<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
MARCH 31, 2000
COMMISSION FILE NO.: 333-36709
------------------------------
WATERSIDE CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
VIRGINIA 54-1694665
(State of incorporation) (I.R.S. Employer Identification Number)
</TABLE>
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, 2000, the registrant had issued and outstanding 1,581,430
shares of Common Stock, $1.00 par value.
- --------------------------------------------------------------------------------
1
<PAGE>
WATERSIDE CAPITAL CORPORATION
FORM 10-Q
Table of Contents
Page
Number
------
PART I. FINANCIAL INFORMATION:
ITEM 1. Balance Sheets as of
June 30, 1999 and March 31, 2000 (unaudited)
Statements of Operations for the Three Months and Nine Months
Ended March 31, 1999 and March 31, 2000 (unaudited)
Statement of Changes in Stockholders' Equity for the
Nine Months Ended March 31, 1999 and March 31, 2000 (unaudited)
Statements of Cash Flows for the
Nine Months Ended March 31, 1999 and March 31, 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
2
<PAGE>
<TABLE>
<CAPTION>
WATERSIDE CAPITAL CORPORATION
Balance Sheets
June 30, 1999 and March 31, 2000
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, March 31,
1999 2000
---------------- ---------------
(unaudited)
<S> <C> <C>
Assets:
Investments in portfolio companies, at fair value (notes 3 and 6):
Equity securities $ 17,070,782 $ 24,602,309
Debt securities 6,894,468 8,199,493
Options and warrants 377,000 4,334,008
------------ ------------
Total investments, cost of $23,860,295 and $35,522,635
at June 30, 1999 and March 31, 2000, respectively 24,342,250 37,135,810
------------ ------------
Current assets:
Cash and cash equivalents 1,269,409 719,762
Dividends receivable 311,737 759,867
Interest receivable 228,438 242,440
Note receivable 150,000 150,000
Refundable income taxes 43,322 -
Prepaid expenses and other current assets 77,916 132,833
------------ ------------
Total current assets 2,080,822 2,004,902
------------ ------------
Property and equipment, net 118,961 114,388
Deferred financing costs, net 567,837 706,467
------------ ------------
Total assets $ 27,109,870 $ 39,961,567
============ ============
Liabilities and Stockholders' Equity:
Current liabilities:
Line of credit $ - $ 353,000
Accounts payable 57,142 40,006
Accrued expenses 372,828 276,974
Deferred revenue 113,631 3,000
Income taxes payable - 92,678
------------ ------------
Total current liabilities 543,601 765,658
Deferred income taxes 195,000 661,000
Debentures payable 12,300,000 19,300,000
------------ ------------
Total liabilities 13,038,601 20,726,658
------------ ------------
Stockholders' equity (note 5):
Common stock, $1 par value, 10,000,000 shares authorized, 1,581,430
issued and outstanding at June 30, 1999 and
March 31, 2000, adjusted for stock dividends 1,491,937 1,581,430
Preferred stock, $1 par value, 25,000 shares authorized,
no shares issued and outstanding - -
Additional paid-in capital 12,769,895 14,618,719
Net unrealized appreciation on investments, net of income taxes 298,434 1,002,188
Undistributed accumulated earnings 966,003 2,032,572
Stockholders' notes receivable (1,455,000) -
------------ ------------
Total stockholders' equity 14,071,269 19,234,909
Commitments, contingencies and subsequent event (notes 3 and 6)
------------ ------------
Total liabilities and stockholders' equity $ 27,109,870 $ 39,961,567
============ ============
Net asset value per common share $ 8.90 $ 12.16
============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
WATERSIDE CAPITAL CORPORATION
Unaudited Statements of Operations
Three months and nine months ended March 31, 1999 and 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
March 31, March 31,
1999 2000 1999 2000
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Operating income:
Dividends $ 245,935 $ 676,760 $ 729,895 $ 1,717,036
Interest on debt securities 183,148 313,819 455,938 707,452
Interest on cash equivalents 32,873 1,608 107,483 31,297
Fee and other income 224,046 222,649 663,545 579,149
----------- ------------ ----------- -----------
Total operating income 686,002 1,214,836 1,956,861 3,034,934
----------- ------------ ----------- -----------
Operating expenses:
Salaries and benefits 176,314 262,971 552,204 691,690
Legal and accounting 25,000 39,480 68,920 113,480
Interest expense 106,227 340,334 210,753 833,604
Other operating expenses 76,654 124,489 268,309 328,057
----------- ------------ ----------- -----------
Total operating expenses 384,195 767,274 1,100,186 1,966,831
----------- ------------ ----------- -----------
Net operating income before income taxes 301,807 447,562 856,675 1,068,103
Income tax expense (benefit) 31,000 (56,000) 58,000 (185,000)
----------- ------------ ----------- -----------
Net operating income 270,807 503,562 798,675 1,253,103
Realized gain on investments, net of income taxes of $90,699
and $469,000 for the three months ended March 31, 1999 and 2000,
respectively, and $144,000 and $1,075,000 for the nine months
ended March 31, 1999 and 2000, respectively 147,099 765,821 234,312 1,751,974
Change in unrealized appreciation on investments, net of income tax
expense (benefit) of $78,100 and $(44,000) for the three
months ended March 31, 1999 and 2000, respectively, and $(174,900)
and $432,000 for the nine months ended March 31, 1999 and 2000,
respectively (note 6) 128,236 (73,897) (284,738) 703,754
----------- ------------ ----------- -----------
Net increase in stockholders' equity resulting
from operations $ 546,142 $ 1,195,486 $ 748,249 $ 3,708,831
=========== ============ =========== ===========
Net increase in stockholders' equity resulting from operations
per share - basic (note 4) $ 0.35 $ 0.76 $ 0.47 $ 2.35
=========== ============ =========== ===========
Net increase in stockholders' equity resulting from operations
per share - diluted (note 4) $ 0.35 $ 0.75 $ 0.47 $ 2.34
=========== ============ =========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
WATERSIDE CAPITAL CORPORATION
Unaudited Statements of Changes in Stockholders' Equity
Nine months ended March 31, 1999 and 2000
<TABLE>
<CAPTION>
Net
1999: unrealized
Common Stock Additional appreciation Undistributed
-------------------------- paid-in on accumulated
Shares Amount capital investments earnings
------ ------ ------- ----------- --------
<S> <C>
Balance at June 30, 1998 1,420,900 $1,420,900 $ 12,272,636 $ 536,810 $ 258,942
5% stock dividend 71,037 71,037 497,259 - (568,359)
Net operating income - - - - 798,675
Net realized gain on investments, net of
income taxes - - - - 234,312
Decrease in net unrealized appreciation on
investments, net of income taxes - - - (284,738) -
---------- ---------- ---------- ----------- -----------
Balance at March 31, 1999 1,491,937 $1,491,937 $12,769,895 $252,072 $723,570
========== ========== =========== =========== ===========
2000:
Balance at June 30, 1999 1,491,937 $1,491,937 $12,769,895 $ 298,434 $ 966,003
6% stock
dividend 89,493 89,493 648,824 - (738,508)
Capitalization of undistributed
accumulated earnings - - 1,200,000 - (1,200,000)
Repayment of stockholders' notes
receivable - - - - -
Net operating income - - - - 1,253,103
Net realized gain on investments, net of
income taxes - - - - 1,751,974
Increase in net unrealized appreciation on
investments, net of income taxes - - - 703,754 -
--------- ------------ ------------ ------------- ------------
Balance at March 31, 2000 1,581,430 $ 1,581,430 $ 14,618,719 $ 1,002,188 $ 2,032,572
========= ============ ============ ============= ============
</TABLE>
<TABLE>
<CAPTION>
1999:
Stockholders' Total
notes stockholders'
receivable equity
---------- ------
<S> <C>
Balance at June 30, 1998 $ (1,455,000) $ 13,034,288
5% stock dividend - (63)
Net operating income - 798,675
Net realized gain on investments, net of
income taxes - 234,312
Decrease in net unrealized appreciation on
investments, net of income taxes - (284,738)
------------ ----------
Balance at March 31, 1999 $ (1,455,000) 13,782,474
============== ==========
2000:
Balance at June 30, 1999 $ (1,455,000) $ 14,071,269
6% stock
dividend - (191)
Capitalization of undistributed
accumulated earnings - -
Repayment of stockholders' notes
receivable 1,455,000 1,455,000
Net operating income - 1,253,103
Net realized gain on investments, net of
income taxes - 1,751,974
Increase in net unrealized appreciation on
investments, net of income taxes - 703,754
-------------- -------------
Balance at March 31, 2000 $ - $ 19,234,909
============== =============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
WATERSIDE CAPITAL CORPORATION
Unaudited Statements of Cash Flows
Nine months ended March 31, 1999 and 2000
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 2000
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net increase in stockholders' equity resulting from operations $ 748,249 $ 3,708,831
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 459,638 (1,135,754)
Realized gain on investments (378,312) (2,826,974)
Accretion of preferred stock and loan investments (22,127) (254,333)
Depreciation and amortization 26,666 51,369
Deferred income tax expense (benefit) (125,600) 466,000
Loss on disposal of property and equipment - 828
Changes in assets and liabilities increasing (decreasing) cash
flows from operating activities:
Dividends receivable (60,350) (448,130)
Interest receivable (151,411) (14,002)
Refundable income taxes - 43,322
Prepaid expenses and other current assets (38,282) (54,917)
Accounts payable and accrued expenses (27,408) (112,990)
Deferred revenue 43,379 (110,631)
Income taxes payable 156,378 92,678
----------- -----------
Net cash provided by (used in) operating activities 630,820 (594,703)
----------- -----------
Cash flows from investing activities:
Investments in equity securities made (7,562,118) (8,618,225)
Investments in debt securities made (4,031,125) (4,764,786)
Principal collected on debt securities 41,472 1,190,585
Proceeds from repayment of stockholders' notes receivable - 1,455,000
Proceeds from sales of investments 2,530,021 3,615,927
Acquisition of property and equipment (22,711) (13,254)
Proceeds from sale of property and equipment - 2,000
----------- -----------
Net cash used in investing activities (9,044,461) (7,132,753)
----------- -----------
Cash flows from financing activities:
Proceeds from line of credit 250,000 353,000
Proceeds from debentures payable 6,000,000 7,000,000
Payments in lieu of fractional shares associated with stock dividend (63) (191)
Payment of deferred financing costs (150,000) (175,000)
----------- -----------
Net cash provided by financing activities 6,099,937 7,177,809
----------- -----------
Net decrease in cash and cash equivalents (2,313,704) (549,647)
Cash and cash equivalents, beginning of period 4,393,501 1,269,409
----------- -----------
Cash and cash equivalents, end of period $ 2,079,797 $ 719,762
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 194,764 $ 907,375
=========== ===========
Cash paid during the period for income taxes $ - $ 720,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
WATERSIDE CAPITAL CORPORATION
Notes to Financial Statements
June 30, 1999 and March 31, 2000 (Unaudited)
- --------------------------------------------------------------------------------
(1) Unaudited Interim Financial Statements
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 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 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
investments are acquired with the intent that they are to be held until
maturity or disposed of in the ordinary course of business. Except for
interest-bearing securities which are convertible into common stock,
interest-bearing securities are valued in an amount not greater than
cost, with unrealized depreciation being recognized when value is
impaired. Equity securities of private companies are presumed to
represent cost unless the performance of the portfolio company, positive
or negative, indicates otherwise in accordance with the Policy
guidelines. The fair value of equity securities of publicly traded
companies are generally valued at their quoted market price discounted
due to the investment size or market liquidity concerns and the for the
effect of restrictions on the sale of such securities.
(Continued)
<PAGE>
WATERSIDE CAPITAL CORPORATION
Notes to Financial Statements
June 30, 1999 and March 31, 2000 (Unaudited)
- --------------------------------------------------------------------------------
Discounts can range from 0% to 40% for investment size and market liquidity
concerns. Actual liquidity discounts in the portfolio at March 31, 2000
ranged from 15% to 40%. Discounts for restriction on the sale of
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 under SBIC investment regulations. The
financial statements include securities valued at $24,342,250 and
$37,135,810 at June 30, 1999 and March 31, 2000 (89.8% and 92.9% 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.
(Continued)
<PAGE>
WATERSIDE CAPITAL CORPORATION
Notes to Financial Statements
June 30, 1999 and March 31, 2000 (Unaudited)
- --------------------------------------------------------------------------------
(4) 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 three months and nine months ended March 31, 1999 and 2000:
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic net increase in stockholders'
equity resulting from operations
per share:
Net increase in stockholders'
equity resulting from
operations $ 546,142 1,195,486 748,249 3,708,831
========== ========== ========== ==========
Weighted average number of
common shares outstanding 1,581,430 1,581,430 1,581,430 1,581,430
========== ========== ========== ==========
Basic net increase in stockholders'
equity resulting from operations
per share $ 0.35 0.76 0.47 2.35
========== ========== ========== ==========
Diluted net increase in stockholders'
equity resulting from operations
per share:
Net increase in stockholders'
equity resulting from
operations $ 546,142 1,195,486 748,249 3,708,831
========== ========== ========== ==========
Weighted average number of
common shares outstanding 1,581,430 1,581,430 1,581,430 1,581,430
Dilutive effect of stock options
(as determined using the
treasury stock method) - 2,236 - 5,676
---------- ---------- ---------- ----------
Adjusted weighted average
number of common shares
outstanding 1,581,430 1,583,666 1,581,430 1,587,106
========== ========== ========== ==========
Diluted net increase in stockholders'
equity resulting from operations
per share $ 0.35 0.75 0.47 2.34
========== ========== ========== ==========
</TABLE>
(Continued)
<PAGE>
WATERSIDE CAPITAL CORPORATION
Notes to Financial Statements
June 30, 1999 and March 31, 2000 (Unaudited)
- --------------------------------------------------------------------------------
(5) Stockholders' Equity
Stock Dividend
On December 7, 1999, the Company declared a 6% stock dividend to
shareholders of record as of January 14, 2000. On January 31, 2000, the
Company issued 89,493 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, weighted average shares
outstanding and net asset value per share have been restated to reflect the
6% stock dividend.
Capitalization of Undistributed Accumulated Earnings
Effective December 7, 1999, the Executive Committee of the Company's Board
of Directors and the Small Business Administration approved the
capitalization of $1,200,000 of the Company's undistributed accumulated
earnings.
(6) Subsequent Event
Subsequent to March 31, 2000, the stock market experienced a correction,
significantly impacting many stocks in the high tech sector. As a result,
the Company's publicly traded investments experienced a decline in value
from amounts reported as of March 31, 2000. Based on the stock trading
values as of May 4, 2000, the Company has incurred an after tax unrealized
loss on investments amounting to approximately $1.3 million since March 31,
2000.
<PAGE>
WATERSIDE CAPITAL CORPORATION
Schedule of Portfolio Investments
June 30, 1999 and March 31, 2000
- --------------------------------------------------------------------------------
The Company's investment portfolio at June 30, 1999, consisted of the following:
<TABLE>
<CAPTION>
Cost or
Contributed
Debt Securities: Maturity Value Fair Value
- ---------------- -------- ----- ----------
<S> <C> <C> <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
SECC (formerly MilleCom, Inc.) 3/31/04 900,000 900,000
SECC (formerly 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 debt securities 6,894,468 6,894,468
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Number
Equity Investments: of Shares
- ------------------- ---------
<S> <C> <C> <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
Electronic Business Systems, Inc.
(formerly Triangle Imaging Group,
Inc.) Preferred Stock 150,000 1,321,500 1,321,500
Electronic Business Systems, Inc.
(formerly Triangle Imaging Group,
Inc.) Convertible Preferred Stock 700 700,000 700,000
Electronic Business Systems, Inc.
(formerly Triangle Imaging Group,
Inc.) Common Stock* 500,000 225,000 273,500
</TABLE>
(Continued)
<PAGE>
WATERSIDE CAPITAL CORPORATION
Schedule of Portfolio Investments
June 30, 1999 and March 31, 2000
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cost or
Number of Contributed Fair Market
Equity Investments, Continued: Shares Value Value
- ------------------------------ --------- ----------- -----------
<S> <C> <C> <C>
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 Worldwide, 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
SECC (formerly 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)
<PAGE>
WATERSIDE CAPITAL CORPORATION
Schedule of Portfolio Investments
June 30, 1999 and March 31, 2000
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cost or
Number of Percentage Contributed Fair Market
Stock Options and Warrants: 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 - 74,100
Electronic Business Systems,
Inc. (formerly 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 Worldwide, 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 - -
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. 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>
(Continued)
<PAGE>
WATERSIDE CAPITAL CORPORATION
Schedule of Portfolio Investments
June 30, 1999 and March 31, 2000
- --------------------------------------------------------------------------------
The Company's investment portfolio at March 31, 2000 (unaudited) consisted of
the following:
<TABLE>
<CAPTION>
Cost or
Contributed
Debt Securities: Maturity Value Fair Value
- --------------- ---------- ----- ----------
<S> <C> <C> <C>
Avery Communications, Inc. Convertible
Note * 12/10/02 $ 350,000 $ 476,000
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 93,252 93,252
Diversified Telecom, Inc. 5/19/02 156,387 156,387
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. 6/30/04 741,667 741,667
Fire King International Demand 550,000 550,000
TABET Manufacturing Co., Inc. 12/31/04 278,764 278,764
National Assisted Living, LP 12/31/04 1,370,184 1,370,184
Electronic Business Systems, Inc.
(formerly Triangle Imaging Group, Inc.) 1/31/05 390,477 390,477
------------- -------------
Total debt securities 8,073,493 8,199,493
------------- -------------
Number
Equity Investments: of Shares
- ------------------ ---------
Publicly-Traded Companies:
Avery Communications, Inc. Common Stock 245,000 249,900 490,000
Netplex Group, Inc. Common Stock 66,400 464,800 662,008
Netplex Group, Inc. Preferred Stock 2,300,000 1,115,826 1,115,826
Electronic Business Systems, Inc.
(formerly Triangle Imaging Group, Inc.)
Preferred Stock 150,000 1,346,004 1,346,004
Electronic Business Systems, Inc.
(formerly Triangle Imaging Group, Inc.)
Convertible Preferred Stock 700 700,000 700,000
Electronic Business Systems, Inc.
(formerly Triangle Imaging Group, Inc.)
Common Stock * 500,000 225,000 125,000
</TABLE>
(Continued)
<PAGE>
WATERSIDE CAPITAL CORPORATION
Schedule of Portfolio Investments
June 30, 1999 and March 31, 2000
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cost or
Number of Contributed Market Value
Shares Value Fair
------ ----- ----
<S> <C> <C> <C>
Equity Investments, Continued:
- ------------------------------
Equity Investments in Private Companies:
Real Time Data Management Services, Inc.
Preferred Stock 300 285,703 449,024
Delta Education Systems, Inc. Preferred Stock 1,625 1,591,873 1,591,873
Diversified Telecom, Inc. Preferred Stock 1,500 1,500,000 1,500,000
Crispies, Inc. Preferred Stock 400 398,180 398,180
Triangle Biomedical Sciences Preferred Stock 2,000 1,882,109 1,882,109
JMS Worldwide, Inc. Preferred Stock 1,500 1,500,000 1,500,000
EPM Development Systems, Corp. Preferred Stock 1,500 1,492,267 1,492,267
Fire King International Preferred Stock 2,000 2,000,000 2,000,000
QuesTech Packaging, Inc. Preferred Stock 1,200 1,200,000 1,200,000
SECC (formerly MilleCom, Inc.) Common Stock 60 60 60
Eton Court Asset Management, Ltd.
Preferred Stock 1,000 971,662 971,662
Fairfax Publishing Co., Inc. Preferred Stock 1,100 1,038,667 1,038,667
DigitalSquare.com Convertible Preferred Stock 1,210,739 1,513,425 1,513,425
Answernet, Inc. Preferred Stock 550 296,554 296,554
Answernet, Inc. Preferred Stock 700 369,691 369,691
ISR Solutions, Inc. Preferred Stock 500 497,260 497,260
Capital Markets Group, Inc. Preferred Stock 1,500 1,500,000 1,500,000
Jubilee Tech International, Inc.
Convertible Preferred Stock 2,444,444 1,962,699 1,962,699
----------- -----------
Total equity investments 24,101,680 24,602,309
----------- -----------
</TABLE>
(Continued)
<PAGE>
WATERSIDE CAPITAL CORPORATION
Schedule of Portfolio Investments
June 30, 1999 and March 31, 2000
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cost or
Number of Percentage Contributed Fair Market
Shares Ownership Value Value
------ --------- ----- -----
<S> <C> <C> <C> <C>
Stock Options and Warrants:
- --------------------------
Publicly-Traded Companies:
Avery Communications, Inc.* 126,000 0.00 $ - $ 25,200
Netplex Group, Inc. 300,000 2.10 900,000 1,791,000
Electronic Business Systems,
Inc. (formerly Triangle
Imaging Group, Inc.)* 56,000 0.39 - 14,000
Private Companies:
Real Time Data Management
Services, Inc. 125 29.41 115,000 150,000
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 2,800
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 11,600
Fire King International - 3.75 - -
QuesTech Packaging, Inc. - 12.50 - -
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 17.64 601,210 601,210
</TABLE>
(Continued)
<PAGE>
WATERSIDE CAPITAL CORPORATION
Schedule of Portfolio Investments
June 30, 1999 and March 31, 2000
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cost or
Stock Options and Warrants, Number of Percentage Contributed Fair Market
- --------------------------
Continued: Shares Ownership Value Value
- --------- ------ --------- ----- -----
<S> <C> <C> <C> <C>
Private Companies (cont):
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
------------ ------------
Total options and
warrants 3,347,462 4,334,008
------------ ------------
Total investments $ 35,522,635 $ 37,135,810
============ ============
</TABLE>
* Represents Rule 144A restricted securities
<PAGE>
1
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
. 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 to fund its portfolio growth, payroll and other expenses
incidental to operations. Waterside currently has 8 full time employees
and 2 offices from which it operates - Norfolk and Richmond, Virginia.
. Results of Operations
Comparison of Three Months Ended March 31, 2000, and March 31, 1999
For the three months ended March 31, 2000, total operating income was
$1,215,000 as compared to the $686,000 reported during the same quarter
of 1999, a 77% increase. The increase in operating income is due to
additional dividend, interest and fee income generated as a result of the
growth in the company's investment portfolio over the past year. The 2000
operating income consisted of dividends of $677,000, interest on debt
securities of $314,000, fee income of $223,000, and interest on cash
equivalents of $1,000.
Total operating expenses for the three months ended March 31, 2000, were
$767,000, consisting of interest expense of $340,000, salary and benefits
of $263,000, legal and accounting expenses of $40,000, and other
operating expenses of $124,000. These expenses compared to the $384,000
reported for the three months ended March 31, 1999, consisting of
interest expense of $106,000, salary and benefits of $176,000, legal and
accounting expenses of $25,000, and other operating expenses of $77,000.
The significant increase in interest expense for the quarter ended March
31, 2000, compared to the quarter ended March 31, 1999, is due to the
increase in borrowings to fund the growth in the Company's investment
portfolio. Net operating income of $504,000 for the three months ended
March 31, 2000, compared favorably to the $271,000 reported for the three
months ended March 31, 1999.
The Company recorded realized gains on investments, net of taxes, of
$766,000 in the three months ended March 31, 2000 as compared to the
$147,000 recorded in the corresponding quarter in the previous year. The
change in unrealized appreciation on investments, net of taxes, declined
to ($74,000) in the three months ended March 31, 2000, as compared to the
$128,000 increase in the comparable period of 1999. The significant
increase in realized gain on investments is due primarily to the increase
in market price of our holdings in The Netplex
<PAGE>
2
Group, Inc. (NASDAQ:NTPL) which saw its per-share market price improve
significantly during the quarter. Net of taxes, total realized and
unrealized gains on investments added $692,000 to total income or $.44
per share during the quarter ended March 31, 2000.
Subsequent to March 31, 2000, the stock market experienced a correction
significantly impacting many stocks in the high tech sector. As a result,
the Company's publicly traded investments experienced a decline in value
from amounts reported as of March 31, 2000. Based on the stock trading
values as of May 4, 2000, the Company has incurred an after tax
unrealized loss on investments amounting to approximately $1.3 million
since March 31, 2000.
Comparison of Nine months ended March 31, 2000, and March 31, 1999
For the nine months ended March 31, 2000, total operating income was
$3,035,000 compared to $1,957,000 for the same period of 1999. The
increase in operating income is due to additional dividend, interest and
fee income generated as a result of the growth in the Company's
investment portfolio. The operating income for the nine months ended
March 31, 2000, consisted of dividends of $1,717,000, interest on debt
securities of $707,000, fee income of $579,000, and interest on cash
equivalents of $32,000.
Total operating expenses for the nine months ended March 31, 2000 were
$1,967,000, consisting of $834,000 in interest expense, $692,000 in
salary and benefits, $113,000 in legal and accounting, and $328,000 in
other operating expenses. These expenses compared to the $1,100,000
reported for the nine months ended March 31, 1999, consisting of $211,000
in interest expense, $552,000 in salary and benefits, $69,000 in legal
and accounting, and $268,000 in other operating expenses. The significant
increase in interest expense for the nine months ended March 31, 2000,
compared to the nine months ended March 31, 1999, is due to the increase
in borrowings to fund the growth in the Company's investment portfolio.
Net operating income of $1,253,000 for the nine months ended March 31,
2000 compared favorably to the $799,000 reported for the nine months
ended March 31, 1999.
The Company recorded realized gains on investments, net of taxes, of
$1,752,000 in the nine months ended March, 31, 2000 as compared to
$234,000 in 1999. The net unrealized appreciation on investments, net of
taxes, increased to $704,000 in the nine months ended March 31, 2000 as
compared to the $285,000 decrease in the comparable period of 1999. The
significant increase in realized gains on investments and change in
unrealized appreciation on investments for the nine months ended March
31, 2000 is a direct result of the holdings in The Netplex Group, Inc.,
previously discussed.
. Financial Condition, Liquidity And Capital Resources
For the nine months ended March 31, 2000, the company funded $13.4
million in investments consisting of $6.7 million in five new portfolio
companies and $6.7 million in additional investments made in existing
investees. To partially fund these new investments, the Company borrowed
$7.0 million from the SBA through debentures payable during the nine
months ended March 31, 2000. The Company also received $1,455,000 in
proceeds from the repayment of stockholders' notes receivable and
$4,807,000 from the repayment or redemption of certain of its investments
during the nine months ended March 31, 2000.
Net asset value per common share increased to $12.16 per share at March
31, 2000, from $8.90 per share at June 30, 1999, of which $2.35 per share
($3.7 million) resulted from operations and $0.91 per share resulted from
the repayment of stockholders' notes receivable of $1,455,000.
<PAGE>
3
During the nine months ended March 31, 2000, cash used in operating
activities was $595,000 as compared to the $631,000 provided during the
nine months ended March 31, 1999. Although net operating income increased
for the nine months ended March 31, 2000, the income taxes on realized
gain on investments also increased and the changes in assets and
liabilities from operating activities have resulted in the decrease in
cash provided by operating activities. The Company used $7,133,000 in
investing activities during the nine months ended March 31, 2000, as
compared to the $9,044,000 used for the nine months ended March
31, 1999. The decrease is primarily due to $2,646,000 of repayments of
both stockholder notes and investee loans. Cash flows provided by
financing activities for the nine months ended March 31, 2000 were
$7,178,000 compared to $6,100,000 for the nine months ended March 31,
1999. Both amounts resulted from net borrowings to finance the growth in
the Company's investment portfolio.
. 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 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.
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-four investments are in thinly traded, small public companies,
whose stock prices have been volatile. The other twenty-one 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 $28.9 million at March 31, 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 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
nine 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
<PAGE>
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.
. The Year 2000
Although January 1, 2000 has passed and the Company is currently unaware
of any significant Year 2000 issues, circumstances related to these
issues could arise throughout the course of the current year, and they
could have a material adverse impact on the Company's business, results
of operations and financial condition. In addition, the Company is
currently unaware of any significant Year 2000 issues related to its
portfolio companies; however, circumstances related to these issues could
arise at one or more of the portfolio companies that could have a
material adverse impact on the value of the Company's portfolio
investments, results of operations and financial condition.
. 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 effect 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
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
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 5th day of May, 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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF WATERSIDE CAPITAL CORPORATION AS PRESENTED IN THE FORM
10-Q FOR THE QUARTER ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 720
<SECURITIES> 37,136
<RECEIVABLES> 1,152
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,005
<PP&E> 159
<DEPRECIATION> (45)
<TOTAL-ASSETS> 39,962
<CURRENT-LIABILITIES> 766
<BONDS> 19,300
0
0
<COMMON> 1,581
<OTHER-SE> 17,654
<TOTAL-LIABILITY-AND-EQUITY> 39,962
<SALES> 0
<TOTAL-REVENUES> 3,035
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,133
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 834
<INCOME-PRETAX> 1,068
<INCOME-TAX> (185)
<INCOME-CONTINUING> 1,253
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 2,456
<NET-INCOME> 3,709
<EPS-BASIC> 2.35
<EPS-DILUTED> 2.34
</TABLE>
