SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED
MARCH 31, 1999
COMMISSION FILE NO.: 333-36709
WATERSIDE CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1694665
(State of incorporation) (I.R.S. Employer
Identification Number)
300 EAST MAIN STREET, SUITE 1380, NORFOLK, VIRGINIA 23510
(Address of principal executive office) (Zip Code)
(757) 626-1111
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and has been subject to the
filing requirements for the past 90 days. Yes [X] No [ ]
As of March 31, 1999, the registrant had issued and outstanding 1,491,937
shares of Common Stock, $1.00 par value.
<PAGE>
WATERSIDE CAPITAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
<S> <C>
PART I. FINANCIAL INFORMATION:
ITEM 1. Statements of Operations for the Three Months and Nine Months
Ended March 31, 1998 and 1999 (unaudited)
Balance Sheets as of
June 30, 1998 and March 31, 1999 (unaudited)
Statement of Changes in Stockholders' Equity for the
Nine Months Ended March 31, 1999 (unaudited)
Statements of Cash Flows for the
Nine Months Ended March 31, 1998 and 1999 (unaudited)
Notes to Financial Statements (unaudited)
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
PART II. OTHER INFORMATION
SIGNATURES
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS
WATERSIDE CAPITAL CORPORATION
FINANCIAL STATEMENTS
JUNE 30, 1998 AND MARCH 31, 1999
<PAGE>
WATERSIDE CAPITAL CORPORATION
Statements of Operations
For the three months and nine months ended March 31, 1998 and 1999 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1998 1999 1998 1999
------- ------ ------ ------
<S> <C> <C> <C> <C>
Operating income:
Interest on loans $10,451 183,148 $13,673 455,938
Dividends 78,098 245,935 164,577 729,895
Interest on cash equivalents 76,170 32,873 113,400 107,483
Fee and other income 38,800 224,046 79,180 663,545
------- ------- ------- ---------
Total operating income 203,519 686,002 370,830 1,956,861
------- ------- ------- ---------
Operating expenses:
Management fees 6,000 - 39,000 -
Salary and benefits 127,199 176,314 152,394 552,204
Legal and accounting 2,037 25,000 27,798 68,920
Interest expense - 106,227 - 210,753
Other operating expenses 45,517 76,654 81,113 268,309
------- ------- ------- ---------
Total operating expenses 180,753 384,195 300,305 1,100,186
------- ------- ------- ---------
Net operating income before income taxes 22,766 301,807 70,525 856,675
Income tax expense (benefit) (18,363) 31,000 (34,055) 58,000
------- ------- ------- ---------
Net operating income 41,129 270,807 104,580 798,675
Realized appreciation on investments,
net of income taxes of $90,699 and
$144,000 for the three months
and nine months ended March
31, 1999, respectively - 147,099 - 234,312
Change in unrealized appreciation on
investments, net of provision (benefit)
for income taxes of $88,242 and
$78,100 for the three months
ended March 31, 1998 and 1999,
respectively, and $127,134 and
$(174,900) for the nine months
ended March 31, 1998 and 1999,
respectively 144,107 128,236 207,783 (284,738)
------- ------- ------- ---------
Net increase in stockholders'
equity resulting from operations
per share-basic and diluted $185,236 546,142 $312,363 748,249
======= ======= ======== =========
Net increase in stockholders' equity
resulting from operations per share -
basic and diluted $ 0.12 0.37 $ 0.21 0.50
======== ======= ======== =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
WATERSIDE CAPITAL CORPORATION
Balance Sheets
June 30, 1998 and March 31, 1999 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, March 31,
1998 1999
--------- -----------
(Unaudited)
<S> <C> <C>
Assets:
Investments in portfolio companies, at fair value
(note 3):
Equity securities $ 6,724,337 11,929,848
Loans 1,575,264 5,328,653
Options and warrants 206,624 210,275
--------- -----------
Total investments, cost of $7,640,893 and
$17,063,083 at June 30, 1998 and March 31,
1999, respectively 8,506,225 17,468,776
--------- -----------
Current assets:
Cash and cash equivalents 4,393,501 2,079,797
Dividends receivable 172,842 233,192
Interest receivable 21,272 172,683
Prepaid expenses and other current assets 45,137 83,419
--------- -----------
Total current assets 4,632,752 2,569,091
Property and equipment, net 112,002 121,697
Other assets, net 123,750 260,100
--------- -----------
Total assets $13,374,729 20,419,664
========= ===========
Liabilities and Stockholders' Equity:
Liabilities:
Current liabilities:
Line of credit (note 4) $ - 250,000
Accounts payable 15,616 5,100
Accrued expenses 66,825 49,933
Deferred revenue - 43,379
Income taxes payable - 156,378
--------- -----------
Total current liabilities 82,441 504,790
Deferred income taxes 258,000 132,400
Notes payable (note 5) - 6,000,000
--------- -----------
Total liabilities 340,441 6,637,190
--------- -----------
Stockholders' Equity:
Preferred stock, $1 par value, 25,000 shares
authorized, no shares issued and outstanding - -
Common stock, $1 par value, 10,000,000 shares
authorized, 1,420,900 issued and
outstanding at June 30, 1998 and 1,491,937
issued and outstanding at March 31, 1999 1,420,900 1,491,937
Additional paid-in capital 12,272,636 12,769,895
Net unrealized appreciation on investments 536,810 252,072
Undistributed accumulated earnings 258,942 723,570
Stockholders' notes receivable (1,455,000 (1,455,000)
---------- -----------
Total stockholders' equity 13,034,288 13,782,474
--------- -----------
Total liabilities and stockholders' equity $ 13,374,729 20,419,664
========== ===========
Net asset value per common share $ 9.17 9.24
========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
WATERSIDE CAPITAL CORPORATION
Statements of Changes in Stockholders' Equity
For the nine months ended March 31, 1999 (Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Net unrealized
Common Stock Additional appreciation Undistributed Stockholders' Total
------------------ paid-in on accumulated notes stockholders'
Shares Amount capital investments earnings receivable equity
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1998 1,420,900 $1,420,900 12,272,636 536,810 258,942 (1,455,000) 13,034,288
Net operating income - - - - 798,675 - 798,675
Net realized appreciation on investments - - - - 234,312 - 234,312
Decrease in net unrealized appreciation on
investments - - - (284,738) - - (284,738)
5% stock dividend (note 6) 71,037 71,037 497,259 - (568,359) - (63)
--------- ----------- ---------- --------- ---------- ---------- ----------
Balance, March 31, 1999 (Unaudited) 1,491,937 $1,491,937 12,769,895 252,072 723,570 (1,455,000) 13,782,474
========= =========== ========== ========= ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
WATERSIDE CAPITAL CORPORATION
Statements of Cash Flows
For the nine months ended March 31, 1998 and 1999 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
1998 1999
--------- ---------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net increase in stockholders' equity resulting
from operations $312,363 748,249
Adjustments to reconcile net increase in stockholders'
equity resulting from operations to
net cash provided by operating activities:
Decrease (increase) in unrealized appreciation
on investments (334,917) 459,638
Realized gain on investments - (378,312)
Accretion of preferred stock and loan investments - (22,127)
Depreciation and amortization 13,763 26,666
Deferred income tax expense (benefit) 128,542 (125,600)
Changes in assets and liabilities increasing
(decreasing) cash flows from operating activities:
Dividends receivable (30,290) (60,350)
Interest receivable (43,113) (151,411)
Refundable income taxes (18,438) -
Prepaid expenses and other current assets (58,976) (38,282)
Accounts payable and accrued expenses 60,389 (27,408)
Deferred revenue - 43,379
Income taxes payable - 156,378
-------- ---------
Net cash provided by operating activities 29,323 630,820
-------- ---------
Cash flows from investing activities:
Investments made (2,075,892) (7,562,118)
Loans made (350,000) (4,031,125)
Principal collected on loans outstanding - 41,472
Proceeds from stockholders' notes receivable 551,000 -
Proceeds from investment liquidation - 2,530,021
Acquisition of property and equipment (53,836) (22,711)
--------- ---------
Net cash used in investing activities (1,928,728) (9,044,461)
--------- ---------
Cash flows from financing activities:
Proceeds from line of credit - 250,000
Proceeds from notes payable - 6,000,000
Payment of deferred financing costs - (150,000)
Proceeds from issuance of common stock 8,211,553 -
Payment related to fractional shares
associated with stock dividend - (63)
-------- ---------
Net cash provided by financing activities 8,211,553 6,099,937
-------- ---------
Net (increase) decrease in cash and cash equivalents 6,312,148 (2,313,704)
Cash and cash equivalents, beginning of period 2,329,148 4,393,501
-------- ---------
Cash and cash equivalents, end of period $ 8,641,296 2,079,797
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
WATERSIDE CAPITAL CORPORATION
Notes to Financial Statements
June 30, 1998 and March 31, 1999 (Unaudited)
- --------------------------------------------------------------------------------
(1) UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited interim
financial statements of Waterside Capital Corporation ("Waterside" or
the "Company") are prepared in accordance with generally accepted
accounting principles ("GAAP") for interim financial information and
pursuant to the requirements for reporting on Form 10-Q and Article 10
of Regulation S-X. Accordingly, certain disclosures accompanying annual
financial statements prepared in accordance with GAAP are omitted. In
the opinion of management, all adjustments, consisting of normal
recurring accruals necessary for the fair presentation of financial
statements for the interim period, have been included. The current
period's results of operations are not necessarily indicative of results
that ultimately may be achieved for the year. The interim financial
statements and notes thereto should be read in conjunction with the
financial statements and notes thereto included in the Company's Form
N-30D, as filed with the Securities and Exchange Commission.
(2) DESCRIPTION OF BUSINESS
The Company was incorporated in the Commonwealth of Virginia on July 13,
1993 and is a closed-end investment company licensed by the Small
Business Administration (the "SBA") as a Small Business Investment
Corporation ("SBIC"). The Company makes equity investments in, and
provides loans to, small business concerns to finance their growth,
expansion and development. Under applicable SBA regulations, the Company
is restricted to investing only in qualified small business concerns as
contemplated by the Small Business Investment Act of 1958.
(3) INVESTMENTS
Investments are carried at fair value, as determined by the Executive
Committee of the Board of Directors. The Company, through its Board of
Directors, has adopted the Model Valuation Policy, as published by the
SBA in Appendix III to Part 107 of Title 12 of the Code of Federal
Regulations (the "Policy"). The Policy, among other things, presumes
that loans and investments are acquired with the intent that they are to
be held until maturity or disposed of in the ordinary course of
business. Except for interest-bearing securities which are convertible
into common stock, interest-bearing securities are valued in an amount
not greater than cost, with unrealized depreciation recognized when
value is impaired. Equity securities of private companies are presumed
to represent cost unless the performance of the portfolio company,
positive or negative, indicates otherwise in accordance with the Policy
guidelines. The fair value of equity securities of publicly-traded
companies are generally valued at their quoted market price discounted
for the effect of restrictions on the sale of such securities. Discounts
range from 0% to 50%. The Company maintains custody of its investments
as permitted by the Investment Company Act of 1940.
(Continued)
<PAGE>
(3) CONTINUED
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
$17,468,776 at June 30, 1998 and March 31, 1999 (63.6% and 85.5% of
assets), respectively. The valuation process completed by management
includes estimates made by management and the Executive Committee in the
absence of readily ascertainable market values. These estimated values
may differ significantly from the values that would have been used had a
ready market for the securities existed, and those differences could be
material.
(4) LINE OF CREDIT
On March 31, 1999, the Company borrowed $250,000 under a line-of-credit
agreement. The interest rate on the line is the bank's prime rate.
Borrowings under the line of credit were fully repaid on April 2, 1999.
(5) NOTES PAYABLE
On October 2, 1998, the Company borrowed $6,000,000 from the SBA under
10-year notes. The notes are due on October 2, 2008 and bear interest at
a rate of 6.24% plus a 1.00% annual charge. The interest rate was
finalized on March 18, 1999. In conjunction with the signing of the
notes, the Company paid a 2.50% origination fee in addition to the 1%
commitment fee paid during fiscal 1998. The total amount of leverage
approved by the SBA and available for borrowing is $12,300,000,
including the $6,000,000 drawn in October 1998 described above.
(6) 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 have been restated to reflect the 5% stock dividend.
<PAGE>
(7) NEW ACCOUNTING PRONOUNCEMENT
As of July 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, REPORTING COMPREHENSIVE INCOME.
SFAS No. 130 established new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this
statement had no material impact on the Company's net increase in
stockholders' equity resulting from operations per share or
stockholders' equity.
<PAGE>
WATERSIDE CAPITAL CORPORATION
Schedule of Portfolio Investments
June 30, 1998 and March 31, 1999
- --------------------------------------------------------------------------------
The Company's investment portfolio at June 30, 1998, consisted of the
following:
<TABLE>
<CAPTION>
Coupon Cost or
interest contributed Fair
Loans: Maturity rate value value
----- -------- -------- ----------- -----
<S> <C> <C> <C> <C>
Avery Communications,
Inc. Convertible Note 12/10/02 12% $ 350,000 $ 600,264
Divaris Consolidated
Investments, Inc. 6/29/04 18% 975,000 975,000
---------- ---------
Total loans 1,325,000 1,575,264
---------- ---------
</TABLE>
<TABLE>
<CAPTION>
Cost or Fair
Number contributed market
Equity Interests: of shares value value
---------------- --------- ----------- -------
<S> <C> <C> <C>
PUBLICLY-TRADED 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>
<PAGE>
WATERSIDE CAPITAL CORPORATION
Schedule of Portfolio Investments
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cost or Fair
Number of Percentage contributed market
Stock Warrants and Options: shares ownership value value
--------------------------- ---------- ----------- ----------- ------
<S> <C> <C> <C> <C>
PUBLICLY-TRADED 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 warrants and options 144,200 206,624
----------- ----------
Total investments $ 7,640,893 8,506,225
=========== ==========
</TABLE>
The Company's investment portfolio at March 31, 1999 (unaudited)
consisted of the following:
<TABLE>
<CAPTION>
Coupon Cost or
interest contributed Fair
Loans: Maturity rate value value
------ -------- -------- ----------- -----
<S> <C> <C> <C> <C>
Avery Communications,
Inc. Convertible Note 12/10/02 12.0% $ 350,000 $ 350,000
Divaris Consolidated
Investments, Inc. 6/29/04 18.0% 1,100,000 1,100,000
Extraction Technologies
of VA, LLC 7/22/03 14.5% 650,000 650,000
JMS Worldwide, Inc. 7/31/03 13.0% 1,000,000 1,000,000
Triangle Imaging Group, Inc. 2/15/03 14.0% 1,314,000 1,314,000
Diversified Telecom, Inc. Demand 13.0% 158,528 158,528
The Netplex Group, Inc. 2/25/04 14.0% 756,125 756,125
---------- -----------
Total loans 5,328,653 5,328,653
---------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Cost or Fair
Number contributed market
Equity Interests: of shares value value
---------------- --------- ----------- -------
<S> <C> <C> <C>
PUBLICLY-TRADED COMPANIES:
Avery Communications, Inc. Common
Stock 245,000 $ 249,900 $ 268,030
Netplex Group, Inc. Preferred Stock 1,500,000 1,500,000 1,500,000
Netplex Group, Inc. Common Stock 165,000 237,000 363,270
Triangle Imaging Group, Inc. Common
Stock 500,000 225,000 227,995
EQUITY INVESTMENTS IN PRIVATE COMPANIES:
Real Time Data Management Services, Inc.
Preferred Stock 400 334,285 538,108
Mid-Atlantic Small Business Finance, Inc.
Preferred Stock 500 140,000 140,000
Coddle Roasted Meats, Inc. Common
Stock 1,117 118 118
Delta Education Systems, Inc. Preferred
Stock 425 404,760 404,760
Diversified Telecom, Inc. Preferred
Stock 1,500 1,500,000 1,500,000
Crispies, Inc. Preferred Stock 400 397,620 397,620
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 1,489,947 1,489,947
Fire King International Preferred Stock 2,000 2,000,000 2,000,000
QuesTech Packaging, Inc. Preferred
Stock 600 600,000 600,000
---------- -----------
Total equity investments 11,578,630 11,929,848
------------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Cost or Fair
Number of Percentage contributed market
Stock Warrants and Options: shares ownership value value
--------------------------- --------- ---------- ----------- -------
<S> <C> <C> <C> <C>
PUBLICLY-TRADED COMPANIES:
Avery Communications, Inc. 126,000 0.00% $ - $ -
Netplex Group, Inc. 75,000 0.70 - 47,475
PRIVATE COMPANIES:
Real Time Data Management
Services, Inc. 125 29.41 115,000 122,000
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 -
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 - -
----------- ------------
Total warrants and options 155,800 210,275
----------- ------------
Total investments $ 17,063,083 $ 17,468,776
=========== ============
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONDITION
o General
Waterside Capital Corporation ("Waterside" or the "Company")
is a specialty finance company headquartered in Norfolk,
Virginia. The Company invests in equity and debt securities to
finance the growth, expansion and modernization of small
private businesses, primarily in the Mid-Atlantic Region. The
Company was formed in 1993 as the Eastern Virginia Small
Business Investment Corporation. Through June 30, 1996 the
Company operated as a development stage company focused
primarily on preparation to commence operation. The Company
was licensed in 1996 by the Small Business Administration
(SBA) as a Small Business Investment Company (SBIC) under the
Small Business Investment Act of 1958. In October 1996 the
Company made its first portfolio investment. In January 1998
the Company completed its Initial Public Offering (IPO) to
raise additional equity to support its growth strategy.
The majority of the Company's operating income is derived from
dividend and interest income on portfolio investments and
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 3 offices from which it operates
- Norfolk and Richmond, Virginia and Charlotte, North
Carolina.
o Results of Operations
Due to the successful completion of its IPO in January 1998
and the Company's initiation of its growth strategy using the
proceeds from its IPO, the three months ended March 31, 1999
do not offer a meaningful comparison with the performance for
the three months ended March 31, 1998.
<PAGE>
For the three months ended March 31, 1999, total operating
income was $686 thousand compared to the $204 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 $246 thousand, fee income of $224 thousand,
interest on loans of $183 thousand and interest on cash
equivalents of $33 thousand.
Total operating expenses for the three months ended March 31,
1999 were $384 thousand, consisting primarily of salary and
benefits of $176 thousand, interest expense on SBA borrowings
of $106 thousand, legal and accounting expenses of $25
thousand and other operating expenses of $77 thousand. These
total operating expenses compared to the $181 thousand
expended during the three months ended March 31, 1998. Net
operating income of $271 thousand for the quarter ended March
31, 1999 compared favorably to the $41 thousand during the
same quarter of 1998.
The realized appreciation on investments net of taxes of $147
thousand for the three months ended March 31, 1999 was due to
the redemption of equity investments by four private
companies. The change in unrealized appreciation on
investments net of taxes of $128 thousand for the three month
ended March 31, 1999 and $144 thousand for the three months
ended March 31, 1998 was due primarily to the changing stock
price of two publicly traded portfolio companies.
For the nine months ended March 31, 1999, total operating
income was $2.0 million compared to the $371 thousand
generated during the same period of 1998. The dramatic
increase in operating income is due to the growth in the
Company's investment portfolio. Total operating expense of
$1.1 million for the nine months ended March 31, 1999 compared
to the $300 thousand expended during the nine months ended
March 31, 1998. Net operating income of $799 thousand for the
nine months ended March 31, 1999 compared favorably to the
$105 thousand generated during the nine months ended March 31,
1998.
The realized appreciation on investments net of taxes of $234
thousand for the nine months ended March 31, 1999 was due to
the redemption of equity investments by four private
companies. The reduction in unrealized appreciation on
investments, net of taxes, of $285 thousand for the nine
months ended March 31, 1999 and the increase in unrealized
appreciation on investments, net of taxes, of $208 thousand
for the nine months ended March 31, 1998 was due primarily to
the changing stock price of two publicly traded portfolio
companies.
<PAGE>
o Financial Condition, Liquidity and Capital Resources
During the quarter ended March 31, 1999, the Company closed
$4.9 million in new investments and funded $3.4 million. To
fund these investments and to fund future originations the
Company borrowed $6,000,000 from the SBA on October 2, 1998 as
its first draw on a leverage commitment previously
outstanding. The notes are due on October 2, 2008 and bear
interest at a rate of 6.24% plus a 1.35% fee annually on the
outstanding balance. The Company has additional approved
leverage of $6.3 million, which it anticipates drawing during
the fourth quarter. The Company has an additional two tiers of
leverage (representing approximately $28 million) that it may
borrow from the SBA based on its current regulatory capital
position. These additional two tiers of leverage are subject
to approval by the SBA. Management believes that these sources
of capital will be sufficient to fund the Company's operations
and grow its portfolio in fiscal 1999. The Company declared
and paid a 5% stock dividend during the quarter ended March
31, 1999.
During the nine months ended March 31, 1999 cash provided by
operating activities was $630 thousand as compared to the $29
thousand provided during the nine months ended March 31,
1998,primarily due to the growth in the Company's investment
portfolio. The Company used $9.0 million in investing
activities during the nine months ended March 31, 1999 as
compared to the $1.9 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
three portfolio companies. The Company generated $6.1 million
in cash from financing activities in the nine months ended
March 31, 1999 primarily representing the proceeds from the
borrowings from the SBA described above.
<PAGE>
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
effected. First, the Company has assessed its financial and
administrative software programs. As part of this process, the
Company has contacted its software vendors, who have indicated
that their programs either are or will be Year 2000 compliant.
The Company will continue to work with these vendors to ensure
that necessary upgrades and testing are completed by mid 1999.
Due to the nature of the Company's business, management does
not expect a significant impact associated with
non-information technology systems. Second, the Company is
assessing its key 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 will continue to analyze this area in
further detail in 1999. Finally, the Company is investigating
the impact of Year 2000 issues on its portfolio companies.
This investigation is not complete, and as a result, the
Company cannot assess the potential exposure associated with
the readiness of its portfolio companies for Year 2000.
Because of the relatively small size of its portfolio
companies, their readiness represents the Company's most
significant risk with regards to the Year 2000. Although the
Company is currently unaware of any significant Year 2000
issues related to its portfolio companies, the failure of one
or more of the portfolio companies to properly prepare for the
Year 2000 could have a material adverse impact on the
Company's business, results of operations and financial
condition. Until the Company completes its assessment, it
cannot offer any assurance that the Year 2000 issue will not
adversely affect the Company's business. Based upon its
assessment, contingency plans will be developed to mitigate
the potential risks by September 30, 1999. Based on the
assessment performed to date, the Company does not believe
that the cost of its Year 2000 remediation activities will
exceed $50,000.
o Forward Looking Statements
Included in this report and other written and oral information
by management from time to time, including reports to
shareholders, quarterly and semi-annual shareholder letters,
filings with the Commission, news releases and investor
presentations, are forward-looking statements about business
objectives and strategies, market potential, the Company 's
ability to expand the geographic scope of its investments, the
quality of the Company's due diligence efforts, its financing
plans, the impact of Year 2000 issues on itself, its vendors,
suppliers, and portfolio companies, future financial
performance and other matters that reflect management's
expectations as of the date made. Without limiting the
foregoing, the words "believes", "anticipates", "plans",
"expects", "seeks" and similar expressions are intended to
identify forward-looking statements. Future events and the
Company's actual results could differ materially from the
results reflected in these forward-looking statements. There
are a number of important factors that could cause the
Company's actual results to differ materially from those
indicated by such forward-looking statements. Please refer to
a discussion of these and other factors in this Report and the
Company's other Commission filings. The Company disclaims any
intent or obligation to update these forward-looking
statements, whether as a result of new information, future
events, or otherwise.
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
On March 15, 1999, the Company distributed 71,037 shares of
common stock to its shareholders as of February 26, 1999 as a
stock dividend.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K:
27 Financial Data Schedule
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this Form 10-Q to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Norfolk, Commonwealth of
Virginia on the 12th day of May, 1999.
WATERSIDE CAPITAL CORPORATION
By /s/ J. Alan Lindauer
----------------------------------
J. Alan Lindauer
PRESIDENT AND PRINCIPAL
EXECUTIVE OFFICER
By /s/ Gerald T. McDonald
-------------------------------
Gerald T. McDonald
PRINCIPAL FINANCIAL OFFICER
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF WATERSIDE CAPITAL CORPORATION AS PRESENTED
IN THE FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS' LEGEND.
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