notes receivable - - - - -
Net operating income - - - - -
Increase in net unrealized appreciation on
investments - - - - -
-------- ---------- ----------- ----------- -----------
Balance at June 30, 1998 - - 1,420,900 1,420,900 12,272,636
5% stock dividend - - 71,037 71,037 497,259
Net operating income - - - - -
Net realized gain on investments - - - - -
Decrease in net unrealized appreciation on
investments - - - - -
--------- ---------- ----------- ----------- ------------
Balance at June 30, 1999 - $ - 1,491,937 $ 1,491,937 12,769,895
========= =========== =========== ============ ============
Net unrealized Undistributed
appreciation accumulated Stockholders' Total
(depreciation) earnings notes stockholders'
on investments (deficit) receivable equity
---------------------------------------------------------------
Balance at June 30, 1996 $ - (21,864) (2,016,000) 3,512,636
Common stock issued pursuant to
private placement - - - 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 at June 30, 1997 211,700 40,717 (2,006,000) 3,856,417
Common stock issued pursuant to
initial public offering - - - 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 at June 30, 1998 536,810 258,942 (1,455,000) 13,034,288
5% stock dividend - (568,359) - (63)
Net operating income - 1,041,108 - 1,041,108
Net realized gain on investments - 234,312 - 234,312
Decrease in net unrealized appreciation on
investments (238,376) - - (238,376)
---------- ------------ ------------- -------------
Balance at June 30, 1999 $ 298,434 966,003 (1,455,000) 14,071,269
=========== ============ ============ =============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
- --------------------------------------------------------------------------------
WATERSIDE CAPITAL CORPORATION
Statements of Cash Flows
Years ended June 30, 1997, 1998 and 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1998 1999
--------------- ------------- ------------
<S> <C>
Cash flows from operating activities:
Net increase in stockholders' equity resulting from operations $ 274,281 543,335 1,037,044
Adjustments to reconcile net increase in stockholders' equity
resulting from operations to net cash provided by (used
in) operating activities:
Decrease (increase) in unrealized appreciation on investments (341,300) (524,030) 383,376
Realized gain on investments - - (378,312)
Accretion of preferred stock and loan investments - - (71,823)
Depreciation and amortization 15,346 38,634 42,185
Deferred income tax expense (benefit) 117,230 151,700 (63,000)
Changes in assets and liabilities increasing (decreasing) cash
flows from operating activities:
Dividend receivable (51,425) (121,417) (138,895)
Interest receivable (5,730) (15,542) (207,166)
Refundable income taxes (16,752) 16,752 (43,322)
Prepaid expenses and other current assets - (45,137) (32,779)
Other assets (390) (750) -
Accounts payable and accrued expenses (114,058) 81,510 347,529
Deferred revenue - - 113,631
Income taxes payable (1,823) - -
------------ ------------- ----------------
Net cash provided by (used in) operating activities (124,621) 125,055 988,468
------------ ------------- ----------------
Cash flows from investing activities:
Investments made (1,140,000) (5,175,893) (12,872,180)
Loans made (400,000) (1,325,000) (5,633,270)
Principal collected on loans made 400,000 - 66,163
Issuance of note receivable - - (150,000)
Proceeds from repayment of stockholders' notes receivable 10,000 551,000 -
Proceeds from sales of investments - - 2,670,021
Acquisition of property and equipment (52,997) (71,345) (24,731)
------------ ------------- ----------------
Net cash used in investing activities (1,182,997) (6,021,238) (15,943,997)
------------ ------------- ----------------
Cash flows from financing activities:
Proceeds from notes payable - - 12,300,000
Payment of deferred financing costs - (123,000) (468,500)
Proceeds from issuance of common stock 59,500 8,083,536 -
Payment related to fractional shares associated with stock dividend - - (63)
Repayment of short-term debt (18,500) - -
------------ ------------- ----------------
Net cash provided by financing activities 41,000 7,960,536 11,831,437
------------ ------------- ----------------
Net increase (decrease) in cash and cash equivalents (1,266,618) 2,064,353 (3,124,092)
Cash and cash equivalents, beginning of year 3,595,766 2,329,148 4,393,501
------------ ------------- ----------------
Cash and cash equivalents, end of year $ 2,329,148 4,393,501 1,269,409
============= ============= ================
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ - - 196,462
============= ============= ================
Cash paid during the year for income taxes $ 10,180 - 160,000
============= ============= ================
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
WATERSIDE CAPITAL CORPORATION
Notes to Financial Statements
June 30, 1998 and 1999
- --------------------------------------------------------------------------------
(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 made its first loan to a
small business concern in October 1996 and its first equity investment
in November 1996.
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, 1998 and 1999:
1998 1999
---- ----
Cash $ 193,501 269,409
Repurchase agreements 4,200,000 1,000,000
--------- -------------
Total $ 4,393,501 1,269,409
========= =============
(Continued)
6
<PAGE>
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 at an amount
not greater than cost, with unrealized depreciation being recognized
when value is impaired. Equity securities of private companies are
presumed to represent cost unless the performance of the portfolio
company, positive or negative, indicates otherwise in accordance with
the Policy guidelines. The fair value of equity securities of publicly
traded companies are generally valued at their quoted market price
discounted due to the investment size or market liquidity concerns and
for the effect of restrictions on the sale of such securities.
Discounts range from 0% to 40% for investment size and market liquidity
concerns. Discounts for restriction on the sale of the investments are
15% in accordance with the provisions of the Policy. The Company
maintains custody of its investments as permitted by the Investment
Company Act of 1940.
REALIZED AND UNREALIZED GAIN OR LOSS ON INVESTMENTS
Realized gains or losses recorded upon disposition of investments are
calculated on the difference between the net 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. The Company
ceases to accrue dividends and interest income if the investee is more
than 120 days delinquent in their payments. Accretion of loans and
preferred stock investments are recorded as a component of interest and
dividend income in the statement of operations.
(Continued)
7
<PAGE>
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.
DEFERRED FINANCING COSTS
Deferred financing costs consist of origination and processing fees
paid in connection with SBA debentures. The origination and processing
fees are amortized over the life of the debentures using the
straight-line method, which approximates the effective interest method.
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.
NET INCREASE IN STOCKHOLDERS' EQUITY RESULTING FROM OPERATIONS PER
SHARE
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.
8
<PAGE>
STOCK OPTION PLAN
The Company accounts for stock options issued to employees 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 and 1998
financial statements to conform to 1999 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.
(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
$8,506,225 and $24,342,250 at June 30, 1998 and 1999 (63.6% and 89.8%
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.
Since December 4, 1998, Diversified Telecom, Inc. has not made required
dividend payments to the Company. As a result, the Company has
discontinued accruing dividends on the investment. Certain changes have
been made at the portfolio company level and management does not
believe that the underlying investment is impaired.
(Continued)
9
<PAGE>
(3) NOTE RECEIVABLE
The Company has a note receivable due from the chief executive officer
of one of its investees. The note earns interest at 9% per annum and
matures on June 30, 2000. Interest payments are due monthly, and a
final installment in the amount of all outstanding principal, plus
accrued and unpaid interest, is due upon maturity.
(4) PROPERTY AND EQUIPMENT
Property and equipment at June 30, 1998 and 1999 consists of the
following:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C>
Furniture and fixtures $ 66,189 80,479
Computer equipment 30,226 37,296
Leasehold improvements 27,927 31,298
------------ -----------
124,342 149,073
Less accumulated depreciation and amortization 12,340 30,112
------------ -----------
Property and equipment, net $ 112,002 118,961
============ =========
</TABLE>
(5) ACCRUED EXPENSES
Accrued expenses at June 30, 1998 and 1999 consist of the following:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C>
Accrued accounting and legal expense $ 45,500 37,932
Accrued salaries and benefits 21,325 114,766
Accrued interest payable - 196,730
Other accrued expenses - 23,400
------------ ----------
Total accrued expenses $ 66,825 372,828
============ =========
</TABLE>
(6) DEBENTURES PAYABLE
At June 30, 1999, the Company had drawn down debentures totaling
$12,300,000 payable to the SBA. The $6,000,000 drawn down during the
second quarter of 1999 bears interest at a fixed interest rate of
6.240% and matures March 1, 2009. Interest on the $6,300,000 drawn down
in the fourth quarter of 1999 is payable at an interim interest rate of
5.535% which is expected to be fixed in September 1999, and matures on
September 1, 2009. The debentures require semi-annual interest-only
payments, with all principal due upon maturity. The SBA debentures are
subject to a prepayment penalty.
10
<PAGE>
In May 1999, the Company was granted approval for additional SBA
debentures totaling up to $16,100,000. The debentures will accrue
interest at an interim rate to be set at the time of each draw against
the facility. The interest rate on any outstanding amounts is fixed in
the March or September following the draw down. At June 30, 1999 none
of these debentures had been drawn upon.
(7) INCOME TAXES
The Company's provision for income taxes for the years ended June 30,
1997, 1998 and 1999 was allocated as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C>
Income tax expense (benefit) attributable to
operations $ (12,370) (47,220) 51,000
Deferred tax expense (benefit) attributable
to change in unrealized appreciation
on investments 129,600 198,920 (145,000)
Current tax expense attributable to realized
gain on investments - - 144,000
---------- ----------- -----------
Total income tax expense $ 117,230 151,700 50,000
========== =========== ===========
</TABLE>
The Company's income tax expense (benefit) attributable to operations
for the years ended June 30, 1997, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C>
Current:
Federal $ - - (25,000)
State - - (6,000)
---------- ----------- -----------
Total current taxes - - (31,000)
---------- ----------- -----------
Deferred:
Federal (10,370) (39,720) 68,000
State (2,000) (7,500) 14,000
---------- ----------- -----------
Total deferred taxes (12,370) (47,220) 82,000
---------- ----------- -----------
Total income tax expense (benefit) attributable
to operations $ (12,370) (47,220) 51,000
========== =========== ===========
</TABLE>
(Continued)
11
<PAGE>
The 1997, 1998 and 1999 actual tax expense (benefit) attributable to
operations differs from the amount which would be provided by applying
the statutory federal rate to net operating income before income taxes
as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C>
Computed "expected" tax expense $ 17,000 58,000 371,000
State taxes, net of federal impact (1,320) (5,000) 5,000
Nontaxable dividend income (17,500) (102,000) (348,000)
Other (10,550) 1,780 23,000
------- ----------- -----------
Total income tax expense (benefit) attributable
to operations $ (12,370) (47,220) 51,000
======= =========== ===========
</TABLE>
The Company's deferred tax assets and liabilities at June 30, 1998 and
1999 are as follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C>
Deferred tax assets:
Net operating loss carryforward $ 53,000 -
Organization costs, due to the differing amortization
methods and implementation of SOP 98-5 23,000 15,000
----------- -----------
Total deferred tax assets 76,000 15,000
----------- -----------
Deferred tax liabilities:
Property and equipment, due to differing
depreciation methods (5,000) (9,000)
Investments, due to recognition of unrealized
appreciation and accretion for financial
statement purposes (329,000) (201,000)
----------- -----------
Total deferred tax liabilities (334,000) (210,000)
----------- -----------
Net deferred tax liabilities $ (258,000) (195,000)
=========== ===========
</TABLE>
(Continued)
12
<PAGE>
(8) STOCKHOLDERS' EQUITY
STOCKHOLDERS' NOTES RECEIVABLE
In 1996, the Company completed a private placement under which 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, 1998 and 1999, $1,455,000 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 stockholders repay the
notes on or before December 31, 1999. Notice of this demand was sent to
the stockholders on December 31, 1997.
STOCK DIVIDEND
On February 5, 1999, the Company declared a 5% stock dividend to
shareholders of record as of February 26, 1999. On March 15, 1999, the
Company issued 71,037 shares of common stock in conjunction with this
dividend. Accordingly, amounts equal to the fair market value (based on
quoted market prices) of the additional shares issued have been charged
to retained earnings and capitalized as common stock and additional
paid-in capital. Historical earnings per share and weighted average
shares outstanding and net asset value per share have been restated to
reflect the 5% stock dividend.
UNDISTRIBUTED ACCUMULATED EARNINGS
Undistributed accumulated earnings at June 30, 1998 and 1999 consist of
the following:
1998 1999
---- ----
Undistributed accumulated investment income $ 258,942 731,691
Undistributed accumulated net realized gains - 234,312
---------- -------
Undistributed accumulated earnings $ 258,942 966,003
========== =======
(Continued)
13
<PAGE>
STOCK OPTION PLAN
During 1998, the Company adopted the Waterside Capital Corporation 1998
Employee Stock Option Plan (the "Plan") pursuant to which the Company
may grant stock options to officers and key employees. The Plan
authorizes the grant of options to purchase up to 105,000 shares 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 was no
plan in effect during 1997. During 1998 and 1999, 81,375 and 21,000
options, respectively, were granted under the Plan. At June 30, 1998
and 1999, there were 23,625 and 2,625 additional shares available for
future grant under the Plan, respectively.
The per share weighted-average fair value of all stock options granted
is $2.94. 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% for
options granted in fiscal 1998 and expected life of five years,
expected volatility of 17.3%, expected dividend yield of 0% and
risk-free interest rate of 6.01% for options granted in fiscal 1999.
Under the Plan, the employee stock options are dividend protected. As a
result, the exercise price of the outstanding options was adjusted
downward and the number of options increased so as to equalize the
holder's value before and after a stock dividend or split. As a result
of the stock dividend described above, all options outstanding were
adjusted in accordance with the Plan.
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>
1998 1999
---- ----
<S> <C>
Net increase in stockholders'
equity resulting from operations As reported $ 543,335 1,037,044
Pro forma 515,587 855,516
Net increase in stockholders'
equity resulting from operations
per share - basic and diluted As reported $ 0.57 0.70
Pro forma 0.54 0.57
</TABLE>
(Continued)
14
<PAGE>
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
Number of Weighted-Average
Shares Exercise Price
------ --------------
<S> <C>
Balance at June 30, 1997 - $ -
Granted 81,375 10.49
Exercised - -
Forfeited - -
Expired - -
---------- ----------
Balance at June 30, 1998 81,375 10.49
Granted 21,000 8.21
Exercised - -
Forfeited - -
Expired - -
---------- ----------
Balance at June 30, 1999 102,375 $ 10.02
========== ==========
</TABLE>
At June 30, 1998 and 1999, 9,450 and 75,425 options, respectively, were
exercisable. The difference between the weighted average exercise
prices for all outstanding options and those exercisable on June 30,
1999 was not significant.
The weighted average remaining contractual life of outstanding options
at June 30, 1999 is 8.9 years.
(Continued)
15
<PAGE>
(9) 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, 1998 and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C>
Basic net increase in stockholders' equity
resulting from operations per share:
Net increase in stockholders' equity
resulting from operations $ 274,281 543,335 1,037,044
============ =========== ===========
Weighted average number of
common shares outstanding $ 590,223 955,749 1,491,937
============ =========== ===========
Basic net increase in stockholders'
equity resulting from operations
per share $ 0.46 0.57 0.70
============ =========== ===========
Diluted net increase in stockholders' equity
resulting from operations per share:
Net increase in stockholders' equity
resulting from operations $ 274,281 543,335 1,037,044
============ =========== ===========
Weighted average number of common
shares outstanding 590,223 955,749 1,491,937
Dilutive effect of stock options (as
determined by using the treasury
stock method) - 1,456 -
------------ ----------- -----------
Adjusted weighted average number
of common shares outstanding $ 590,223 957,205 1,491,937
============ =========== ===========
Diluted net increase in
stockholders' equity resulting
from operations per share $ 0.46 0.57 0.70
============ =========== ===========
</TABLE>
(10) 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. In
addition, for the fiscal years ended June 30, 1998 and 1999, the
Company paid fees of $14,000 and $88,000, respectively, to an officer
and director of the Company and to a partnership owned by an officer
and director of the Company for the use of an airplane.
(Continued)
16
<PAGE>
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. As of June 30, 1999, the
Company no longer has an investment in this entity.
(11) LEASES
The Company has four noncancelable operating leases, primarily for
office space, that expire over the next four years. The Company nets
rent expense with sublease income.
Future minimum lease payments under noncancelable operating leases
(with initial or remaining lease terms in excess of one year) as of
June 30, 1999 are:
Year ending June 30,
2000 $ 62,907
2001 64,241
2002 65,370
2003 33,326
------------
Total minimum lease payments $ 225,844
============
Net rental expense for operating leases for the years ended June 30,
1997, 1998 and 1999 was $20,919, $34,834 and $68,376, respectively.
Sublease income for the years ended June 30, 1997, 1998 and 1999 was
$3,500, $10,900 and $4,900, respectively.
(12) COMMITMENTS AND CONTINGENCIES
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 1999 and December 2002. If the employees are
terminated by the Executive Committee due to disability or without
cause, the compensation of four employees will be paid for a period of
90 days from the termination date, and the compensation of one employee
will be paid for a period of two years from termination date. The
Company's commitment for termination benefits is approximately
$276,000.
(Continued)
17
<PAGE>
LINE OF CREDIT
The Company has an open line of credit with a financial institution for
$1,500,000. The interest rate on the line is the bank's prime rate.
There were no outstanding borrowings under the line of credit at June
30, 1999.
(13) CONCENTRATION OF CREDIT RISK
Most of the Company's portfolio investment companies are located in the
Mid-Atlantic region of the United States. As a result, any adverse
impact on the economy of that region could impact the Company's results
of operations and financial position.
(14) 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, 1998 and 1999:
CASH AND CASH EQUIVALENTS, DIVIDENDS RECEIVABLE, INTEREST RECEIVABLE,
NOTE RECEIVABLE, ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
The carrying amounts approximate fair value because of the short
maturity of these instruments.
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).
DEBENTURES PAYABLE:
The carrying amounts approximate fair value as the interest rate on the
$6,000,000 draw down was fixed in March 1999 and the $6,300,000 draw
down received an interim rate on April 22, 1999. In addition, interest
rates did not materially change between March and June 30, 1999.
(Continued)
18
<PAGE>
STOCKHOLDERS' NOTES RECEIVABLE:
The fair value of stockholders' notes receivable is estimated by
discounting the future cash flows using current interest rates at which
similar notes would be made to borrowers with similar credit ratings.
The fair value at June 30, 1998 and 1999 is estimated to be $1,279,000
and $1,394,000, respectively.
(15) 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 8% 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. Total employer expense for the plan for the
year ended June 30, 1999 was $21,708.
(16) CHANGE IN ESTIMATE
In the fourth quarter of 1999, the Company changed its estimate of the
liquidity discount used to calculate the fair value of investments in
publicly traded companies. The change in estimate provides a more
reasonable basis to determine the actual liquidity discount based on
the amount of shares held and the average daily trading volume. The
change resulted in additional unrealized appreciation on investments of
approximately $66,000, net of income taxes, for the fourth quarter of
1999.
(Continued)
19
<PAGE>
WATERSIDE CAPITAL CORPORATION
Schedule of Portfolio Investments
JUNE 30, 1998 AND 1999
- --------------------------------------------------------------------------------
The Company's investment portfolio at June 30, 1998, consisted of the
following:
<TABLE>
<CAPTION>
Cost or
contributed Fair
Loans: Maturity value value
------ -------- ----- -----
<S> <C>
Avery Communications,
Inc. Convertible Note 12/10/02 $ 350,000 600,264
Divaris Consolidated
Investments, Inc. 6/29/04 975,000 975,000
------------ ------------
Total loans 1,325,000 1,575,264
------------ ------------
Cost or Fair
Number contributed market
Equity Investments: of shares value value
------------------- --------- ----- -----
PUBLICLY-TRADED COMPANY -
Avery Communications, Inc. Common
Stock 245,000 $ 249,900 568,033
EQUITY INVESTMENTS IN PRIVATE COMPANIES:
Real Time Data Management Services, Inc.
Preferred Stock 700 585,000 710,247
Mid-Atlantic Small Business Finance, Inc.
Preferred Stock 500 140,000 140,000
Coddle Roasted Meats, Inc. Preferred
Stock 125 125,000 93,750
Election Products, Inc. Preferred Stock 500 875,000 875,000
Election Products, Inc. Common Stock 223 4 140,518
NKL Industries, Inc. Preferred Stock 900 900,000 900,000
NKL Industries, Inc. Common Stock 989 989 989
Delta Education Systems, Inc. Preferred
Stock 425 398,600 398,600
Diversified Telecom, Inc. Preferred
Stock 1,500 1,500,000 1,500,000
Crispies, Inc. Preferred Stock 400 397,200 397,200
Triangle Biomedical Sciences Preferred
Stock 1,000 1,000,000 1,000,000
------------ ------------
Total equity investments 6,171,693 6,724,337
------------ ------------
</TABLE>
(Continued)
20
<PAGE>
WATERSIDE CAPITAL CORPORATION
Schedule of Portfolio Investments (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cost or Fair
Number of Percentage contributed market
Stock Options and Warrants: shares ownership value value
--------------------------- ------ --------- ----- -----
<S> <C>
PUBLICLY-TRADED COMPANY:
Avery Communications, Inc. * 91,000 0.00% $ - 53,424
PRIVATE COMPANIES:
Real Time Data Management
Services, Inc. 125 29.41 115,000 124,000
Coddle Roasted Meats, Inc. 1,177 15.00 - -
Delta Education Systems, Inc. 176 15.00 26,400 26,400
Diversified Telecom, Inc. 3,611 10.74 - -
Crispies, Inc. 524 6.37 2,800 2,800
Triangle Biomedical Sciences 23,260 6.57 - -
------------ -------------
Total options and warrants 144,200 206,624
------------ -------------
Total investments $ 7,640,893 8,506,225
============ =============
</TABLE>
The Company's investment portfolio at June 30, 1999 consisted of the
following:
<TABLE>
<CAPTION>
Cost or
contributed Fair
Loans: Maturity value value
------ --------- ----- -----
<S> <C>
Avery Communications,
Inc. Convertible Note 12/10/02 $ 350,000 350,000
Divaris Consolidated
Investments, Inc. 6/29/04 1,100,000 1,100,000
Extraction Technologies
of VA, LLC 7/22/03 900,000 900,000
JMS Worldwide, Inc. 7/31/03 1,000,000 1,000,000
Diversified Telecom, Inc. Demand 133,837 133,837
Diversified Telecom, Inc. 5/19/02 152,145 152,145
The Netplex Group, Inc. 2/25/04 758,319 758,319
MilleCom, Inc. 3/31/04 900,000 900,000
MilleCom, Inc. 5/11/04 360,000 360,000
DigitalSquare.com
Convertible Note 12/31/99 500,000 500,000
ISR Solutions, Inc. 6/30/04 740,167 740,167
------------ -------------
Total loans 6,894,468 6,894,468
------------ -------------
</TABLE>
(Continued)
21
<PAGE>
WATERSIDE CAPITAL CORPORATION
Schedule of Portfolio Investments (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cost or Fair
Number contributed market
Equity Investments: of shares value value
------------------- --------- ----- -----
<S> <C>
PUBLICLY-TRADED COMPANIES:
Avery Communications, Inc. Common
Stock 245,000 $ 249,900 223,685
Netplex Group, Inc. Preferred Stock 1,500,000 1,500,000 1,500,000
Netplex Group, Inc. Common Stock * 165,000 237,000 427,425
Triangle Imaging Group, Inc. Preferred
Stock 150,000 1,321,500 1,321,500
Triangle Imaging Group, Inc. Convertible
Preferred Stock 700 700,000 700,000
Triangle Imaging Group, Inc. Common
Stock * 500,000 225,000 273,500
EQUITY INVESTMENTS IN PRIVATE COMPANIES:
Real Time Data Management Services, Inc.
Preferred Stock 400 369,334 557,479
Coddle Roasted Meats, Inc. Common
Stock 1,200 120 120
Delta Education Systems, Inc. Preferred
Stock 1,625 1,584,643 1,584,643
Diversified Telecom, Inc. Preferred Stock 1,500 1,500,000 1,500,000
Crispies, Inc. Preferred Stock 400 397,760 397,760
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 1,490,527 1,490,527
Fire King International Preferred Stock 2,000 2,000,000 2,000,000
QuesTech Packaging, Inc. Preferred
Stock 600 600,000 600,000
MilleCom, Inc. Common Stock 60 60 60
Eton Court Asset Management, Ltd.
Preferred Stock 1,000 966,457 966,457
Fairfax Publishing Co., Inc. Preferred
Stock 1,100 1,027,626 1,027,626
-------------- --------------
Total equity investments 16,669,927 17,070,782
-------------- --------------
</TABLE>
(Continued)
22
<PAGE>
WATERSIDE CAPITAL CORPORATION
Schedule of Portfolio Investments (continued)
<TABLE>
<CAPTION>
Cost or Fair
Number of Percentage contributed market
Stock Options and Warrants: shares ownership value value
-------------------------- ------ --------- ------ ------
<S> <C>
PUBLICLY-TRADED COMPANIES:
Avery Communications, Inc. 126,000 0.00% $ - -
Netplex Group, Inc. * 75,000 0.70 - 74,100
Triangle Imaging Group, Inc. * 20,000 0.14 - -
PRIVATE COMPANIES:
Real Time Data Management
Services, Inc. 125 29.41 115,000 122,000
Delta Education Systems, Inc. 639 39.00 48,200 48,200
Diversified Telecom, Inc. 8,998 15.00 - -
Crispies, Inc. 524 6.37 2,800 2,800
Triangle Biomedical Sciences 23,260 6.57 - -
Extraction Technologies of
VA, LLC - 15.00 - -
JMS North America, Inc. 199 5.00 - -
EPM Development Systems,
Corp. 87 8.00 11,600 11,600
Fire King International - 3.75 - -
QuesTech Packaging, Inc. - 12.50 - -
MilleCom, Inc. 150,000 3.15 - -
Eton Court Asset
Management, Ltd. 14,943 13.00 34,700 34,700
Fairfax Publishing Co., Inc. 526 16.50 73,600 73,600
ISR Solutions, Inc. 476,951 6.00 10,000 10,000
------------- -------------
Total options and warrants 295,900 377,000
------------- -------------
Total investments $ 23,860,295 $ 24,342,250
============= =============
</TABLE>
* Represents Rule 144A restricted securities
- --------------------------------------------------------------------------------
23
<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
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
Monday, October 25, 1999
at 10:00 a.m. at Nauticus,
One Waterside Drive,
Norfolk, 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
ACCOUNTANTS
KPMG LLP
Norfolk, Virginia
CORPORATE COUNSEL
WILLIAMS, MULLEN, CLARK & DOBBINS, P.C.
Virginia Beach, Virginia
DIRECTORS AND OFFICERS
DIRECTORS
Peter M. Meredith, Jr.1,3
Chairman of the Board
President
Meredith Construction Co. Inc.
J. Alan Lindauer1
President and Chief Executive Officer
James E. Andrews
Principal Owner
Anzell Automotive, Inc.
Donna C. Bennett2
Vice President
First Union National Bank
J.W. Whiting Chisman, Jr.1,3
President
Dare Investment Company
Jeffrey R. Ellis
Private Investor
Marvin S. Friedberg
Chief Executive Officer
Virginia Commonwealth
Trading Company
Eric L. Fox
Portfolio Manager
Paine Webber
Roger L. Frost2
Retired
Ernest F. Hardee1,3
President and Chief
Executive Officer
Hardee Realty Corporation
Henry U. Harris, III
President
Virginia Investment
Counselors, Inc.
Robert I. Low1,2
Senior Partner
Goodman & Company
Harold J. Marioneaux, Jr.
Dental Surgeon
Charles H. Merriman, III1
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.1
Executive Vice President
Branch Bank & Trust Corp.
James W. Noel, Jr.
Executive Director
York County Industrial Dev. Authority
Richard G. Ornstein1
Real Estate Management and Development
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
Mark A. Sommer, III
Controller
Martin N. Speroni
Director of Research
Lex W. Troutman
Business Development
Officer
1 Executive Committee
2 Audit Committee
3 Compensation/Stock Option Committee
<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-K FOR THE YEAR ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS' LEGEND.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 1,269
<SECURITIES> 24,342
<RECEIVABLES> 540
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,081
<PP&E> 119
<DEPRECIATION> 0
<TOTAL-ASSETS> 27,110
<CURRENT-LIABILITIES> 544
<BONDS> 12,300
0
0
<COMMON> 1,492
<OTHER-SE> 12,579
<TOTAL-LIABILITY-AND-EQUITY> 27,110
<SALES> 0
<TOTAL-REVENUES> 2,897
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,387
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 418
<INCOME-PRETAX> 1,092
<INCOME-TAX> 51
<INCOME-CONTINUING> 1,041
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (4)
<NET-INCOME> 1,037
<EPS-BASIC> .70
<EPS-DILUTED> .70
</TABLE>
