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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED
SEPTEMBER 30, 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 September 30, 1999, the registrant had issued and outstanding
1,491,937 shares of Common Stock, $1.00 par value.
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WATERSIDE CAPITAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
Page
Number
------
PART I. FINANCIAL INFORMATION:
ITEM 1. Balance Sheets as of
June 30, 1999 and September 30, 1999 (unaudited) 2
Statements of Operations for the Three Months
Ended September 30, 1998 and 1999 (unaudited)
Statement of Changes in Shareholders' Equity for the
Three Months Ended September 30, 1998 and 1999 (unaudited)
Statements of Cash Flows for the
Three Months Ended September 30, 1998 and 1999 (unaudited) 5
Notes to Financial Statements (unaudited) 6
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
PART II. OTHER INFORMATION
SIGNATURES
PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
WATERSIDE CAPITAL CORPORATION
Balance Sheets
June 30, 1999 and September 30, 1999
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June 30, September 30,
1999 1999
--------------- ----------------
(unaudited)
Assets:
Investments in portfolio companies, at fair value:
Equity securities $ 17,070,782 $ 18,340,180
Loans 6,894,468 5,416,649
Options and warrants 377,000 800,121
--------------- ----------------
Total investments, cost of $23,860,295 and $24,442,317
at June 30, 1999 and September 30, 1999, respectively 24,342,250 24,556,950
--------------- ----------------
Current assets:
Cash and cash equivalents 1,269,409 667,329
Dividends receivable 311,737 434,909
Interest receivable 228,438 63,716
Note receivable 150,000 150,000
Refundable income taxes 43,322 43,322
Prepaid expenses and other current assets 77,916 144,361
--------------- ----------------
Total current assets 2,080,822 1,503,637
Property and equipment, net 118,961 112,959
Deferred financing costs, net 567,837 557,075
Deferred income taxes - 15,000
--------------- ----------------
Total assets $ 27,109,870 $ 26,745,621
=============== ================
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable $ 57,142 $ 41,263
Accrued expenses 372,828 139,311
Deferred revenue 113,631 66,000
--------------- ----------------
Total current liabilities 543,601 246,574
Deferred income taxes 195,000 -
Debentures payable 12,300,000 12,300,000
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Total liabilities 13,038,601 12,546,574
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Stockholders' equity:
Common stock, $1 par value, 10,000,000 shares authorized, 1,491,937
issued and outstanding at June 30, 1999 and September 30, 1999 1,491,937 1,491,937
Preferred stock, $1 par value, 25,000 shares authorized,
no shares issued and outstanding - -
Additional paid-in capital 12,769,895 12,769,895
Net unrealized appreciation on investments, net of income taxes 298,434 70,112
Undistributed accumulated earnings 966,003 1,322,103
Stockholders' notes receivable (1,455,000) (1,455,000)
--------------- ----------------
Total stockholders' equity 14,071,269 14,199,047
Commitments and contingencies
--------------- ----------------
Total liabilities and stockholders' equity $ 27,109,870 $ 26,745,621
=============== ================
Net asset value per common share $ 9.43 $ 9.52
=============== ================
See accompanying notes to financial statements.
WATERSIDE CAPITAL CORPORATION
Unaudited Statements of Operations
Three months ended September 30, 1998 and 1999
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1998 1999
---------------- ---------------
Operating income:
Dividends $ 225,768 $ 505,652
Interest on loans 104,043 191,681
Interest on cash equivalents 26,823 22,847
Fee and other income 321,634 110,000
---------------- ---------------
Total operating income 678,268 830,180
---------------- ---------------
Operating expenses:
Salary and benefits 226,177 217,407
Legal and accounting 14,595 24,000
Interest expense - 225,223
Other operating expenses 81,515 78,450
---------------- ---------------
Total operating expenses 322,287 545,080
---------------- ---------------
Net operating income before income taxes 355,981 285,100
Income tax expense (benefit) 49,400 (71,000)
---------------- ---------------
Net operating income 306,581 356,100
Realized gain on investments, net of income taxes of $53,301 87,213 -
Decrease in unrealized appreciation on investments, net of income tax
benefit of $238,000 for 1998 and $139,000 for 1999 (388,984) (228,322)
---------------- ---------------
Net increase in stockholders' equity resulting from operations $ 4,810 $ 127,778
================ ===============
Net increase in stockholders' equity resulting from operations per share -
basic and diluted $ - $ 0.09
================ ===============
See accompanying notes to financial statements.
WATERSIDE CAPITAL CORPORATION
Unaudited Statements of Changes in Stockholders' Equity
Three months ended September 30, 1998 and 1999
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1998: Net
Common Stock Additional unrealized Undistributed Stockholders' Total
------------------ paid-in appreciation accumulated notes stockholders'
Shares Amount capital on investments earnings receivable equity
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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 - - - - 306,581 - 306,581
Net realized gain on investments - - - - 87,213 - 87,213
Decrease in net unrealized
appreciation on investments - - - (388,984) - - (388,984)
--------- ---------- ----------- --------- ---------- ----------- -----------
Balance at September 30, 1998 1,420,900 $1,420,900 $12,272,636 $ 147,826 $ 652,736 $(1,455,000) $13,039,098
========= ========== =========== ========= ========== =========== ===========
1999: Net
Common Stock Additional unrealized Undistributed Stockholders' Total
------------------ paid-in appreciation accumulated notes stockholders'
Shares Amount capital on investments earnings receivable equity
-------------------------------------------------------------------------------------------------
Balance at June 30, 1999 1,491,937 $1,491,937 $12,769,895 $ 298,434 $ 966,003 $(1,455,000) $14,071,269
Net operating income - - - - 356,100 - 356,100
Decrease in net unrealized
appreciation on investments - - - (228,322) - - (228,322)
--------- ---------- ------------ --------- ---------- ----------- -----------
Balance at September 30, 1999 1,491,937 $1,491,937 $12,769,895 $ 70,112 $1,322,103 $(1,455,000) $14,199,047
========= ========== ============ ========= ========== =========== ===========
See accompanying notes to financial statements.
WATERSIDE CAPITAL CORPORATION
Unaudited Statements of Cash Flows
Three months ended September 30, 1998 and 1999
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1998 1999
---------------- ----------------
Cash flows from operating activities:
Net increase in stockholders' equity resulting from operations $ 4,810 $ 127,778
Adjustments to reconcile net increase in stockholders' equity resulting from
operations to net cash provided by (used in) operating activities:
Decrease in unrealized appreciation on investments 626,984 367,322
Accretion of preferred stock and loan investments - (38,663)
Depreciation and amortization 4,159 15,691
Deferred income tax benefit (238,000) (210,000)
Loss on disposal of property and equipment - 828
Changes in assets and liabilities increasing (decreasing) cash
flows from operating activities:
Dividends receivable (127,643) (123,172)
Interest receivable (26,665) 164,722
Prepaid expenses and other current assets 6,595 (66,445)
Accounts payable and accrued expenses 73,239 (249,396)
Deferred revenue 91,028 (47,631)
Income taxes payable 102,700 -
---------------- ----------------
Net cash provided by (used in) operating activities 517,207 (58,966)
---------------- ----------------
Cash flows from investing activities:
Investments made (4,500,400) (1,363,424)
Loans made (1,775,000) (350,579)
Principal collected on loans made - 1,170,644
Proceeds from sales of investments 875,405 -
Acquisition of property and equipment (10,787) (1,755)
Proceeds from sale of property and equipment - 2,000
---------------- ----------------
Net cash used in investing activities (5,410,782) (543,114)
---------------- ----------------
Cash flows from financing activities -
Proceeds from short-term debt 700,000 -
---------------- ----------------
Net decrease in cash and cash equivalents (4,193,575) (602,080)
Cash and cash equivalents, beginning of period 4,393,501 1,269,409
---------------- ----------------
Cash and cash equivalents, end of period $ 199,926 $ 667,329
================ ================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest
$ - $ 375,486
================ ================
Cash paid during the period for income taxes $ - $ -
================ ================
See accompanying notes to financial statements.
WATERSIDE CAPITAL CORPORATION
Notes to Financial Statements
June 30, 1999 and September 30, 1999 (Unaudited)
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(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.
(Continued)
WATERSIDE CAPITAL CORPORATION
Notes to Financial Statements
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Discounts can range from 0% to 40% for investment size and market
liquidity concerns. Actual liquidity discounts in the portfolio at
September 30, 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 $24,556,950 at June 30, 1999 and September 30, 1999
(89.8% and 91.8% 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) Subsequent Event
During October 1999, the Company obtained a new line of credit in the
amount of $1,500,000 from a financial institution and increased their
existing line of credit from $1,500,000 to $2,500,000. These unsecured
lines of credit bear interest at the prime rate and are to be used to
fund loans and investments until draw requests can be applied for and
processed by the SBA.
WATERSIDE CAPITAL CORPORATION
Schedule of Portfolio Investments
June 30, 1999 and September 30, 1999
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The Company's investment portfolio at June 30, 1999, consisted of the following:
Cost or
Contributed
Loans: Maturity Value Fair Value
- ------ -------- ----- ----------
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
MilleCom, Inc. 3/31/04 900,000 900,000
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
----------------- ------------------
(Continued)
Cost or
Number of Contributed Fair
Equity Investments: Shares Value Value
- ------------------- ------ ----- -----
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
Triangle Imaging Group, Inc. Preferred Stock 150,000 1,321,500 1,321,500
Triangle Imaging Group, Inc. Convertible
Preferred Stock 700 700,000 700,000
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
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
----------------- ------------------
(Continued)
Number Cost or
of Percentage Contributed Fair
Stock Options and Warrants: Shares Ownership Value Value
- -------------------------- -------- ---------- ----------- -----------
Publicly-Traded Companies:
Avery Communications, Inc. 126,000 0.00 $ - $ -
Netplex Group, Inc. * 75,000 0.70 - 74,100
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 - -
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
================ ================
(Continued)
The Company's investment portfolio at September 30, 1999 (unaudited) consisted
of the following:
Cost or
Contributed
Loans: Maturity Value Fair Value
- ----- -------- ----- ----------
Avery Communications, Inc. Convertible Note 12/10/02 $ 350,000 $ 350,000
Extraction Technologies of VA, LLC 7/22/03 1,089,552 1,089,552
JMS Worldwide, Inc. 7/31/03 950,000 950,000
Diversified Telecom, Inc. Demand 113,193 113,193
Diversified Telecom, Inc. 5/19/02 152,724 152,724
The Netplex Group, Inc. 2/25/04 760,513 760,513
MilleCom, Inc. 3/31/04 900,000 900,000
MilleCom, Inc. 5/11/04 360,000 360,000
ISR Solutions, Inc. 6/30/04 740,667 740,667
--------------- --------------
Total loans 5,416,649 5,416,649
--------------- --------------
(Continued)
Cost or
Number of Contributed Fair
Equity Investments: Shares Value Value
- ------------------- ------ ----- -----
Publicly-Traded Companies:
Avery Communications, Inc. Common Stock 245,000 $ 249,900 $ 116,375
Netplex Group, Inc. Preferred Stock 1,500,000 1,500,000 1,500,000
Netplex Group, Inc. Common Stock * 165,000 237,000 326,700
Triangle Imaging Group, Inc. Preferred Stock 150,000 1,331,500 1,331,500
Triangle Imaging Group, Inc. Convertible
Preferred Stock 700 700,000 700,000
Triangle Imaging Group, Inc. Common Stock * 500,000 225,000 113,500
Equity Investments in Private Companies:
Real Time Data Management Services, Inc.
Preferred Stock 400 375,084 572,603
Coddle Roasted Meats, Inc. Common Stock 1,200 120 120
Delta Education Systems, Inc. Preferred Stock 1,625 1,587,053 1,587,053
Diversified Telecom, Inc. Preferred Stock 1,500 1,500,000 1,500,000
Crispies, Inc. Preferred Stock 400 397,900 397,900
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 1,491,107 1,491,107
Fire King International Preferred Stock 2,000 2,000,000 2,000,000
QuesTech Packaging, Inc. Preferred Stock 900 900,000 900,000
MilleCom, Inc. Common Stock 60 60 60
Eton Court Asset Management, Ltd. Preferred Stock 1,000 968,192 968,192
Fairfax Publishing Co., Inc. Preferred Stock 1,100 1,031,307 1,031,307
DigitalSquare.com Preferred Stock 810,739 1,013,424 1,013,424
Answernet, Inc. Preferred Stock 550 290,339 290,339
----------------- ------------------
Total equity investments 18,297,986 18,340,180
----------------- ------------------
(Continued)
Number Cost or
of Percentage Contributed Fair
Stock Options and Warrants: Shares Ownership Value Value
- -------------------------- ------ --------- ----- -----
Publicly-Traded Companies:
Avery Communications, Inc. 126,000 0.00 $ - $ -
Netplex Group, Inc. * 75,000 0.70 - 32,325
Triangle Imaging Group, Inc. * 20,000 0.14 - -
Private Companies:
Real Time Data Management Services,
Inc. 125 29.41 115,000 155,114
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 - 18.00 163,167 163,167
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 - -
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. 479,951 6.00 10,000 10,000
DigitalSquare.com 81,074 5.70 - -
Answernet, Inc. 68,355 18.00 268,615 268,615
---------------- ---------------
Total options and warrants 727,682 800,121
---------------- ---------------
Total investments $ 24,442,317 $ 24,556,950
================ ===============
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* Represents Rule 144A restricted securities
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
o General
Waterside Capital Corporation ("Waterside" or the "Company") is a specialty
finance company headquartered in Norfolk, Virginia. The Company invests in
equity and debt securities to finance the growth, expansion and
modernization of small private businesses, primarily in the Mid-Atlantic
Region. The Company was formed in 1993 as the Eastern Virginia Small
Business Investment Corporation. Through June 30, 1996, the Company
operated as a development stage company focused primarily on preparation to
commence operation. The Company was licensed in 1996 by the Small Business
Administration (SBA) as a Small Business Investment Company (SBIC) under
the Small Business Investment Act of 1958. In October 1996 the Company made
its first portfolio investment. In January 1998 the Company completed its
Initial Public Offering (IPO) to raise additional equity to support its
growth strategy.
The majority of the Company's operating income is derived from dividend and
interest income on portfolio investments and application and processing
fees related to investment originations. The remaining portion of the
Company's operating income comes from interest earned on cash equivalents.
The Company's operating expenses primarily consist of payroll and other
expenses incidental to operation. Waterside currently has 8 full time
employees and 2 offices from which it operates - Norfolk and Richmond,
Virginia.
o Results of Operations
For the three months ended September 30, 1999 total operating income was
$830 thousand compared to the $678 thousand reported during the same period
of 1998. The increase in operating income is due to the growth in the
company's investment portfolio. The 1999 operating income consisted of
dividends of $506 thousand, interest on loans of $192 thousand, fee income
of $110 thousand and interest on cash equivalents of $22 thousand.
Total operating expenses for the three months ended September 30, 1999 were
$320 thousand, excluding interest expense, compared to the $322 thousand
for the comparable three month period of 1998. Total operating expenses for
the three months ended September 30, 1999 consisted of $217 thousand in
salary and benefits, $225 thousand in interest expense, legal and
accounting expenses of $24 thousand and other operating expenses of $79
thousand. The significant increase in interest expense for the quarter
ended September 30, 1999 over the quarter ended September 30, 1998 is due
to the increase in borrowings from the SBA to fund the growth in the
company's investment portfolio. Net operating income of $356 thousand for
the three months ended 30, 1999 compared favorably to the $307 thousand
reported for the three months ended September 30, 1998.
The decrease in unrealized appreciation on investments net of taxes of $228
thousand for the three months ended September 30, 1999 and $389 thousand
for the three months ended September 30, 1998 was primarily due to the
changing stock price of three publicly traded portfolio companies. The
realized gain on investments net of taxes of $87 thousand for the three
months ended September 30, 1998 was due to the sale of an equity investment
in one private company.
o Financial Condition, Liquidity and Capital Resources
During the quarter ended September 30, 1999, the Company closed $3.0
million in new investments and funded $1.7 million. The investments closed
for the quarter consisted of investments in two new private companies and
add-ons to three existing investments. Additionally an investee prepaid a
$1.1 million loan during the quarter.
During the three months ended September 30, 1999, cash used in operating
activities was $59 thousand as compared to the $517 thousand provided
during the three months ended September 30, 1998, primarily due to
increases in the Company's receivables due to growth of the investment
portfolio and due to the timing of payments of accounts payable and accrued
expenses. The Company used $543 thousand in investing activities during the
three months ended September 30, 1999 as compared to the 5.4 million used
in the comparable period of 1998. In 1998 the Company originated $6.3
million of debt and equity investments as compared to $1.7 million in 1999.
The fluctuation was also affected by the early repayment of a $1.1 million
loan by a portfolio company. Cash flows provided by financing activities
for the three months ended September 30, 1998 were $700 thousand due to
borrowings under the Company's line of credit to facilitate growth in the
Company's investment portfolio. There were no such borrowings during the
three months ended September 30, 1999.
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 interest rate risk and
valuation risk. 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 in relation to industry,
geographic area, property type, 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 21 investments are in thinly traded,
small public companies, whose stock prices have been volatile. The other 18
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 $24.6 million at September 30, 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
The Company has identified and addressed the potential impact of the Year
2000 issue on its operations. This process has identified three primary
areas in which the Company could be effected. First, the Company has
upgraded its financial and administrative software programs as part of this
process. The software vendors have indicated that their programs are Year
2000 compliant. Second, the Company has assessed its key relationships with
suppliers and other third parties, including its principal bank. These
parties have represented that their software programs are Year 2000
compliant. Finally, the Company has investigated the impact of Year 2000
issues on its portfolio companies. Based on questionnaires completed by the
individual investee companies, their managements have represented that the
companies are Year 2000 compliant. Because of the relatively small size of
its portfolio companies, their readiness represents the Company's most
significant risk with regards to the Year 2000. Although the Company is
currently unaware of any significant Year 2000 issues related to its
portfolio companies, the failure of one or more of the portfolio companies
to properly prepare for the Year 2000 could have a material adverse impact
on the Company's business, results of operations and financial condition.
Based on the assessment of the three primary areas discussed above and
performed to date, the cost of its Year 2000 remediation activities by the
Company has been less than $50,000.
o Forward Looking Statements
Included in this report and other written and oral information by
management from time to time, including reports to shareholders, quarterly
and semi-annual shareholder letters, filings with the Commission, news
releases and investor presentations, are forward-looking statements about
business objectives and strategies, market potential, the Company's ability
to expand the geographic scope of its investments, the quality of the
Company's due diligence efforts, its financing plans, the impact of Year
2000 issues on itself, its vendors, suppliers, and portfolio companies,
future financial performance and other matters that reflect management's
expectations as of the date made. Without limiting the foregoing, the words
"believes", "anticipates", "plans", "expects", "seeks" and similar
expressions are intended to identify forward-looking statements. Future
events and the Company's actual results could differ materially from the
results reflected in these forward-looking statements. Please refer to a
discussion of these and other factors in this Report and the Company's
other Commission filings. The Company disclaims any intent or obligation to
update these forward-looking statements, whether as a result of new
information, future events, or otherwise.
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
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K:
27 Financial Data Schedule
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 15 day of November, 1999.
WATERSIDE CAPITAL CORPORATION
By /s/ J. Alan Lindauer
-----------------------------------------
J. Alan Lindauer
PRESIDENT AND PRINCIPAL EXECUTIVE OFFICER
By /s/ Gerald T. McDonald
-----------------------------------------
Gerald T. McDonald
PRINCIPAL FINANCIAL OFFICER