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, 2002
COMMISSION FILE NO.: 333-36709
______________________________
WATERSIDE CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1694665
(State of Incorporation) (I.R.S. Employer Identification Number)
300 EAST MAIN STREET, SUITE 1380, NORFOLK, VIRGINIA 23510
(Address of principal executive office) (Zip Code)
(757) 626-1111
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and has been subject to the
filing requirements for the past 90 days.
Yes [X] No
As of March 31, 2002, the registrant had issued and outstanding 1,569,630
shares of Common Stock, $1.00 par value.
WATERSIDE CAPITAL CORPORATION
FORM 10-Q
Table of Contents
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Balance Sheets as of June 30, 2001 and March 31, 2002 (unaudited) 2
Statements of Operations for the Three Months Ended and
Nine Months Ended March 31, 2001 and 2002 (unaudited) 3
Statements of Changes in Stockholders' Equity for the Nine
Months Ended March 31, 2001 and 2002 (unaudited) 4
Statements of Cash Flows for the Nine Months Ended
March 31, 2001 and 2002 (unaudited) 5
Notes to Financial Statements (unaudited) 6-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
PART II. OTHER INFORMATION 16
SIGNATURES 16
1
PART I. FINANCIAL INFORMATION
ITEM 1.
WATERSIDE CAPITAL CORPORATION
Unaudited Balance Sheets
June 30, 2001 and March 31, 2002
- --------------------------------------------------------------------------------
June 30, March 31,
2001 2002
------------ ------------
Assets:
Investments in portfolio companies, at fair value (note 3):
Equity securities $ 23,146,571 $ 17,473,760
Debt securities 6,514,395 7,397,960
Options and warrants 4,025,942 4,910,454
------------ ------------
Total investments, cost of $41,702,728 and $38,831,875
at June 30, 2001 and March 31, 2002, respectively 33,686,908 29,782,174
------------ ------------
Current assets:
Cash and cash equivalents 1,089,386 2,691,725
Current portion of dividends receivable 719,188 642,671
Interest receivable 101,304 146,836
Notes receivable 237,550 229,452
Refundable income taxes 533,225 89,513
Prepaid expenses 131,891 97,955
Other current assets 50,466 7,084
------------ ------------
Total current assets 2,863,010 3,905,236
------------ ------------
Dividends receivable, excluding current portion 278,583 413,583
Property and equipment, net 133,217 101,633
Deferred income taxes 550,000 -
Deferred financing costs, net 867,040 816,979
------------ ------------
Total assets $ 38,378,758 $ 35,019,605
============ ============
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable $ 85,224 $ 67,035
Accrued interest 657,514 171,756
Accrued expenses 237,009 66,443
Deferred revenue - 19,417
------------ ------------
Total current liabilities 979,747 324,651
Debentures payable 25,400,000 25,400,000
------------ ------------
Total liabilities 26,379,747 25,724,651
------------ ------------
Stockholders' equity:
Common stock, $1 par value, 10,000,000 shares authorized,
1,581,430 and 1,569,630 issued and outstanding at
June 30, 2001 and March 31, 2002, respectively 1,581,430 1,569,630
Preferred stock, $1 par value, 25,000 shares authorized,
no shares issued and outstanding - -
Additional paid-in capital 14,618,719 14,591,319
Net unrealized depreciation on investments, net of income taxes (7,464,341) (9,048,222)
Undistributed accumulated earnings 3,263,203 2,182,227
------------ ------------
Total stockholders' equity 11,999,011 9,294,954
------------ ------------
Commitments and contingencies
Total liabilities and stockholders' equity $ 38,378,758 $ 35,019,605
============ ============
Net asset value per common share $ 7.59 $ 5.92
============ ============
See accompanying notes to financial statements.
2
WATERSIDE CAPITAL CORPORATION
Unaudited Statements of Operations
Three Months and Nine Months ended March 31, 2001 and 2002
- --------------------------------------------------------------------------------
Three Months ended Nine Months ended
March 31, March 31,
-------------------------- --------------------------
2001 2002 2001 2002
------------ ------------ ------------ ------------
Operating income:
Dividends $ 736,577 $ 458,043 $ 2,096,483 $ 1,578,180
Interest on debt securities 301,112 275,323 759,775 933,301
Interest on cash equivalents 1,176 9,094 9,408 26,477
Fee and other income 110,203 92,257 315,430 331,564
------------ ------------ ------------ ------------
Total operating income 1,149,068 834,717 3,181,096 2,869,522
------------ ------------ ------------ ------------
Operating expenses:
Salaries and benefits 243,906 188,230 699,279 557,621
Legal and accounting 71,100 135,100 165,581 223,300
Interest expense 497,224 514,352 1,454,883 1,564,615
Other operating expenses 108,447 75,400 295,626 222,854
------------ ------------ ------------ ------------
Total operating expenses 920,677 913,082 2,615,369 2,568,390
------------ ------------ ------------ ------------
Net operating income (loss) before income taxes 228,391 (78,365) 565,727 301,132
Income tax benefit (146,000) - (465,000) -
------------ ------------ ------------ ------------
Net operating income (loss) 374,391 (78,365) 1,030,727 301,132
Realized gain (loss) on investments, net of income tax expense
of $40,000 for the three months and nine months ended
March 31, 2001 and $0 for the three months and nine months
ended March 31, 2002 66,457 (64,345) 66,457 (1,382,108)
Change in unrealized depreciation on investments, net of income
tax expense (benefit) of $106,000 and $38,000 for the three
months ended March 31, 2001 and 2002, respectively, and
$(168,000) and $550,000 for the nine months ended March 31,
2001 and 2002, respectively (2,639,937) (1,209,168) (4,718,973) (1,583,881)
------------ ------------ ------------ ------------
Net decrease in stockholders' equity resulting
from operations $ (2,199,089) $ (1,351,878) $ (3,621,789) $ (2,664,857)
============ ============ ============ ============
Net decrease in stockholders' equity resulting from operations
per share - basic and diluted $ (1.39) $ (0.86) $ (2.29) $ (1.69)
============ ============ ============ ============
Weighted average shares outstanding 1,581,430 1,575,336 1,581,430 1,579,428
============ ============ ============ ============
See accompanying notes to financial statements.
3
WATERSIDE CAPITAL CORPORATION
Unaudited Statements of Changes in Stockholders' Equity
Nine Months ended March 31, 2001 and 2002
- --------------------------------------------------------------------------------
Common stock Additional Net unrealized Undistributed Total
---------------------------- paid-in depreciation accumulated stockholders'
Shares Amount capital on investments earnings equity
------------- ------------- ------------- ------------- ------------- -------------
Balance at June 30, 2000 1,581,430 $ 1,581,430 $ 14,618,719 $ (1,216,357) $ 1,850,599 $ 16,834,391
Net operating income - - - - 1,030,727 1,030,727
Net realized gain on investments, net of
income taxes - - - - 66,457 66,457
Change in net unrealized depreciation on
investments, net of income taxes - - - (4,718,973) - (4,718,973)
------------- ------------- ------------- ------------- ------------- -------------
Balance at March 31, 2001 1,581,430 $ 1,581,430 $ 14,618,719 $ (5,935,330) $ 2,947,783 $ 13,212,602
============= ============= ============= ============= ============= =============
Balance at June 30, 2001 1,581,430 $ 1,581,430 $ 14,618,719 $ (7,464,341) $ 3,263,203 $ 11,999,011
Net operating income - - - - 301,132 301,132
Repurchase of outstanding stock (11,800) (11,800) (27,400) - - (39,200)
Net realized loss on investments - - - - (1,382,108) (1,382,108)
Change in net unrealized depreciation on
investments, net of income taxes - - - (1,583,881) - (1,583,881)
------------- ------------- ------------- ------------- ------------- -------------
Balance at March 31, 2002 1,569,630 $ 1,569,630 $ 14,591,319 $ (9,048,222) $ 2,182,227 $ 9,294,954
============= ============= ============= ============= ============= =============
See accompanying notes to financial statements.
4
WATERSIDE CAPITAL CORPORATION
Unaudited Statements of Cash Flows
Nine months ended March 31, 2001 and 2002
- --------------------------------------------------------------------------------
2001 2002
------------ ------------
Cash flows from operating activities:
Net decrease in stockholders' equity resulting from operations $ (3,621,789) $ (2,664,857)
Adjustments to reconcile net decrease in stockholders' equity resulting
from operations to net cash provided by (used in) operating activities:
Unrealized depreciation on investments 4,886,973 1,033,881
Realized (gain) loss on investments (106,457) 1,382,108
Accretion of preferred stock and loan investments (412,775) (366,195)
Depreciation and amortization 73,474 83,406
Deferred income tax expense (benefit) (582,000) 550,000
Changes in assets and liabilities increasing (decreasing)
cash flows from operating activities:
Dividends receivable (133,106) (58,483)
Interest receivable 128,315 (45,532)
Refundable income taxes 323,322 443,712
Prepaid expenses and other current assets (49,382) 77,318
Other assets (935) -
Accounts payable and accrued expenses (344,339) (674,513)
Deferred revenue - 19,417
------------ ------------
Net cash provided by (used in) operating activities 161,301 (219,738)
------------ ------------
Cash flows from investing activities:
Investments in equity securities made (2,495,113) -
Investments in debt securities made (3,291,249) (3,037,258)
Principal collected on debt securities 2,094,931 1,629,232
Proceeds from collection of note receivable - 29,258
Proceeds from sales of investments - 3,241,806
Acquisition of property and equipment (3,844) (1,761)
------------ ------------
Net cash provided by (used in) investing activities (3,695,275) 1,861,277
------------ ------------
Cash flows from financing activities:
Repurchase of stock - (39,200)
Repayments of lines of credit (2,200,000) -
Proceeds from debentures payable 6,100,000 -
Payment of deferred financing costs (192,500) -
------------ ------------
Net cash provided by (used in) financing activities 3,707,500 (39,200)
------------ ------------
Net increase in cash and cash equivalents 173,526 1,602,339
Cash and cash equivalents, beginning of year 118,314 1,089,386
------------ ------------
Cash and cash equivalents, end of period $ 291,840 $ 2,691,725
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,735,867 $ 2,080,312
============ ============
Noncash investing activity - In the first quarter of 2002, the Company's
preferred stock investment in Tangent Solutions, Inc. was settled in exchange
for a $87,842 note receivable through a bankruptcy proceeding. Of this amount,
$66,682 was written off as a realized loss upon completion of the bankruptcy
process.
See accompanying notes to financial statements.
5
WATERSIDE CAPITAL CORPORATION
Notes to Unaudited Financial Statements
March 31, 2002
- --------------------------------------------------------------------------------
(1) Basis of Presentation
In the opinion of management, the accompanying unaudited interim financial
statements of Waterside Capital Corporation (the Company) as of March 31,
2002 and for the three month and nine month periods ended March 31, 2002
and 2001 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 periods, 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 Company's balance sheet as of June 30, 2001
has been derived from the audited financial statements as of June 30,
2001. The interim financial statements and notes thereto should read in
conjunction with the financial statements and notes thereto included in
the Company's Form 10-K as of and for the year ended June 30, 2001, as
filed with the Securities and Exchange Commission.
(2) Description of Business
The Company was incorporated in the Commonwealth of Virginia on July 13,
1993 and is a closed-end investment company licensed by the Small Business
Administration (the SBA) as a Small Business Investment Corporation
(SBIC). The Company makes equity investments in, and provides loans to,
small business concerns to finance their growth, expansion and
development. Under applicable SBA regulations, the Company is restricted
to investing only in qualified small business concerns as contemplated by
the Small Business Investment Act of 1958.
(3) Investments
Investments are carried at fair value, as determined by the Executive
Committee of the Board of Directors. The Company, through its Board of
Directors, has adopted the Model Valuation Policy, as published by the
SBA, in Appendix III to Part 107 of Title 12 of the Code of Federal
Regulations (the Policy). The Policy, among other things, presumes that
loans and investments are acquired with the intent that they are to be
held until maturity or disposed of in the ordinary course of business.
Except for interest-bearing securities which are convertible into common
stock, interest-bearing securities are valued at an amount not greater
than cost, with unrealized depreciation being recognized when value is
impaired. Equity securities of private companies are presumed to represent
cost unless the performance of the portfolio company, positive or
negative, indicates otherwise in accordance with the Policy
6 (Continued)
WATERSIDE CAPITAL CORPORATION
Notes to Unaudited Financial Statements
March 31, 2002
- --------------------------------------------------------------------------------
guidelines, The fair value of equity securities of publicly traded
companies are generally valued at their quoted market price discounted due
to the investment size or market liquidity concerns and for the effect of
restrictions on the sale of such securities.
Discounts can range from 0% to 40% for investment size and market liquidity
concerns. Actual liquidity discounts in the portfolio at March 31, 2002
ranged from 15% to 40%. Discounts for restriction on the sale of the
investments are 15% in accordance with the provisions of the Policy. The
Company maintains custody of its investments as permitted by the Investment
Company Act of 1940.
Investments consist primarily of preferred stock and debt securities
obtained from portfolio companies in accordance with SBIC investment
regulations. The financial statements include securities valued at
$33,686,908 and $29,782,174 at June 30, 2001 and March 31, 2002 (87.8% and
85.0% of assets), respectively. The valuation process completed by
management includes estimates made by management and the Executive
Committee in the absence of readily ascertainable market values. These
estimated values may differ significantly from the values that would have
been used had a ready market for the securities existed, and those
differences could be material.
(4) Stock Repurchase
During February 2002, the Company's Board of Directors approved a stock
repurchase program. Under the program, the Company can repurchase up to 2%
of its currently outstanding common stock over the next year in the open
market and in privately negotiated transactions. During the quarter ended
March 31, 2002, the Company acquired 11,800 shares of common stock with a
price of $39,200. These shares were retired in accordance with Virginia
law.
7
WATERSIDE CAPITAL CORPORATION
Unaudited Schedule of Portfolio Investments
June 30, 2001 and March 31, 2002
- -------------------------------------------------------------------------------
The Company's investment portfolio at June 30, 2001 consisted of the following:
Cost or
Number of contributed
Equity Securities: shares value Fair value
- ------------------ ----------- --------------- ---------------
Publicly Traded Companies:
Avery Communications, Inc. Common Stock 245,000 $ 235,597 $ 65,660
Avery Communications, Inc. Common Stock (a) 190,167 95,084 43,359
Avery Communications, Inc. Preferred Stock 1,250,000 1,250,000 1,250,000
Netplex Group, Inc. Common Stock 66,400 464,800 9,761
Netplex Group, Inc. Preferred Stock 1,500,000 1,355,504 1,355,504
Tangent Solutions, Inc. (formerly Electronic Business
Systems, Inc.) Common Stock (b) 500,000 225,000 -
Tangent Solutions, Inc. (formerly Electronic Business
Systems, Inc.) Common Stock (b) 1,423,821 60,484 -
Primal Solutions, Inc. Common Stock 475,167 9,503 11,404
Private Companies:
Real Time Data Management Services, Inc. Preferred Stock 300 296,715 512,848
Delta Education Systems, Inc. Preferred Stock 1,625 1,603,923 1,603,923
Diversified Telecom, Inc. Preferred Stock (c) 1,500 1,500,000 508,512
Crispies, Inc. Preferred Stock 400 398,880 398,880
Triangle Biomedical Sciences Preferred Stock (c) 2,100 2,113,969 2,113,969
JMS Worldwide, Inc. Preferred Stock 1,500 1,500,000 1,500,000
EPM Development Systems Corp. Preferred Stock 1,500 1,495,167 1,495,167
Fire King International Preferred Stock 2,000 2,000,000 2,000,000
CCT Holdings (formerly SECC) Common Stock 840,000 60 60
Eton Court Asset Management, Ltd. Preferred Stock 1,000 980,337 980,337
Fairfax Publishing Co., Inc. Preferred Stock 1,100 1,663,746 1,663,746
Digital Square, Inc. Convertible Preferred Stock 1,210,739 1,513,425 1,513,425
Answernet, Inc. Preferred Stock 550 336,232 336,232
Answernet, Inc. Preferred Stock 700 412,369 412,369
ISR Solutions, Inc. Preferred Stock 500 497,995 497,995
Capital Markets Group, Inc. Preferred Stock (c) 1,500 1,500,000 -
Jubilee Tech International, Inc. Convertible Preferred Stock (c) 2,200,000 2,007,514 2,007,514
VentureCom, Inc. Convertible Preferred Stock 278,164 2,000,000 2,000,000
Phoenix Fabrications, Inc. Preferred Stock (c) 400 279,063 279,063
AmeriComm Direct Marketing LLC Preferred Stock 27,696 28 28
Signius Investment Corporation Common Stock 2,059 332,595 586,815
--------------- ---------------
Total equity securities 26,127,990 23,146,571
--------------- ---------------
Cost or
contributed
Debt Securities: Maturity value Fair value
- ---------------- ----------- --------------- ---------------
Avery Communications, Inc. Convertible Note 12/10/02 $ 350,000 $ 350,000
Extraction Technologies of VA, LLC (c) (d) 7/22/03 900,000 -
Extraction Technologies of VA, LLC (c) (d) 8/31/04 202,316 -
Extraction Technologies of VA, LLC (c) (d) 11/2/04 373,711 -
Extraction Technologies of VA, LLC (c) (d) 2/7/05 263,742 -
Extraction Technologies of VA, LLC (c) (d) 2/25/05 97,409 -
Extraction Technologies of VA, LLC (c) (d) 3/14/05 95,584 -
JMS Worldwide, Inc. 7/31/03 900,000 900,000
Diversified Telecom, Inc. (c) Demand 84,250 84,250
Diversified Telecom, Inc. (c) 5/19/02 131,238 131,238
ISR Solutions, Inc. 6/30/04 744,167 744,167
Fire King International Demand 550,000 550,000
TABET Manufacturing Co., Inc. 12/31/04 304,575 304,575
National Assisted Living, LP (c) 12/31/04 835,880 -
New Dominion Pictures LLC 4/30/06 784,103 784,103
(Continued)
8
WATERSIDE CAPITAL CORPORATION
Unaudited Schedule of Portfolio Investments
June 30, 2001 and March 31, 2002
- --------------------------------------------------------------------------------
Cost or
contributed
Maturity value Fair value
------------- ------------- ---------------
Mayfair Enterprises, Inc. 7/18/05 $ 243,519 $ 243,519
Digital Square, Inc. (c) 9/15/05 289,250 289,250
Phoenix Fabrications, Inc. 9/8/05 348,830 348,830
Kotarides Baking Co. of VA (c) 6/5/01 577,336 577,336
Kotarides Baking Co. of VA Demand 200,000 200,000
AmeriComm Direct Marketing LLC 12/29/05 750,000 750,000
Triangle Biomedical Sciences 12/8/01 164,843 164,843
Tangent Solutions, Inc. (formerly Electronic Business
Systems, Inc.) (b) (c) - 2,038,287 92,284
------------- ---------------
Total debt securities 11,229,040 6,514,395
------------- ---------------
Cost or
Number of Percentage contributed
Stock Options and Warrants: shares ownership value Fair value
- --------------------------- ----------- ------------- ------------- --------------
Publicly Traded Companies:
Netplex Group, Inc. (a) 300,000 2.10 $ 900,000 $ -
Tangent Solutions, Inc. (formerly Electronic Business
Systems, Inc.) (a) (b) 98,000 0.63 - -
Private Companies:
Real Time Data Management Services, Inc. 125 29.41 115,000 157,270
Delta Education Systems, Inc. 639 39.00 48,200 75,413
Diversified Telecom, Inc. 8,998 15.00 - -
Crispies, Inc. 524 6.37 2,800 4,395
Triangle Biomedical Sciences 632,916 12.20 171,967 216,485
Extraction Technologies of VA, LLC (d) - 39.00 337,567 -
JMS Worldwide, Inc. 199 5.00 - -
EPM Development Systems Corp. 87 8.00 11,600 1,177,415
Fire King International 4 4.00 - -
CCT Holdings (formerly SECC) 150,000 3.15 - -
Eton Court Asset Management, Ltd. 14,943 13.00 34,700 34,700
Fairfax Publishing Co., Inc. 1,026 20.30 123,238 426,638
ISR Solutions, Inc. 588,334 5.90 12,936 12,936
Digital Square, Inc. 150,000 - 75,000 75,000
Answernet, Inc. 69,837 16.50 268,615 268,615
TABET Manufacturing Co., Inc. 487,500 19.50 175,400 175,400
National Assisted Living, LP - 15.00 667,000 -
Capital Markets Group, Inc. 2,294,118 15.00 - -
Jubilee Tech International, Inc. 400,000 1.60 240,000 240,000
Signius Investment Corporation 12 11.67 - -
VentureCom, Inc. 38,943 0.37 - -
New Dominion Pictures LLC - 9.00 464,650 464,650
Mayfair Enterprises, Inc. - 15.00 214,400 214,400
Phoenix Fabrications, Inc. - 25.00 297,000 297,000
Kotarides Baking Co. of VA - 13.75 185,625 185,625
------------- ---------------
Total options and warrants 4,345,698 4,025,942
------------- ---------------
Total investments $ 41,702,728 $ 33,686,908
============= ===============
(Continued)
9
WATERSIDE CAPITAL CORPORATION
Unaudited Schedule of Portfolio Investments
June 30, 2001 and March 31, 2002
- --------------------------------------------------------------------------------
The Company's investment portfolio at March 31, 2002 consisted of the following:
Cost or
Number of contributed
Equity Securities: shares value Fair value
- ------------------ ------------- ------------- ---------------
Publicly Traded Companies:
Avery Communications, Inc. Preferred Stock 1,250,000 $ 1,250,000 $ 1,250,000
Netplex Group, Inc. Common Stock 66,400 464,800 2,058
Tangent Solutions, Inc. (formerly Electronic Business
Systems, Inc.) Common Stock (b) 500,000 225,000 -
Tangent Solutions, Inc. (formerly Electronic Business
Systems, Inc.) Common Stock (b) 1,423,821 60,484 -
Primal Solutions, Inc. Common Stock 200,000 4,000 8,400
Private Companies:
Real Time Data Management Services, Inc. Common Stock 125 115,000 100,000
Delta Education Systems, Inc. Preferred Stock 1,625 1,606,333 1,606,333
Diversified Telecom, Inc. Preferred Stock (c) 1,500 1,500,000 508,512
Crispies, Inc. Preferred Stock 400 399,300 399,300
Triangle Biomedical Sciences Preferred Stock (c) 2,200 2,133,085 2,133,085
EPM Development Systems Corp. Preferred Stock 1,500 1,496,907 1,496,907
Fire King International Preferred Stock 2,000 2,000,000 2,000,000
CCT Holdings (formerly SECC) Common Stock 840,000 60 60
Eton Court Asset Management, Ltd. Preferred Stock (c) 1,000 985,542 985,542
Fairfax Publishing Co., Inc. Preferred Stock 600 578,004 578,004
Digital Square, Inc. Convertible Preferred Stock (c) 1,210,739 1,513,425 -
Answernet, Inc. Preferred Stock 545 332,566 332,566
Answernet, Inc. Preferred Stock 700 447,417 447,417
Capital Markets Group, Inc. Preferred Stock (c) 1,500 1,500,000 -
Jubilee Tech International, Inc. Convertible Preferred Stock (c) 2,200,000 2,038,734 2,038,734
VentureCom, Inc. Convertible Preferred Stock 278,164 2,000,000 2,000,000
Phoenix Fabrications, Inc. Preferred Stock (c) 400 283,229 -
AmeriComm Direct Marketing LLC Preferred Stock 27,696 28 28
Signius Investment Corporation Common Stock 2,059 332,595 586,814
Netplex Systems, Inc. Preferred Stock (c) 1,000,000 1,187,107 1,000,000
------------- --------------
Total equity securities 22,453,616 17,473,760
------------- --------------
Cost or
contributed
Debt Securities: Maturity value Fair value
- ---------------- ------------- ------------- ---------------
Avery Communications, Inc. Convertible Note 12/31/06 $ 680,681 $ 680,681
Extraction Technologies of VA, LLC (c) (d) 7/22/03 900,000 -
Extraction Technologies of VA, LLC (c) (d) 8/31/04 202,316 -
Extraction Technologies of VA, LLC (c) (d) 11/2/04 373,711 -
Extraction Technologies of VA, LLC (c) (d) 2/7/05 263,742 -
Extraction Technologies of VA, LLC (c) (d) 2/25/05 97,409 -
Extraction Technologies of VA, LLC (c) (d) 3/14/05 95,584 -
JMS Worldwide, Inc. (c) 7/31/03 2,350,000 -
Diversified Telecom, Inc. (c) Demand 77,250 77,250
Diversified Telecom, Inc. (c) 5/19/02 131,238 131,238
Fire King International Demand 550,000 550,000
TABET Manufacturing Co., Inc. 12/31/04 325,000 325,000
National Assisted Living, LP (c) 12/31/04 835,880 -
New Dominion Pictures LLC 4/30/06 830,879 830,879
Mayfair Enterprises, Inc. Demand 541,000 541,000
Digital Square, Inc. (c) 9/15/05 289,250 -
Phoenix Fabrications, Inc. (c) 9/8/05 379,038 -
AmeriComm Direct Marketing LLC 12/29/05 750,000 750,000
(Continued)
10
WATERSIDE CAPITAL CORPORATION
Unaudited Schedule of Portfolio Investments
June 30, 2001 and March 31, 2002
- --------------------------------------------------------------------------------
Cost or
contributed
Maturity value Fair value
-------- ----------- ----------
Triangle Biomedical Sciences (c) Demand $ 187,101 $ 187,101
Jubilee Tech International, Inc. (c) 3/21/02 125,000 125,000
Netplex Group, Inc. (c) 12/31/01 92,919 92,919
Netplex Group, Inc. (c) 1/28/02 1,068,397 900,000
Netplex Group, Inc. (c) 5/1/02 50,000 50,000
Eton Court Asset Management, Ltd. (c) 5/18/04 522,578 522,578
Caldwell/VSR, Inc. 12/16/06 1,634,314 1,634,314
------------- ------------
Total debt securities 13,353,287 7,397,960
------------- ------------
Cost or
Number of Percentage contributed
Stock Options and Warrants: shares ownership value Fair value
- --------------------------- --------- ---------- ----------- ----------
Private Companies:
Delta Education Systems, Inc. 639 39.00 $ 48,200 $ 1,118,667
Diversified Telecom, Inc. 8,998 15.00 - -
Crispies, Inc. 524 6.37 2,800 4,395
Triangle Biomedical Sciences 632,916 12.20 171,967 216,485
Extraction Technologies of VA, LLC (d) - 39.00 337,567 -
JMS Worldwide, Inc. 199 5.00 - -
EPM Development Systems Corp. 87 8.00 11,600 1,177,415
Fire King International 4 4.00 - -
Eton Court Asset Management, Ltd. 14,943 13.00 34,700 34,700
Fairfax Publishing Co., Inc. 1,026 20.30 123,238 426,638
ISR Solutions, Inc. 588,334 5.90 11,965 761,834
Digital Square, Inc. 150,000 - 75,000 -
Answernet, Inc. 69,837 16.50 268,615 435,000
TABET Manufacturing Co., Inc. 487,500 19.50 175,400 175,400
National Assisted Living, LP - 15.00 667,000 -
Capital Markets Group, Inc. 2,294,118 15.00 - -
Jubilee Tech International, Inc. 400,000 1.60 240,000 -
Signius Investment Corporation 12 11.67 - -
VentureCom, Inc. 38,943 0.37 - -
New Dominion Pictures LLC - 9.00 464,650 464,650
Phoenix Fabrications, Inc. - 25.00 297,000 -
Caldwell/VSR, Inc. - 5.75 95,270 95,270
----------- ------------
Total options and warrants 3,024,972 4,910,454
----------- ------------
Total investments $ 38,831,875 $ 29,782,174
=========== ============
(a) Rule 144A restricted securities.
(b) This entity filed Chapter 11 bankruptcy on September 1, 2000.
(c) Entity is in arrears with respect to dividend/interest payments.
(d) This entity filed Chapter 11 bankruptcy on December 26, 2000.
11
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 located in Norfolk, Virginia. The Company invests in equity
and debt securities to finance the growth, expansion and modernization of
small private businesses, primarily in the Mid-Atlantic Region. The Company
was formed in 1993 as the Eastern Virginia Small Business Investment
Corporation. Through June 30, 1996, the Company operated as a development
stage company focused primarily on preparation to commence operation. The
Company was licensed in 1996 by the Small Business Administration (SBA) as
a Small Business Investment Company (SBIC) under the Small Business
Investment Act of 1958. In October 1996 the Company made its first
portfolio investment. In January 1998, the Company completed its Initial
Public Offering (IPO) to raise additional equity to support its growth
strategy.
The majority of the Company's operating income is derived from dividend and
interest income on portfolio investments and application and processing
fees related to investment originations. The remaining portion of the
Company's operating income comes from interest earned on cash equivalents.
The Company's operating expenses primarily consist of interest expense on
borrowings and payroll and other expenses incidental to operations.
Waterside currently has 6 full time employees.
... Results of Operations
Comparison of Three Months Ended March 31, 2002 and March 31, 2001
For the three months ended March 31, 2002, total operating income was
$835,000 compared to $1,149,000 reported during the same period of 2001, a
decrease of $314,000 or 27.3%. The decrease in operating income is
primarily due to management's decision to discontinue the accrual of
dividend and interest income on an increased number of investments due to
the uncertainty of collection of this income. The Company's quarterly
operating income for the three months ended March 31, 2002 consisted of
dividends of $458,000, interest on debt securities of $276,000, fee income
of $92,000 and interest on cash equivalents of $9,000. For the comparable
period of 2001 quarterly operating income consisted of dividends of
$737,000, interest on debt securities of $301,000, fee income of $110,000
and interest on cash equivalents of $1,000.
Total operating expenses were $913,000 for the three months ended March 31,
2002, compared to $921,000 reported for the three months ended March 31,
2001. Total operating expenses for the three months ended March 31, 2002
consisted of interest expense of $514,000, salaries and benefits of
$188,000, legal and accounting expenses of $135,000 and other operating
expenses of $76,000. For the three months ended March 31, 2001, total
operating expenses consisted of interest expense of $497,000, salaries and
benefits of $244,000, legal and accounting expenses of $71,000 and other
operating expenses of $109,000. The decrease in salaries and benefits for
the quarter ended March 31, 2002, compared to the quarter ended March 31,
2001, is due to the reduction in force of one Business Development Officer
and one clerical position. The significant increase in legal and accounting
expense from $71,000 for the three months ended March 31, 2001 to $135,000
for the three months ended March 31, 2002 is due to increased legal costs
associated with the collection effort on two investments written
off. The Company's net operating loss was $78,000 for the three months
ended March 31, 2002 compared to the $374,000 of net operating income
reported for the three months ended March 31, 2001 due to the items
noted above.
The change in unrealized depreciation on investments of $1.2 million for
the three months ended March 31, 2002 was primarily due to the write downs
of $453,000 on the Digital Square, Inc. investment and $662,000 on the
Phoenix Fabrication, Inc. investment due to their deteriorating financial
condition. The change in unrealized depreciation on investments of
$2,640,000 for the three months ended March 31, 2001 was primarily due to
the write down of $920,000 for Extraction Technologies of Virginia
12
that filed for bankruptcy protection under Chapter 11 of the US Bankruptcy
Code and a $1,500,000 write down on Capital Markets Group, Inc. due to
deteriorating financial condition.
During the quarter ended December 31, 2001, the Company ceased recognizing
deferred tax benefits associated with the generation of net operating
losses from operations and its realized losses because management could no
longer conclude that it is more likely than not that those benefits could
be realized. Because the Company operates as a licensed SBIC, its dividend
income is not taxable. As a result, it is unlikely that the Company will
generate taxable income from operations in the foreseeable future. Unless
the Company is able to generate significant realized gains on sales of
investments, the benefits of tax losses from operations and any realized
losses from settlement of investments are not likely to be realized. As a
result, the Company has provided a valuation allowance against the full
amount of its deferred tax asset.
The net decrease in stockholders' equity resulting from operations of
$1,352,000 for the three months ended March 31, 2002, or $.86 per share,
compared to a decrease of $2,199,000, or $1.39 per share, for the three
months ended March 31, 2001 due to the items discussed above.
Comparison of Nine months ended March 31, 2002 and March 31, 2001
For the nine months ended March 31, 2002, total operating income was
$2,870,000 compared to the $3,181,000 reported for the nine months ended
March 31, 2001. The operating income reported for the nine months ended
March 31, 2002 consisted of dividends of $1,578,000, interest on debt
securities of $933,000, fee income of $332,000, and interest on cash
equivalents of $27,000. For the nine months ended March 31, 2001, operating
income consisted of dividends of $2,097,000, interest on debt securities of
$760,000, fee income of $315,000, and interest on cash equivalents of
$9,000. The decrease in operating income is primarily due to management's
decision to discontinue the accrual of dividend income on an increased
number of investments due to the uncertainty of collection of the income.
This decrease was partially offset by an increase in interest income due to
an increase in the Company's investments in debt securities.
Total operating expenses for the nine months ended March 31, 2002 were
$2,568,000, consisting of interest expense of $1,564,000, salaries and
benefits of $558,000, legal and accounting expenses of $223,000 and other
operating expenses of $223,000. These expenses compared to $2,615,000 for
the nine months ended March 31, 2001, consisting of interest expense of
$1,455,000, salaries and benefits of $699,000, legal and accounting
expenses of $165,000, and other operating expenses of $296,000. The
decrease in salaries and benefits and other operating expenses when
comparing the nine months ended March 31, 2002 to 2001, is due to a
combination of a reduction in force and reduced travel expense. As an SBIC,
the Company is regulated by the SBA and must operate within certain
prescribed expense guidelines. At March 31, 2002, the Company is in
compliance with the SBA guidelines for management expense. The increase in
legal and accounting expense is due to increased legal costs associated
with the collection effort on two investments written off.
The Company recognized $465,000 in income tax benefit for the nine months
ended March 31, 2001 compared to $0 for the nine months ended March 31,
2002.
During the nine months ended March 31, 2002, the Company realized a loss on
investments of $1.4 million due primarily to the realization of the
previously recorded unrealized loss related to Tangent Solutions, Inc.
(formerly named Electronic Business Systems, Inc. and Triangle Imaging
Group, Inc.).
The change in unrealized depreciation on investments, net of income tax
expense, of $1,584,000 for the nine months ended March 31, 2002 was due to
numerous gains and losses recognized on the Company's investment portfolio.
The change in unrealized depreciation consisted of gains of $1.0 million on
the Delta Education Systems, Inc. investment due to a new significant
outside investment, $750,000 on the ISR Solutions, Inc. investment due to a
new significant outside investment, $537,000 on the The Netplex Group, Inc.
investment due to restructuring of the terms of the investment and a $1.9
million reclassification of unrealized depreciation related to Tangent
Solutions, Inc to a realized loss. These items
13
were offset by unrealized losses recognized of $2.4 million on the JMS
North America Inc. investment, $1.9 million on the Digital Square
investment and $959,000 on the Phoenix Fabrication, Inc. investment due to
deteriorating financial condition of these investees. During the nine
months ended March 31, 2001, Waterside recorded an after tax unrealized
depreciation in the fair value of its investments of $4.7 million,
primarily due to the deteriorating financial condition of three portfolio
companies, two of which filed for bankruptcy protection under Chapter 11 of
the US Bankruptcy Code. The write downs for the companies in bankruptcy
were $1.3 million for Electronic Business Systems, Inc., and $2.0 million
for Extraction Technologies of Virginia, LLC. The Company also recorded a
write down of $1.5 million for Capital Markets Group, Inc. due to
deteriorating financial condition. In addition, during the nine months
ended March 31, 2001, the Company recorded a valuation allowance of
$1,689,000 on its deferred tax assets due to greater uncertainty as to the
realization of these tax benefits. As previously discussed in the three
month comparison, the Company has ceased recognizing deferred tax benefits
associated with the generation of net operating losses from operations and
its realized and unrealized losses.
The net decrease in stockholders' equity resulting from operations of $2.7
million for the nine months ended March 31, 2002 or $1.69 per share
compared to a decrease of $3.6 million or $2.29 per share for the
comparable nine months ended March 31, 2001 due to the items noted above.
... Financial Condition, Liquidity And Capital Resources
At March 31, 2002, the Company's investment portfolio totaled $29.8 million
compared with the $33.7 million reported at June 30, 2001. For the nine
months ended March 31, 2002, the Company funded $3.0 million in new loans
and investments and received proceeds from sales of investments and
principal collected on debt securities of $4.9 million. For the comparable
nine months ended March 31, 2001, the Company funded $5.8 million in new
investments and received $2.1 million in principal collected on debt
securities.
Net asset value per common share declined to $5.92 per share at March 31,
2002, from $7.59 per share reported at June 30, 2001.
During the nine months ended March 31, 2002, net cash used in operating
activities was $220,000 compared to the $161,000 provided during the nine
months ended March 31, 2001. The reduction in cash provided by operating
activities for the nine months of 2002 compared to 2001 is due to the
decline in dividend income as a result of the increased number of non
performing investments. Net cash provided by investing activities was
$1,861,000 for the nine months ended March 31, 2002 as compared to the
$3,695,000 used in investing activities for the nine months ended March 31,
2001. This fluctuation is primarily due to new investments made of $3.0
million and proceeds from sales of investments and principal collected on
debt securities of $4.9 million for the nine months ended March 31, 2002
compared to new investments made of $5.8 million and principal collected on
debt securities of $2.1 million for the nine months ended March 31, 2001.
Cash used in financing activities for the nine months ended March 31, 2002
was $39,000 for the repurchase of 11,800 shares of the company stock
compared to the $3,708,000 provided during the nine months ended March 31,
2001. Cash was provided in 2001 by debenture borrowings from the SBA during
the nine months ended March 31, 2001, necessary to finance new investments.
The cash received from the SBA was partially offset by repayments of the
Company's lines of credit.
... Quantitative and Qualitative Disclosure About Market Risk
The Company's business activities contain elements of market risk. The
Company considers the principal types of market risk to be: risk of lending
and investing in small privately owned companies, valuation risk of
portfolio, risk of illiquidity of portfolio investments and the competitive
market for investment opportunities. The Company considers the management
of risk essential to conducting its business. 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.
14
The Company manages its market risk by maintaining a portfolio of
investments 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 thirty
investments are in thinly traded, small public companies, whose stock
prices have been volatile. The other twenty-seven 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 based on estimates made by 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 investments of $29.8 million at March
31, 2002, would have resulted in unrealized gains or losses and would have
changed net decrease in stockholders' equity resulting from operations for
the quarter by $298,000.
The Company's sensitivity to changes in interest rates is regularly
monitored and analyzed by measuring the characteristics of assets and
liabilities. The Company utilizes various methods to assess interest rate
risk in terms of the potential effect of interest income net of interest
expense, the market value of net assets and the value at risk in an effort
to ensure that the Company is insulated from any significant adverse
effects from changes in interest rates. Based on the model used for the
sensitivity of interest income net of interest expense, if the balance
sheet were to remain constant and no actions were taken to alter the
existing interest rate sensitivity, a hypothetical 100 basis point change
in interest rates would have a negligible effect on the net increase in
stockholders' equity resulting from operations over the next year. 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 operating results.
Accordingly, no assurances can be given that actual results would not
differ materially from the potential outcome simulated by this estimate.
... 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 Securities and
Exchange Commission, news releases and investor presentations, are
forward-looking statements about business objectives and strategies, market
potential, its available capital resources, including SBA leverage, 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. When the Company
uses words such as "believes," "expects," "anticipates," "intends,"
"plans," "estimates," "should," "likely," or similar expressions, the
Company is making a forward-looking statement. It is possible that the
assumptions made by management - including, but not limited to, the average
maturity of our investments, the potential to realize investment gains as
these investments mature, investment opportunities, results, performance or
expectations - may not materialize. Actual results may differ materially
from those projected or implied in any forward-looking statements. In
addition to the above factors, other important factors that may affect the
Company's performance include: the risks associated with the performance of
the Company's portfolio companies, dependencies on key employees, interest
rates, the level of economic activity, and competition, as well as other
risks described from time to time in the Company's filings with the
Securities Exchange Commission, press releases, and other communications.
The Company disclaims any intent or obligation to update these
forward-looking statements, whether as a result of new information, future
events, or otherwise.
15
PART II. OTHER INFORMATION
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 10/th/ day of May 2002.
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
16