<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
DECEMBER 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 December 31, 1999, 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
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION:
ITEM 1. Balance Sheets as of
June 30, 1999 and December 31, 1999 (unaudited) 3
Statements of Operations for the Three Months and Six Months
Ended December 31, 1998 and 1999 (unaudited) 5
Statement of Changes in Stockholders' Equity for the
Six Months Ended December 31, 1998 and 1999 (unaudited) 6
Statements of Cash Flows for the
Six Months Ended December 31, 1998 and 1999 (unaudited) 7
Notes to Financial Statements (unaudited) 9
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 20
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders 27
SIGNATURES
</TABLE>
<PAGE>
WATERSIDE CAPITAL CORPORATION
Balance Sheets
June 30, 1999 and December 31, 1999
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
1999 1999
--------------- ----------------
(unaudited)
<S> <C>
Assets:
Investments in portfolio companies, at fair value:
Equity securities $ 17,070,782 $ 20,184,219
Loans 6,894,468 7,951,224
Options and warrants 377,000 4,665,186
-------------- ---------------
Total investments, cost of $23,860,295 and $31,065,022
at June 30, 1999 and December 31, 1999, respectively 24,342,250 32,800,629
-------------- ---------------
Current assets:
Cash and cash equivalents 1,269,409 683,815
Dividends receivable 311,737 531,099
Interest receivable 228,438 104,617
Note receivable 150,000 150,000
Refundable income taxes 43,322 -
Prepaid expenses and other current assets 77,916 283,403
-------------- ---------------
Total current assets 2,080,822 1,752,934
Property and equipment, net 118,961 109,970
Deferred financing costs, net 567,837 546,313
-------------- ---------------
Total assets $ 27,109,870 $ 35,209,846
============== ===============
Liabilities and Stockholders' Equity:
Current liabilities:
Line of credit $ - $ 3,700,000
Accounts payable 57,142 39,559
Accrued expenses 372,828 422,686
Deferred revenue 113,631 34,500
Income taxes payable - 399,678
-------------- ---------------
Total current liabilities 543,601 4,596,423
Deferred income taxes 195,000 705,000
Debentures payable 12,300,000 12,300,000
-------------- ---------------
Total liabilities 13,038,601 17,601,423
-------------- ---------------
Stockholders' equity:
Common stock, $1 par value, 10,000,000 shares authorized, 1,581,430
issued and outstanding at June 30, 1999 and
December 31, 1999, 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 1,076,085
Undistributed accumulated earnings 966,003 763,189
Stockholders' notes receivable (1,455,000) (431,000)
-------------- ---------------
Total stockholders' equity 14,071,269 17,608,423
Commitments and contingencies
-------------- ---------------
Total liabilities and stockholders' equity $ 27,109,870 $ 35,209,846
============== ===============
Net asset value per common share $ 8.90 $ 11.13
============== ===============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
WATERSIDE CAPITAL CORPORATION
Unaudited Statements of Operations
Three months and six months ended December 31, 1998 and 1999
- -------------------------------------------------------------------------------
<TABLE>
Three Months Ended Six Months Ended
December 31, December 31,
1998 1999 1998 1999
--------- ---------- ---------- ------------
<S> <C>
Operating income:
Dividends $ 258,192 $ 534,624 $ 483,960 $ 1,040,276
Interest on loans 168,747 201,952 272,790 393,633
Interest on cash equivalents 47,787 6,842 74,610 29,689
Fee and other income 117,865 246,500 439,499 356,500
--------- ---------- ---------- ------------
Total operating income 592,591 989,918 1,270,859 1,820,098
--------- ---------- ---------- ------------
Operating expenses:
Salary and benefits 149,713 211,312 375,890 428,719
Legal and accounting 29,325 50,000 43,920 74,000
Interest expense 104,526 268,047 104,526 493,270
Other operating expenses 110,139 125,118 191,655 203,568
--------- ---------- ---------- ------------
Total operating expenses 393,703 654,477 715,991 1,199,557
--------- ---------- ---------- ------------
Net operating income before income taxes 198,888 335,441 554,868 620,541
Income tax expense (benefit) (22,400) (58,000) 27,000 (129,000)
--------- ---------- ---------- ------------
Net operating income 221,288 393,441 527,868 749,541
Realized gain on investments, net of income taxes of $606,000 for the three
and six months ended December 31, 1999 and $53,301 for the six months
ended December 31, 1998 - 986,153 87,213 986,153
Change in unrealized appreciation on investments, net of income tax
expense (benefit) of $(15,000) and $615,000 for the three months ended
December 31, 1998 and 1999, respectively, and $(253,000) and $476,000
for the six months ended December 31, 1998 and 1999, respectively (23,989) 1,005,973 (412,974) 777,651
--------- ---------- ---------- ------------
Net increase in stockholders' equity resulting from operations $ 197,299 $2,385,567 $ 202,107 $ 2,513,345
========= ========== ========== ============
Net increase in stockholders' equity resulting from operations per share -
basic and diluted (note 4) $ 0.12 $ 1.51 $ 0.13 $ 1.59
========= ========== ========== ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
WATERSIDE CAPITAL CORPORATION
Unaudited Statements of Changes in Stockholders' Equity
Six months ended December 31, 1998 and 1999
<TABLE>
<CAPTION>
1998: Net
Common Stock Additional unrealized Undistributed Stockholders' Total
----------------------- paid-in appreciation accumulated notes stockholders'
Shares Amount capital on investments earnings receivable equity
------------------------------------------------------------------------------------ ------------
<S> <C>
Balance at June 30, 1998 1,420,900 $ 1,420,900 $12,272,636 $ 536,810 $ 258,942 $(1,455,000) $ 13,034,288
Net operating income - - - - 527,868 - 527,868
Net realized gain on
investments, net of
income taxes - - - - 87,213 - 87,213
Decrease in net
unrealized appreciation on
investments, net of
income taxes - - - (412,974) - - (412,974)
--------- ----------- ----------- ----------- ---------- ----------- ------------
Balance at December 31, 1998 1,420,900 $ 1,420,900 $12,272,636 $ 123,836 $ 874,023 $(1,455,000) $ 13,236,395
========= =========== =========== =========== ========== =========== ============
1999:
Balance at June 30, 1999 1,491,937 $ 1,491,937 $12,769,895 $ 298,434 $ 966,003 $(1,455,000) $ 14,071,269
6% stock dividend 89,493 89,493 648,824 - (738,508) - (191)
Capitalization of
undistributed
accumulated earnings - - 1,200,000 - (1,200,000) - -
Repayment of stockholders'
notes receivable - - - - - 1,024,000 1,024,000
Net operating income - - - - 749,541 - 749,541
Net realized gain on
investments, net of
income taxes - - - - 986,153 - 986,153
Increase in net unrealized
appreciation on
investments, net
of income taxes - - - 777,651 - - 777,651
--------- ----------- ----------- ----------- ---------- ----------- ------------
Balance at December 31, 1999 1,581,430 $ 1,581,430 $14,618,719 $ 1,076,085 $ 763,189 $ (431,000) $ 17,608,423
========= =========== =========== =========== ========== =========== ============
</TABLE>
<PAGE>
WATERSIDE CAPITAL CORPORATION
Unaudited Statements of Cash Flows
Six months ended December 31, 1998 and 1999
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1999
----------- ------------
<S> <C>
Cash flows from operating activities:
Net increase in stockholders' equity resulting from operations $ 202,107 $ 2,513,345
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 719,074 (1,253,651)
Realized gain on investments (140,514) (1,592,153)
Accretion of preferred stock and loan investments (53,100) (89,527)
Depreciation and amortization 15,225 31,442
Deferred income tax expense (benefit) (191,000) 510,000
Loss on disposal of property and equipment - 828
Changes in assets and liabilities increasing (decreasing) cash
flows from operating activities:
Dividends receivable (93,375) (219,362)
Interest receivable (170,211) 123,821
Refundable income taxes - 43,322
Prepaid expenses and other current assets 6,840 (205,487)
Accounts payable and accrued expenses 104,584 32,275
Deferred revenue 66,942 (79,131)
Income taxes payable 21,979 399,678
---------- ----------
Net cash provided by operating activities 488,551 215,400
---------- ----------
Cash flows from investing activities:
Investments made (4,500,000) (4,953,425)
Loans made (3,475,000) (3,754,189)
Principal collected on loans made 16,483 1,181,842
Proceeds from repayment of stockholders' notes receivable - 1,024,000
Proceeds from sales of investments 1,015,518 2,002,724
Acquisition of property and equipment (14,315) (3,755)
Proceeds from sale of property and equipment - 2,000
--------- ----------
Net cash used in investing activities (6,957,314) (4,500,803)
---------- ----------
Cash flows from financing activities:
Proceeds from line of credit - 3,700,000
Proceeds from debentures payable 6,000,000 -
Payments in lieu of fractional shares associated with stock dividend - (191)
Payment of deferred financing costs (150,000) -
----------- ----------
Net cash provided by financing activities 5,850,000 3,699,809
----------- ----------
Net decrease in cash and cash equivalents (618,763) (585,594)
Cash and cash equivalents, beginning of period 4,393,501 1,269,409
---------- ----------
Cash and cash equivalents, end of period $ 3,774,738 $ 683,815
========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 321 $ 389,911
========== ===========
Cash paid during the period for income taxes $ - $ -
========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
WATERSIDE CAPITAL CORPORATION
Notes to Financial Statements
June 30, 1999 and December 31, 1999 (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 loans and
investments are acquired with the intent that they are to be held until
maturity or disposed of in the ordinary course of business. Except for
interest-bearing securities which are convertible into common stock,
interest-bearing securities are valued in an amount not greater than cost,
with unrealized depreciation being recognized when value is impaired. Equity
securities of private companies are presumed to represent cost unless the
performance of the portfolio company, positive or negative, indicates
otherwise in accordance with the Policy guidelines. The fair value of equity
securities of publicly traded companies are generally valued at their quoted
market price discounted due to the investment size or market liquidity
concerns and the for the effect of restrictions on the sale of such
securities.
<PAGE>
WATERSIDE CAPITAL CORPORATION
Notes to Financial Statements
June 30, 1999 and December 31, 1999 (Unaudited)
- --------------------------------------------------------------------------------
Discounts can range from 0% to 40% for investment size and market liquidity
concerns. Actual liquidity discounts in the portfolio at December 31, 1999
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 obtained from and loans
made to portfolio companies under SBIC investment and loan regulations. The
financial statements include securities valued at $24,342,250 and
$32,800,629 at June 30, 1999 and December 31, 1999 (89.8% and 93.2% 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.
<PAGE>
WATERSIDE CAPITAL CORPORATION
Notes to Financial Statements
June 30, 1999 and December 31, 1999 (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 six months ended December 31, 1998 and 1999:
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
1998 1999 1998 1999
------------ ------------ ------------ ------------
Basic net increase in stockholders'
equity resulting from operations
per share:
<S> <C>
Net increase in stockholders'
equity resulting from
operations $ 197,299 2,385,567 202,107 2,513,345
========= ========= ========= =========
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 $ 0.12 1.51 0.13 1.59
========= ========= ========= =========
Diluted net increase in stockholders'
equity resulting from operations
per share:
Net increase in stockholders'
equity resulting from
operations $ 197,299 2,385,567 202,107 2,513,345
========= ========= ========= =========
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) - 1,032 - 1,032
--------- --------- --------- ---------
Adjusted weighted average
number of common shares
outstanding 1,581,430 1,582,462 1,581,430 1,582,462
========= ========= ========= =========
Diluted net increase in stockholders'
equity resulting from operations
per share $ 0.12 1.51 0.13 1.59
========= ========= ========= =========
</TABLE>
<PAGE>
WATERSIDE CAPITAL CORPORATION
Notes to Financial Statements
June 30, 1999 and December 31, 1999 (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 capitalization as common stock and additional paid-in
capital. Historical earnings per share and weighted average shares
outstanding and net asset value per share have been restated to reflect the
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
During January 2000, the Company liquidated an additional 75,000 shares of
Netplex Group, Inc. Common Stock for proceeds of $970,584. A gain of
$867,459 was realized on the transaction.
<PAGE>
WATERSIDE CAPITAL CORPORATION
Schedule of Portfolio Investments
June 30, 1999 and December 31, 1999
- --------------------------------------------------------------------------------
The Company's investment portfolio at June 30, 1999, consisted of the following:
<TABLE>
<CAPTION>
Cost or
Contributed
Loans: Maturity Value Fair Value
- ------ -------- ------------------ --------------
<S> <C>
Avery Communications, Inc.
Convertible Note 12/10/02 $ 350,000 $ 350,000
Divaris Consolidated Investments, Inc. 6/29/04 1,100,000 1,100,000
Extraction Technologies of VA, LLC 7/22/03 900,000 900,000
JMS Worldwide, Inc. 7/31/03 1,000,000 1,000,000
Diversified Telecom, Inc. Demand 133,837 133,837
Diversified Telecom, Inc. 5/19/02 152,145 152,145
The Netplex Group, Inc. 2/25/04 758,319 758,319
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 loans 6,894,468 6,894,468
------------------ --------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Cost or Fair Market
Number of Shares Contributed Value Value
---------------- ----------------- -----------
<S> <C>
Equity Investments:
- ------------------
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
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>
<PAGE>
<TABLE>
<CAPTION>
Number Cost or
of Percentage Contributed Fair Market
Stock Options and Warrants: Shares Ownership Value Value
- --------------------------- ------ --------- ----------- -----------
<S> <C>
Publicly-Traded Companies:
Avery Communications, Inc. 126,000 0.00 $ - $ -
Netplex Group, Inc. * 75,000 0.70 - 74,100
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>
<PAGE>
WATERSIDE CAPITAL CORPORATION
Schedule of Portfolio Investments
June 30, 1999 and December 31, 1999
- --------------------------------------------------------------------------------
The Company's investment portfolio at December 31, 1999 (unaudited) consisted of
the following:
<TABLE>
<CAPTION>
Cost or
Contributed
Loans: 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 8/31/04 197,711 197,711
Extraction Technologies of VA, LLC 11/2/04 373,711 373,711
JMS Worldwide, Inc. 7/31/03 950,000 950,000
Diversified Telecom, Inc. Demand 101,995 101,995
Diversified Telecom, Inc. 5/19/02 156,334 156,334
The Netplex Group, Inc. 2/25/04 762,706 762,706
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. 6/30/04 741,167 741,167
Fire King International Demand 550,000 550,000
TABET Manufacturing Co., Inc. 12/31/04 274,600 274,600
National Assisted Living, LP 12/31/04 1,333,000 1,333,000
------------ -------------
Total loans 7,951,224 7,951,224
------------ --------------
</TABLE>
<TABLE>
<CAPTION>
Cost or
Number of Contributed Market Value
Equity Investments: Shares Value Fair
- ------------------ --------- ----------- ------------
<S> <C>
Publicly-Traded Companies:
Avery Communications, Inc. Common Stock 245,000 $ 249,900 $ 248,185
Netplex Group, Inc. Preferred Stock 1,500,000 309,705 309,705
Electronic Business Systems, Inc.
(formerly Triangle Imaging Group, Inc.)
Preferred Stock 150,000 1,341,500 1,341,500
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 69,500
</TABLE>
<PAGE>
WATERSIDE CAPITAL CORPORATION
Schedule of Portfolio Investments
June 30, 1999 and December 31, 1999
<TABLE>
<CAPTION>
Cost or
Number of Contributed Fair Market
Equity Investments: Shares Value Value
- ------------------ --------- ----------- -----------
<S> <C>
Equity Investments in Private Companies:
Real Time Data Management Services, Inc.
Preferred Stock 300 285,703 441,000
Coddle Roasted Meats, Inc. Common Stock 1,200 120 120
Delta Education Systems, Inc. Preferred
Stock 1,625 1,589,463 1,589,463
Diversified Telecom, Inc. Preferred Stock 1,500 1,500,000 1,500,000
Crispies, Inc. Preferred Stock 400 398,040 398,040
Triangle Biomedical Sciences Preferred
Stock 1,700 1,575,737 1,575,737
JMS Worldwide, Inc. Preferred Stock 1,500 1,500,000 1,500,000
EPM Development Systems, Corp. Preferred
Stock 1,500 1,491,687 1,491,687
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 1,000 969,927 969,927
Fairfax Publishing Co., Inc. Preferred
Stock 1,100 1,034,987 1,034,987
DigitalSquare.com Convertible Preferred
Stock 1,210,739 1,513,424 1,513,424
Answernet, Inc. Preferred Stock 550 303,770 303,770
ISR Solutions, Inc. Preferred Stock 500 497,113 497,113
Capital Markets Group, Inc. Preferred
Stock 1,500 1,500,000 1,500,000
------------ ------------
Total equity investments 20,186,136 20,184,219
------------ ------------
</TABLE>
<PAGE>
WATERSIDE CAPITAL CORPORATION
Schedule of Portfolio Investments
June 30, 1999 and December 31, 1999
<TABLE>
<CAPTION>
Number Cost or
of Percentage Contributed Fair Market
Stock Options and Warrants: Shares Ownership Value Value
- --------------------------- ------ ---------- ----------- -----------
<S> <C>
Publicly-Traded Companies:
Avery Communications, Inc. 126,000 0.00 $ - $ -
Netplex Group, Inc. 475,000 4.40 1,200,000 2,888,713
Electronic Business Systems,
Inc. (formerly Triangle
Imaging Group, Inc.) * 20,000 0.14 - 1,548
Private Companies:
Real Time Data Management
Services, Inc. 125 29.41 115,000 150,000
Delta Education Systems, Inc. 639 39.00 48,200 60,463
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 - 21.00 190,362 190,362
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. 68,355 18.00 268,615 268,615
</TABLE>
<PAGE>
WATERSIDE CAPITAL CORPORATION
Schedule of Portfolio Investments
June 30, 1999 and December 31, 1999
<TABLE>
<CAPTION>
Cost or
Number of Percentage Contributed Fair Market
Stock Options and Warrants: Shares Ownership Value Value
- ---------------------------- --------- ---------- ----------- -----------
<S> <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 - -
--------- ---------
Total options and
warrants 2,927,662 4,665,186
---------- ---------
Total investments $31,065,022 $32,800,629
========== ==========
</TABLE>
* Represents Rule 144A restricted securities
<PAGE>
PART I. FINANCIAL INFORMATION:
ITEM 1. Financial Statements
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 operations. 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 made 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 in Norfolk and
Richmond, Virginia.
o Results of Operations
Comparison of Three Months Ended December 31, 1999, and December
31, 1998
For the three months ended December 31, 1999, total operating
income was $990,000 as compared to the $593,000 reported during
the same quarter of 1998, a 67% 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 1999 operating income
consisted of dividends of $535,000, interest on loans of $202,000,
fee income of $246,000, and interest on cash equivalents of
$7,000.
Total operating expenses for the three months ended December 31,
1999 were $654,000, consisting of interest expense of $268,000,
salary and benefits of $211,000, legal and accounting expenses of
$50,000, and other operating expenses of $125,000. These expenses
compared to the $394,000 reported for the three months ended
December 31, 1998, consisting of interest expense of $105,000,
salary and benefits of $150,000, legal and accounting expenses of
$29,000, and other operating expenses of $110,000. The significant
increase in interest expense for the quarter ended December 31,
1999 compared to the quarter ended December 31, 1998, is due to
the increase in borrowings to fund the growth in the Company's
investment portfolio. Net operating income of $393,000 for the
three months ended December 31, 1999 compared favorably to the
$221,000 reported for the three months ended December 31, 1998.
The Company recorded realized gains on investments, net of taxes,
of $986,000 in the three months ended December 31, 1999. The net
unrealized appreciation on investments, net of taxes, increased to
$1,006,000 in the three months ended December 31, 1999 as compared
to the $24,000 decrease in the comparable period of 1998. The
significant increase in realized gain on investments and change in
unrealized appreciation on investments is due primarily to the
increase in market price of our holdings in the Netplex Group,
Inc. (NASDAQ:NTPL) which saw its per-share market price improve
<PAGE>
from $2.35 per share to $11.375 during the quarter. Net of taxes,
total realized and unrealized gains and investments added $2.0
million to our stockholders' equity or $1.26 per share during the
quarter ended December 31, 1999.
Comparison of Six months ended December 31, 1999, and December 31,
1998
For the six months ended December 31, 1999, total operating income
was $1,820,000 compared to $1,271,000 for the same period of 1998.
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 six
months ended December 31, 1999, consisted of dividends of
$1,040,000, interest on loans of $394,000, fee income of $356,000,
and interest on cash equivalents of $30,000.
Total operating expenses for the six months ended December 31,
1999 were $1,200,000, consisting of $493,000 in interest expense,
$429,000 in salary and benefits, $74,000 in legal and accounting,
and $204,000 in other operating expenses. These expenses compared
to the $716,000 reported for the six months ended December 31,
1998, consisting of $104,000 in interest expense, $376,000 in
salary and benefits, $44,000 in legal and accounting, and $192,000
in other operating expenses. The significant increase in interest
expense for the six months ended December 31, 1999 compared to the
six months ended December 31, 1998, is due to the increase in
borrowings to fund the growth in the Company's investment
portfolio. Net operating income of $750,000 for the six months
ended December 31, 1999, compared favorably to the $528,000
reported for the six months ended December 31, 1998.
The Company recorded realized gains on investments, net of taxes,
of $986,000 in the six months ended December 31, 1999 as compared
to $87,000 in 1998. The net unrealized appreciation on
investments, net of taxes, increased to $778,000 in the six months
ended December 31, 1999 as compared to the $413,000 decrease in
the comparable period of 1998. The significant increase in
realized gains on investments and change in unrealized
appreciation on investments for the six months ended December 31,
1999, is a direct result of the holdings in the Netplex Group,
Inc. previously discussed.
o Financial Condition, Liquidity And Capital Resources
For the six months ended December 31, 1999, the Company funded
$8.7 million in investments consisting of $4.5 million in four new
portfolio companies and $4.2 million in additional investments
made in existing investees. To partially fund these new
investments, the Company borrowed $3.7 million against its bank
lines of credit during the six months ended December 31, 1999. The
Company also received $1,024,000 in proceeds from the repayment of
stockholders' notes receivable and $3,185,000 from the repayment
or redemption of certain of its investments during the six months
ended December 31, 1999.
Net asset value per common share increased to $11.13 per share at
December 31, 1999 from $8.98 per share at September 30, 1999, of
which $1.51 per share ($2.4 million) resulted from operations and
$0.64 per share resulted from the repayment of stockholders' notes
receivable of $1,024,000.
During the six months ended December 31, 1999, cash provided by
operating activities was $215,000 as compared to the $489,000
provided during the six months ended December 31, 1998. Although
net operating income increased for the six months ended December
31, 1999, 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 $4,501,000 in investing
activities during the six months ended December 31, 1999, as
compared to the $6,957,000 used for the six months ended December
31, 1998. The decrease is primarily due to $2,206,000 of
repayments of both stockholder notes and investee loans. Cash
flows provided by financing activities for the six months ended
<PAGE>
December 31, 1999, were $3,700,000 compared to $5,850,000 for the
six months ended December 31, 1998. Both amounts resulted from net
borrowings 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 as
follows: 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 designed to be 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-three investments
are in thinly traded, small public companies, whose stock prices
have been volatile. The other twenty 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 interest of $24.8 million at December 31,
1999, 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 six month horizon. Although
management believes that this measure is indicative of the
Company's sensitivity to interest rate changes, it does not adjust
for potential changes in credit quality, size and composition of
the balance sheet and other business developments that could
affect net income. Accordingly, no assurances can be given that
actual results would not differ materially from the potential
outcome simulated by this estimate.
o 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.
<PAGE>
o Forward-Looking Statements
Included in this report and other written and oral information by
management from time to time, including reports to shareholders,
quarterly and semi-annual shareholder letters, filings with the
Commission, news releases and investor presentations, are
forward-looking statements about business objectives and
strategies, market potential, the Company's ability to expand the
geographic scope of its investments, the quality of the Company's
due diligence efforts, its financing plans, 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,
valuations, 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
The 1999 Annual Meeting of Shareholders of Waterside Capital Corporation was
held on October 25, 1999 to consider four matters of business. The matters
brought before the shareholders and the voting results are as follows:
1. Election of Directors
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTES*
--- ------- ------- ---------
<S> <C>
James E. Andrews 1,216,919 0 525 --
Donna C. Bennett 1,216,919 0 525 --
J. W. Whiting Chisman, Jr. 1,215,369 0 2,075 --
Jeffrey R. Ellis 1,216,919 0 525 --
Eric L. Fox 1,215,077 0 2,367 --
Roger L. Frost 1,216,919 0 525 --
Ernest F. Hardee 1,216,919 0 525 --
Henry U. Harris, III 1,213,419 0 4,025 --
J. Alan Lindauer 1,214,552 0 2,892 --
Robert I. Low 1,216,919 0 525 --
Harold J. Marioneaux, Jr. 1,216,919 0 525 --
Peter W. Meredith, Jr. 1,211,637 0 5,807 --
Charles H. Merriman 1,216,419 0 1,025 --
Augustus C. Miller 1,214,844 0 2,600 --
Paul F. Miller 1,215,369 0 2,075 --
Juan M. Montero 1,216,919 0 525 --
R. Scott Morgan, Sr. 1,216,919 0 525 --
James W. Noel, Jr. 1,215,369 0 2,075 --
Richard G. Ornstein 1,216,419 0 1,025 --
Marvin S. Friedberg 1,216,919 0 525 --
Jordan E. Slone 1,216,919 0 525 --
</TABLE>
2. To amend the Company's 1998 Employee Stock Option Plan
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTES*
--- ------- ------- ---------
<S> <C>
894,780 39,341 11,025 272,298
</TABLE>
<PAGE>
3. Ratification of the appointment of KPMG LLP as independent auditors for 2001
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTES*
--- ------- ------- ---------
<S> <C>
1,217,444 0 0 0
</TABLE>
*"Broker Non-Votes" occur where a broker holding stock in street name does not
vote those shares.
ITEM 5. OTHER INFORMATION
On December 17, 1999, the Company declared a 6% stock dividend
payable to shareholders of record on January 14, 2000. This dividend was paid on
January 31, 2000. This dividend comprised 89,493 shares.
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 9th day of February, 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 DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS' LEGEND.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 684
<SECURITIES> 32,801
<RECEIVABLES> 786
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,753
<PP&E> 110
<DEPRECIATION> 0
<TOTAL-ASSETS> 35,210
<CURRENT-LIABILITIES> 4,596
<BONDS> 0
0
0
<COMMON> 1,581
<OTHER-SE> 16,027
<TOTAL-LIABILITY-AND-EQUITY> 35,210
<SALES> 0
<TOTAL-REVENUES> 1,820
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 706
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 493
<INCOME-PRETAX> 621
<INCOME-TAX> (129)
<INCOME-CONTINUING> 750
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 1,763
<NET-INCOME> 2,513
<EPS-BASIC> 1.59
<EPS-DILUTED> 1.59
</TABLE>
