<PAGE>
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
SEPTEMBER 30, 2000
COMMISSION FILE NO.: 333-36709
-------------------------------
WATERSIDE CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
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)
</TABLE>
(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 September 30, 2000, the registrant had issued and outstanding 1,581,430
shares of Common Stock, $1.00 par value.
<PAGE>
WATERSIDE CAPITAL CORPORATION
FORM 10-Q
Table of Contents
Page
Number
------
PART I. FINANCIAL INFORMATION:
ITEM 1. Balance Sheets as of
June 30, 2000 and September 30, 2000 (unaudited)
Statements of Income for the Three Months
Ended September 30, 1999 and 2000 (unaudited)
Statement of Changes in Shareholders' Equity for the
Three Months Ended September 30, 1999 and 2000 (unaudited)
Statements of Cash Flows for the
Three Months Ended September 30, 1999 and 2000 (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
1
<PAGE>
WATERSIDE CAPITAL CORPORATION
Balance Sheets
June 30, 2000 and September 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, September 30,
2000 2000
------------ -------------
(unaudited)
<S> <C>
Assets:
Investments in portfolio companies, at fair value (note 3):
Equity securities $ 23,237,050 $ 22,483,335
Debt securities 8,877,766 9,687,261
Options and warrants 3,752,744 4,287,038
------------ -------------
Total investments, cost of $37,826,396 and $39,559,033
at June 30, 2000 and September 30, 2000, respectively 35,867,560 36,457,634
------------ -------------
Current assets:
Cash and cash equivalents 118,314 62,056
Dividends receivable 654,767 714,549
Interest receivable 222,517 218,325
Note receivable 237,550 237,550
Refundable income taxes 323,322 505,322
Prepaid expenses and other current assets 140,403 65,397
------------ -------------
Total current assets 1,696,873 1,803,199
Property and equipment, net 167,919 160,133
Deferred income taxes 650,000 1,050,000
Deferred financing costs, net 716,391 782,940
------------ -------------
Total assets $ 39,098,743 $ 40,253,906
============ =============
Liabilities and Stockholders' Equity:
Current liabilities:
Lines of credit $ 2,200,000 $ 1,113,700
Accounts payable 31,310 15,328
Accrued expenses 733,042 218,544
------------ -------------
Total current liabilities 2,964,352 1,347,572
Debentures payable (note 4) 19,300,000 22,400,000
------------ -------------
Total liabilities 22,264,352 23,747,572
------------ -------------
Stockholders' equity:
Common stock, $1 par value, 10,000,000 shares authorized,
1,581,430 issued and outstanding 1,581,430 1,581,430
Preferred stock, $1 par value, 25,000 shares authorized,
no shares issued and outstanding - -
Additional paid-in capital 14,618,719 14,618,719
Net unrealized depreciation on investments, net of income taxes (1,216,357) (1,925,920)
Undistributed accumulated earnings 1,850,599 2,232,105
------------ -------------
Total stockholders' equity 16,834,391 16,506,334
Commitments and contingencies
------------ -------------
Total liabilities and stockholders' equity $ 39,098,743 $ 40,253,906
============ =============
Net asset value per common share $ 10.65 $ 10.44
============ =============
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
WATERSIDE CAPITAL CORPORATION
Unaudited Statements of Operations
Three months ended September 30, 1999 and 2000
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
1999 2000
------------- -------------
<S><C>
Operating income:
Dividends $ 505,652 $ 714,347
Interest on debt securities 191,681 260,455
Interest on cash equivalents 22,847 6,590
Fee and other income 110,000 112,046
------------- -------------
Total operating income 830,180 1,093,438
------------- -------------
Operating expenses:
Salaries and benefits 217,407 250,537
Legal and accounting 24,000 42,381
Interest expense 225,223 463,015
Other operating expenses 78,450 104,999
------------- -------------
Total operating expenses 545,080 860,932
------------- -------------
Net operating income before income taxes 285,100 232,506
Income tax benefit (71,000) (149,000)
------------- -------------
Net operating income 356,100 381,506
Change in unrealized depreciation on investments,
net of income tax benefit of $139,000 and $433,000
for 1999 and 2000, respectively (228,322) (709,563)
------------- -------------
Net increase (decrease) in stockholders'
equity resulting from operations $ 127,778 $ (328,057)
============= =============
Net increase (decrease) in stockholders' equity resulting from
operations per share - basic and diluted $ 0.08 $ (0.21)
============= =============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
WATERSIDE CAPITAL CORPORATION
Unaudited Statements of Changes in Stockholders' Equity
Three months ended September 30, 1999 and 2000
<TABLE>
<CAPTION>
Additional Net unrealized Undistributed Stockholders' Total
Common stock paid-in appreciation accumulated notes stockholders'
Shares Amount capital on investments earnings receivable equity
------ ------ ------- -------------- -------- ---------- ------
<S> <C>
Balance at June 30, 1999 1,491,937 $ 1,491,937 $ 12,769,895 $ 298,434 $ 966,003 $ (1,455,000) $ 14,071,269
Net operating income - - - - 356,100 - 356,100
Decrease in net unrealized
appreciation on
investments, net
of income taxes - - - (228,322) - - (228,322)
---------- ------------ ------------- ----------- ----------- ------------- -------------
Balance at
September 30, 1999 1,491,937 $ 1,491,937 $ 12,769,895 $ 70,112 $ 1,322,103 $ (1,455,000) $ 14,199,047
========= ============ ============= =========== =========== ============= =============
</TABLE>
<TABLE>
<CAPTION>
Additional Net unrealized Undistributed Stockholders' Total
Common stock paid-in depreciation accumulated notes stockholders'
Shares Amount capital on investments earnings receivable equity
------ ------ ------- -------------- -------- ---------- ------
<S> <C>
Balance at June 30, 2000 1,581,430 $ 1,581,430 $ 14,618,719 $ (1,216,357) $ 1,850,599 $ - $ 16,834,391
Net operating income - - - - 381,506 - 381,506
Increase in net unrealized
depreciation on investments,
net of income taxes - - - (709,563) - - (709,563)
---------- ------------ ------------- ----------- ----------- ------------- -------------
Balance at
September 30, 2000 1,581,430 $ 1,581,430 $ 14,618,719 $ (1,925,920) $ 2,232,105 $ - $ 16,506,334
========= ============= ============= ============= ============= ======== =============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
WATERSIDE CAPITAL CORPORATION
Unaudited Statements of Cash Flows
Three months ended September 30, 1999 and 2000
<TABLE>
<CAPTION>
1999 2000
------------- -------------
<S> <C>
Cash flows from operating activities:
Net increase (decrease) in stockholders' equity resulting from operations $ 127,778 $ (328,057)
Adjustments to reconcile net increase (decrease) in stockholders' equity
resulting from operations to net cash used in operating activities:
Change in unrealized appreciation/depreciation
on investments 367,322 1,142,563
Accretion of preferred stock and loan investments (38,663) (124,096)
Depreciation and amortization 15,691 21,709
Deferred income tax benefit (210,000) (400,000)
Loss on disposal of property and equipment 828 -
Changes in assets and liabilities increasing (decreasing) cash
flows from operating activities:
Dividends receivable (123,172) (59,782)
Interest receivable 164,722 4,192
Refundable income taxes - (182,000)
Prepaid expenses and other current assets (66,445) 75,006
Accounts payable and accrued expenses (249,396) (530,480)
Deferred revenue (47,631) -
------------- -------------
Net cash used in operating activities (58,966) (380,945)
------------- -------------
Cash flows from investing activities:
Investments in equity securities made (1,363,424) (500,000)
Investments in debt securities made (350,579) (1,583,472)
Principal collected on debt securities 1,170,644 474,931
Acquisition of property and equipment (1,755) (2,972)
Proceeds from sale of property and equipment 2,000 -
------------- -------------
Net cash used in investing activities (543,114) (1,611,513)
------------- -------------
Cash flows from financing activities:
Payments on lines of credit - (1,086,300)
Proceeds from debentures payable - 3,100,000
Payment of deferred financing costs - (77,500)
------------- -------------
Net cash provided by financing activities - 1,936,200
------------- -------------
Net decrease in cash and cash equivalents (602,080) (56,258)
Cash and cash equivalents, beginning of period 1,269,409 118,314
------------- -------------
Cash and cash equivalents, end of period $ 667,329 $ 62,056
============= =============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 375,486 $ 807,214
============= =============
Cash paid during the period for income taxes $ - $ -
============= =============
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
WATERSIDE CAPITAL CORPORATION
Notes to Financial Statements
June 30, 2000 and September 30, 2000 (Unaudited)
-------------------------------------------------------------------------------
(1) Unaudited Interim Financial Information
In the opinion of management, the accompanying unaudited interim
financial statements of Waterside Capital Corporation (the Company) are
prepared in accordance with generally accepted accounting principles
(GAAP) for interim financial information and pursuant to the
requirements for reporting on Form 10-Q and Article 10 of Regulation
S-X. Accordingly, certain disclosures accompany annual financial
statements prepared in accordance with GAAP are omitted. In the opinion
of management, all adjustments, consisting of normal recurring accruals
necessary for the fair presentation of financial statements for the
interim period, have been included. The current period's results of
operations are not necessarily indicative of results that ultimately may
be achieved for the year. The interim financial statements and notes
thereto should be read in conjunction with the financial statements and
notes thereto included in the Company's Form 10-K, as filed with the
Securities and Exchange Commission.
(2) Description of Business
The Company was incorporated in the Commonwealth of Virginia on July 13,
1993 and is a closed-end investment company licensed by the Small
Business Administration (the "SBA") as a Small Business Investment
Corporation ("SBIC"). The Company makes equity investments in, and
provides loans to, small business concerns to finance their growth,
expansion and development. Under applicable SBA regulations, the Company
is restricted to investing only in qualified small business concerns as
contemplated by the Small Business Investment Act of 1958.
(3) Investments
Investments are carried at fair value, as determined by the Executive
Committee of the Board of Directors. The Company, through its Board of
Directors, has adopted the Model Valuation Policy, as published by the
SBA, in Appendix III to Part 107 of Title 12 of the Code of Federal
Regulations (the "Policy"). The Policy, among other things, presumes
that loans and investments are acquired with the intent that they are to
be held until maturity or disposed of in the ordinary course of
business. Except for interest-bearing securities which are convertible
into common stock, interest-bearing securities are valued at an amount
not greater than cost, with unrealized depreciation being recognized
when value is impaired. Equity securities of private companies are
presumed to represent cost unless the performance of the portfolio
company, positive or negative, indicates otherwise in accordance with
the Policy guidelines. The fair value of equity securities of publicly
traded companies are generally valued at their quoted market price
discounted due to the investment size or market liquidity concerns and
for the effect of restrictions on the sale of such securities.
6
<PAGE>
WATERSIDE CAPITAL CORPORATION
Notes to Financial Statements
June 30, 2000 and September 30, 2000 (Unaudited)
-------------------------------------------------------------------------------
Discounts can range from 0% to 40% for investment size and market
liquidity concerns. Actual liquidity discounts in the portfolio at
September 30, 2000 ranged from 11% to 40%. Discounts for restriction on
the sale of the investments are 15% in accordance with the provisions of
the Policy. The Company maintains custody of its investments as
permitted by the Investment Company Act of 1940.
Investments consist primarily of preferred stock and debt securities
obtained from portfolio companies in accordance with SBIC investment
regulations. The financial statements include securities valued at
$35,867,560 and $36,457,634 at June 30, 2000 and September 30, 2000
(91.7% and 90.6% of assets), respectively. The valuation process
completed by management includes estimates made by management and the
Executive Committee in the absence of readily ascertainable market
values. These estimated values may differ significantly from the values
that would have been used had a ready market for the securities existed,
and those differences could be material.
(4) Debentures Payable
During the first quarter of fiscal 2001, the Company has drawn an
additional $3,100,000, against the total available SBA debentures of
$9,100,000. The note bears interest at a rate of 8.452% and matures on
September 1, 2010.
7
<PAGE>
WATERSIDE CAPITAL CORPORATION
Schedule of Portfolio Investments
June 30, 2000 and September 30, 2000
-------------------------------------------------------------------------------
The Company's investment portfolio at June 30, 2000 consisted of the following:
<TABLE>
<CAPTION>
Cost or
Number of contributed Fair market
Equity Securities: shares value value
------------------ ------ ----- -----
<S><C>
Publicly Traded Companies:
Avery Communications, Inc. Common Stock 245,000 $ 249,900 $ 156,310
Netplex Group, Inc. Common Stock (a) 66,400 464,800 129,281
Netplex Group, Inc. Preferred Stock 2,300,000 1,151,784 1,151,784
Electronic Business Systems, Inc. (formerly Triangle
Imaging Group, Inc.) Convertible Preferred Stock (b) (c) 700 2,046,004 1,346,004
Electronic Business Systems, Inc. (formerly Triangle
Imaging Group, Inc.) Common Stock (b) (c) 500,000 225,000 28,000
Electronic Business Systems, Inc. (formerly Triangle
Imaging Group, Inc.) Common Stock (b) (c) 1,080,071 60,484 60,484
Private Companies:
Real Time Data Management Services, Inc. Preferred Stock 300 286,859 463,500
Delta Education Systems, Inc. Preferred Stock 1,625 1,594,283 1,594,283
Diversified Telecom, Inc. Preferred Stock (c) 1,500 1,500,000 750,000
Crispies, Inc. Preferred Stock 400 398,320 398,320
Triangle Biomedical Sciences Preferred Stock 2,000 1,988,481 1,988,481
JMS Worldwide, Inc. Preferred Stock 1,500 1,500,000 1,500,000
EPM Development Systems Corp. Preferred Stock 1,500 1,492,847 1,492,847
Fire King International Preferred Stock 2,000 2,000,000 2,000,000
SECC (formerly MilleCom, Inc.) Common Stock 60 60 60
Eton Court Asset Management, Ltd. Preferred Stock 1,000 973,397 973,397
Fairfax Publishing Co., Inc. Preferred Stock 1,100 1,042,347 1,042,347
DigitalSquare.com Preferred Stock 1,210,739 1,513,425 1,513,425
Answernet, Inc. Preferred Stock 550 303,194 303,194
Answernet, Inc. Preferred Stock 700 376,926 376,926
ISR Solutions, Inc. Preferred Stock 500 497,407 497,407
Capital Markets Group, Inc. Preferred Stock 1,500 1,500,000 1,500,000
Jubilee Tech International, Inc. Convertible Preferred Stock 2,444,444 1,971,000 1,971,000
VentureCom, Inc. Preferred Stock 278,164 2,000,000 2,000,000
---------- ----------
Total equity securities 25,136,518 23,237,050
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
Cost or
contributed
Debt Securities: Maturity value Fair value
---------------- -------- ----- ----------
<S><C>
Avery Communications, Inc. Convertible Note 12/10/02 350,000 350,000
Extraction Technologies of VA, LLC 7/22/03 900,000 900,000
Extraction Technologies of VA, LLC 8/31/04 202,316 202,316
Extraction Technologies of VA, LLC 11/2/04 373,711 373,711
Extraction Technologies of VA, LLC 2/7/05 263,742 263,742
Extraction Technologies of VA, LLC 2/25/05 97,409 97,409
Extraction Technologies of VA, LLC 3/14/05 95,584 95,584
JMS Worldwide, Inc. 7/31/03 950,000 950,000
Diversified Telecom, Inc. Demand 84,250 84,250
Diversified Telecom, Inc. 5/19/02 156,387 156,387
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Cost or
contributed
Debt Securities, continued: Maturity value Fair value
--------------------------- -------- ----- ------------
<S><C>
SECC (formerly MilleCom, Inc.) 3/31/04 $ 900,000 $ 900,000
SECC (formerly MilleCom, Inc.) 5/11/04 360,000 360,000
ISR Solutions, Inc. 6/30/04 742,167 742,167
Fire King International Demand 550,000 550,000
TABET Manufacturing Co., Inc. 12/31/04 283,230 283,230
National Assisted Living, LP 12/31/04 1,408,689 1,408,689
Electronic Business Systems, Inc. (formerly
Triangle Imaging Group, Inc.) (b) 1/31/05 424,931 424,931
New Dominion Pictures LLC 4/30/06 735,350 735,350
--------- ---------
Total debt securities 8,877,766 8,877,766
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
Cost or
Number of Percentage contributed Fair market
Stock Options and Warrants: shares ownership value value
--------------------------- ------ --------- ----- -----
<S><C>
Publicly Traded Companies:
Avery Communications, Inc. 161,000 0.00 - -
Netplex Group, Inc. (a) 300,000 2.10 900,000 171,600
Electronic Business Systems, Inc. (formerly
Triangle Imaging Group, Inc.) (a) (b) 56,000 0.39 - -
Private Companies:
Real Time Data Management Services, Inc. 125 29.41 115,000 139,573
Delta Education Systems, Inc. 639 39.00 48,200 69,546
Diversified Telecom, Inc. 8,998 15.00 - -
Crispies, Inc. 524 6.37 2,800 3,235
Triangle Biomedical Sciences 50,743 11.70 127,449 127,449
Extraction Technologies of VA, LLC - 39.00 337,567 337,567
JMS Worldwide, Inc. 199 5.00 - -
EPM Development Systems Corp. 87 8.00 11,600 634,278
Fire King International 4 4.00 - -
SECC (formerly MilleCom, Inc.) 150,000 3.15 - -
Eton Court Asset Management, Ltd. 14,943 13.00 34,700 34,700
Fairfax Publishing Co., Inc. 526 16.50 73,600 73,600
ISR Solutions, Inc. 550,973 7.20 12,936 12,936
DigitalSquare.com 81,074 5.70 - -
Answernet, Inc. 69,837 17.64 268,615 268,615
TABET Manufacturing Co., Inc. 500,000 20.00 175,400 175,400
National Assisted Living, LP - 15.00 667,000 667,000
Capital Markets Group, Inc. 2,294,118 15.00 - -
Jubilee Tech International, Inc. 400,000 1.60 240,000 240,000
Signius Investment Corporation 12 11.67 332,595 332,595
VentureCom, Inc. 38,943 0.37 - -
New Dominion Pictures LLC - 9.00 464,650 464,650
------------ ------------
Total options and warrants 3,812,112 3,752,744
------------ ------------
Total investments $ 37,826,396 $ 35,867,560
============ ============
</TABLE>
The Company's investment portfolio at September 30, 2000 consisted of the
following:
<TABLE>
<CAPTION>
Cost or
Number of contributed Fair market
Equity Securities: shares value value
------------------ ------ ----- -----
<S><C>
Publicly Traded Companies:
Avery Communications, Inc. Common Stock 245,000 $ 249,900 $ 245,000
Netplex Group, Inc. Common Stock (a) 66,400 464,800 47,410
</TABLE>
9
<PAGE>
<TABLE>
<S><C>
Netplex Group, Inc. Preferred Stock 2,300,000 1,195,979 1,195,979
Electronic Business Systems, Inc. (formerly Triangle
Imaging Group, Inc.) Convertible Preferred Stock (b) (c) 700 2,046,004 211,384
Electronic Business Systems, Inc. (formerly Triangle
Imaging Group, Inc.) Common Stock (b) (c) 500,000 225,000 -
Electronic Business Systems, Inc. (formerly Triangle
Imaging Group, Inc.) Common Stock (b) (c) 1,080,071 60,484 -
Private Companies:
Real Time Data Management Services, Inc. Preferred Stock 300 289,323 475,125
Delta Education Systems, Inc. Preferred Stock 1,625 1,596,693 1,596,693
Diversified Telecom, Inc. Preferred Stock (c) 1,500 1,500,000 750,000
Crispies, Inc. Preferred Stock 400 398,460 398,460
Triangle Biomedical Sciences Preferred Stock 2,100 2,094,853 2,094,853
JMS Worldwide, Inc. Preferred Stock 1,500 1,500,000 1,500,000
EPM Development Systems Corp. Preferred Stock 1,500 1,493,427 1,493,427
Fire King International Preferred Stock 2,000 2,000,000 2,000,000
SECC (formerly MilleCom, Inc.) Common Stock 60 60 60
Eton Court Asset Management, Ltd. Preferred Stock 1,000 975,132 975,132
Fairfax Publishing Co., Inc. Preferred Stock 1,100 1,046,027 1,046,027
DigitalSquare.com Preferred Stock 1,210,739 1,513,425 1,513,425
Answernet, Inc. Preferred Stock 550 310,427 310,427
Answernet, Inc. Preferred Stock 700 384,759 384,759
ISR Solutions, Inc. Preferred Stock 500 497,554 497,554
Capital Markets Group, Inc. Preferred Stock 1,500 1,500,000 1,500,000
Jubilee Tech International, Inc. Convertible Preferred Stock 2,444,444 1,979,620 1,979,620
VentureCom, Inc. Preferred Stock 278,164 2,000,000 2,000,000
Phoenix Fabrications, Inc. Preferred Stock 400 268,000 268,000
---------- ----------
Total equity securities 25,589,927 22,483,335
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
Cost or
contributed Fair
Debt Securities: Maturity value value
---------------- -------- ----- ----------
<S> <C>
Avery Communications, Inc. Convertible Note 12/10/02 350,000 466,667
Extraction Technologies of VA, LLC (c) 7/22/03 900,000 900,000
Extraction Technologies of VA, LLC (c) 8/31/04 202,316 202,316
Extraction Technologies of VA, LLC (c) 11/2/04 373,711 373,711
Extraction Technologies of VA, LLC (c) 2/7/05 263,742 263,742
Extraction Technologies of VA, LLC (c) 2/25/05 97,409 97,409
Extraction Technologies of VA, LLC (c) 3/14/05 95,584 95,584
</TABLE>
<TABLE>
<CAPTION>
Cost or
contributed Fair
Debt Securities, continued: Maturity value value
--------------------------- -------- ----- ----------
<S><C>
JMS Worldwide, Inc. 7/31/03 $ 900,000 $ 900,000
Diversified Telecom, Inc. Demand 84,250 84,250
Diversified Telecom, Inc. 5/19/02 156,387 156,387
SECC (formerly MilleCom, Inc.) (c) 3/31/04 900,000 900,000
SECC (formerly MilleCom, Inc.) (c) 5/11/04 360,000 360,000
ISR Solutions, Inc. 6/30/04 742,667 742,667
Fire King International Demand 550,000 550,000
TABET Manufacturing Co., Inc. 12/31/04 288,020 288,020
National Assisted Living, LP 12/31/04 1,448,588 1,448,588
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
New Dominion Pictures LLC 4/30/06 746,276 746,276
Mayfair Enterprises, Inc. 7/18/05 487,394 487,394
DigitalSquare.com 9/15/05 289,250 289,250
Phoenix Fabrications, Inc. 9/8/05 335,000 335,000
--------- ---------
Total debt securities 9,570,594 9,687,261
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
Cost or
Number of Percentage contributed Fair market
Stock Options and Warrants: shares ownership value value
--------------------------- ------ --------- ----- -----
<S> <C>
Publicly Traded Companies:
Avery Communications, Inc. 161,000 - - 95,084
Netplex Group, Inc. (a) 300,000 2.10 900,000 -
Electronic Business Systems, Inc. (formerly
Triangle Imaging Group, Inc.) (a) (b) 56,000 0.39 - -
Private Companies:
Real Time Data Management Services, Inc. 125 29.41 115,000 163,983
Delta Education Systems, Inc. 639 39.00 48,200 69,546
Diversified Telecom, Inc. 8,998 15.00 - -
Crispies, Inc. 524 6.37 2,800 3,235
Triangle Biomedical Sciences 50,743 11.70 127,449 127,449
Extraction Technologies of VA, LLC - 39.00 337,567 337,567
JMS Worldwide, Inc. 199 5.00 - -
EPM Development Systems Corp. 87 8.00 11,600 634,278
Fire King International 4 4.00 - -
SECC (formerly MilleCom, Inc.) 150,000 3.15 - -
Eton Court Asset Management, Ltd. 14,943 13.00 34,700 34,700
Fairfax Publishing Co., Inc. 526 16.50 73,600 73,600
ISR Solutions, Inc. 550,973 7.20 12,936 12,936
DigitalSquare.com - - 75,000 75,000
Answernet, Inc. 69,837 17.64 268,615 268,615
TABET Manufacturing Co., Inc. 500,000 20.00 175,400 175,400
National Assisted Living, LP - 15.00 667,000 667,000
Capital Markets Group, Inc. 2,294,118 15.00 - -
Jubilee Tech International, Inc. 400,000 1.60 240,000 240,000
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Cost or
Number of Percentage contributed Fair market
Stock Options and Warrants, continued: shares ownership value value
-------------------------------------- ------ --------- ----- -----
<S> <C>
Signius Investment Corporation 12 11.67 $ 332,595 $ 332,595
VentureCom, Inc. 38,943 0.37 - -
New Dominion Pictures LLC - 9.00 464,650 464,650
Mayfair Enterprises, Inc. - 15.00 214,400 214,400
Phoenix Fabrications, Inc. - 25.00 297,000 297,000
----------- ------------
Total options and warrants 4,398,512 4,287,038
----------- ------------
Total investments $39,559,033 $ 36,457,634
=========== ============
</TABLE>
(a) Rule 144A restricted securities
(b) This entity, which is considered an affiliate of the Company, filed Chapter
11 bankruptcy on September 1, 2000.
(c) Entity is in arrears with respect to dividend/interest payments.
12
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
o General
Waterside Capital Corporation ("Waterside" or the "Company") is a
specialty finance company 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 interest expense on borrowings to fund its portfolio
growth and payroll and other expenses incidental to operations.
Waterside currently has 9 full time employees and 2 offices from
which it operates - Norfolk and Reston, Virginia.
o Results of Operations
Comparison of Three Months Ended September 30, 2000 and September 30,
1999
For the three months ended September 30, 2000 total operating income
was $1,093,000 compared to $830,000 reported during the same period
of 1999. The increase in operating income is primarily due to
additional dividend income and interest income generated as a result
of the growth in the company's investment portfolio over the past
year. The September 30, 2000 quarterly operating income consisted of
dividends of $714,000, interest on debt securities of $260,000, fee
income of $112,000 and interest on cash equivalents of $7,000.
Total operating expenses for the three months ended September 30,
2000 were $861,000 consisting of interest expense of $463,000,
salaries and benefits of $251,000, legal and accounting expenses of
$42,000 and other operating expenses of $105,000. These expenses
compared to the $545,000 reported for the three months ended
September 30, 1999 consisting of interest expense of $225,000,
salaries and benefits of $217,000, legal and accounting expenses of
$24,000, and other operating expenses of $79,000. The significant
increase in interest expense for the quarter ended September 30, 2000
compared to the quarter ended September 30, 1999 is due to the
increase in borrowings to fund the growth in the company's investment
portfolio.
The increase in unrealized depreciation on investments net of taxes
of $710,000 for the three months ended September 30, 2000 and the
decrease in unrealized appreciation of $228,000 for the three months
ended September 30, 1999 was primarily due to the changing stock
prices of the publicly traded companies held in the portfolio. The
most significant write down was Electronic Business Systems, Inc. for
<PAGE>
$1.2 million due to its deteriorating financial condition and
resulting bankruptcy filing under Chapter 11 of the U.S. Bankruptcy
Code.
o Financial Condition, Liquidity And Capital Resources
For the three months ended September 30, 2000 the Company made $2.1
million in investments compared to the $1.7 million made during the
comparable quarter of 1999. To fund these new investments, the
Company borrowed $3.1 million from the SBA through debentures payable
during the quarter.
Net asset value per common share increased to $10.44 per share at
September 30, 2000 from $8.98 per share at September 30, 1999, of
which $.92 per share resulted from the repayment of stockholders
notes receivable of $1,455,000 and the remainder from operations.
During the three months ended September 30, 2000 cash used in
operating activities was $381,000 as compared to the $59,000 used
during the three months ended September 30, 1999, primarily due to
the timing of cash receipts and payments resulting in changes in
operating assets and liabilities. The company used $1.6 million in
investing activities during the three months ended September 30, 2000
as compared to $543,000 used for the three months ended September 30,
1999. The increase in cash used in investing activities is due to the
decrease in principal collected on debt securities. Cash flows
provided by financing activities for the three months ended September
30, 2000 were $1.9 million resulting from borrowings from the SBA to
finance the growth in the company's investment portfolio.
o Quantitative and Qualitative Disclosure About Market Risk
The Company's business activities contain elements of risk. The
Company considers the principal types of market risk to be: risk of
lending and investing in small privately owned companies, valuation
risk of portfolio, risk of illiquidity of portfolio investments and
the competitive market for investment opportunities. The Company
considers the management of risk essential to conducting its business
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.
The Company manages its market risk by maintaining a portfolio of
equity interests that is diverse by industry, geographic area, size
of individual investment and borrower. The Company is exposed to a
degree of risk of public market price fluctuations as three of the
Company's twenty-seven investments are in thinly traded, small public
<PAGE>
companies, whose stock prices have been volatile. The other
twenty-four investments are in private business enterprises. Since
there is typically no public market for the equity interests of the
small companies in which the Company invests, the valuation of the
equity interests in the Company's portfolio of private business
enterprises is subject to the estimate of the Company's Executive
Committee. In the absence of a readily ascertainable market value,
the estimated value of the Company's portfolio of equity interests
may differ significantly from the values that would be placed on the
portfolio if a ready market for the equity interests existed. Any
changes in estimated value are recorded in the Company's statement of
operations as "Net unrealized gains (losses)." Each hypothetical 1%
increase or decrease in value of the Company's portfolio of equity
securities of $36.5 million at September 30, 2000, would have
resulted in unrealized gains or losses and would have changed net
increase in stockholders' equity resulting from operations for the
quarter significantly.
The Company's sensitivity to changes in interest rates is regularly
monitored and analyzed by measuring the characteristics of assets and
liabilities. The Company utilizes various methods to assess interest
rate risk in terms of the potential effect of interest income net of
interest expense, the market value of net assets and the value at
risk in an effort to ensure that the Company is insulated from any
significant adverse effects from changes in interest rates. Based on
the model used for the sensitivity of interest income net of interest
expense, if the balance sheet were to remain constant and no actions
were taken to alter the existing interest rate sensitivity, a
hypothetical 100 basis point change in interest rates would have
affected net increase in stockholders' equity resulting from
operations significantly over a three month horizon. Although
management believes that this measure is indicative of the Company's
sensitivity to interest rate changes, it does not adjust for
potential changes in credit quality, size and composition of the
balance sheet and other business developments that could affect net
income. Accordingly, no assurances can be given that actual results
would not differ materially from the potential outcome simulated by
this estimate.
o Forward-Looking Statements
Included in this report and other written and oral information by
management from time to time, including reports to shareholders,
quarterly and semi-annual shareholder letters, filings with the
Commission, news releases and investor presentations, are
forward-looking statements about business objectives and strategies,
market potential, the Company's ability to expand the geographic
scope of its investments, the quality of the Company's due diligence
efforts, its financing plans, its vendors, suppliers, and portfolio
companies, future financial performance and other matters that
reflect management's expectations as of the date made.
Except for historical information, all of the statements,
expectations and assumptions contained in the foregoing are
"forward-looking statements" (within the meaning of the Private
Securities Litigation Reform Act of 1995) that involve a number of
risks and uncertainties. It is possible that the assumptions made by
management - including, but not limited to, the average maturity of
our investments, the potential to realize investment gains as these
investments mature, investment opportunities, results, performance or
expectations - may not materialize. Actual results may differ
materially from those projected or implied in any forward-looking
statements. In addition to the above factors, other important factors
that may affect the company's performance include: the risks
associated with the performance of the Company's portfolio companies,
dependencies on key employees, interest rates, the level of economic
activity, and competition, as well as other risks described from time
to time in the Company's filings with the Securities Exchange
Commission, press releases, and other communications. The Company
disclaims any intent or obligation to update these forward-looking
statements, whether as a result of new information, future events, or
otherwise.
<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
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K:
(i) 27 - Financial Data Schedule
16
<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 14th day of November, 2000.
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
17
