EX-13 3 dex13.txt ANNUAL REPORT WATERSIDE CAPITAL CORPORATION 2001 Annual Report
Table of Contents Letter to Stockholders............................... 1 Five-Year Summary of Selected Financial Data ..................................... 2 Management's Discussion And Analysis................. 3 Independent Auditors' Report......................... 8 Financial Statements................................. 9 Corporate Information................................ Inside Back Cover
Waterside Capital Corporation A Small Business Investment Company Letter to Stockholders Fiscal 2001, the first full year of the new millennium, proved to be a formi- dable challenge for the U.S. economy, for the venture capital industry and for our company. This was a period of uncertainty with no precedents, no good comparables, and also a period of adjustment. Some of our portfolio companies experienced deteriorating financial condi- tions. Management is aggressively pursuing recovery alternatives through all available channels. Moving forward there is clearly much hard work to be done. Even in these turbulent economic times, our company has been active, investing $6 million in new financings during fiscal 2001. We currently have investments in thirty portfolio companies of which four are publicly traded and twenty-six are privately held. Some of our clients have reached significant milestones during this fiscal year. Many have graduated from cashflow negative to cashflow positive posi- tions. Most have undertaken pro-active changes to adapt to current economic conditions. We have remained in close contact with the management teams of our client firms, offering support, advice and encouragement. For fiscal 2002, we see more challenges and renewed opportunities. We continue to evaluate potential investments in companies at the most attractive valua- tions seen in many years. Current economic conditions provide unique opportu- nities for solid, well-managed venture capital firms with a clear strategic direction. We will stay the course with quality-controlled growth and contin- ued improvement in our operating efficiency. Our business plan has always envisioned our investments maturing in three to five years. Our first investment will soon reach its fifth anniversary. We be- lieve that our strategy is on course, and we remain confident in the fundamen- tal strength of your company. We are grateful for the loyalty of our staff and their dedication to the achievement of our goals. On behalf of all directors, managers and employees, we thank you for your continued support. /s/ J. Alan Lindauer J. Alan Lindauer President & CEO 300 East Main Street . Suite 1380 . Norfolk, Virginia 23510 (757) 626-1111 . (757) 626-0114 Fax . E-mail to waterside@watersidecapital.com NASDAQ Symbol WSCC FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
Year Ended June 30, ---------------------------------------------------------------- 1997 1998 1999 2000 2001 ---------- ----------- ----------- ----------- ----------- Summary of Earnings Information: Operating income: Dividends.............. $ 51,425 $ 299,080 $ 1,071,899 $ 2,189,862 $ 2,865,832 Interest on debt securities............ 9,430 24,290 717,437 1,009,744 1,008,202 Interest on cash equivalents........... 166,573 211,440 160,899 37,203 17,642 Fee and other income... 37,450 271,714 947,013 677,205 354,827 ---------- ----------- ----------- ----------- ----------- Total operating income............... 264,878 806,524 2,897,238 3,914,014 4,246,503 Operating expenses: Interest expense....... -- -- 417,605 1,224,066 1,956,330 Other.................. 214,667 635,519 1,387,525 1,645,318 1,625,941 ---------- ----------- ----------- ----------- ----------- Net operating income before income taxes.. 50,211 171,005 1,092,108 1,044,630 664,232 Income tax expense (benefit).............. (12,370) (47,220) 51,000 (352,000) (675,000) ---------- ----------- ----------- ----------- ----------- Net operating income... 62,581 218,225 1,041,108 1,396,630 1,339,232 Realized gain on investments, net of income taxes (1)....... -- -- 234,312 1,426,474 73,372 Change in unrealized appreciation (depreciation) on investments, net of income taxes (2)....... 211,700 325,110 (238,376) (1,514,791) (6,247,984) ---------- ----------- ----------- ----------- ----------- Net increase (decrease) in stockholders' equity resulting from operations........... $ 274,281 $ 543,335 $ 1,037,044 $ 1,308,313 $(4,835,380) ========== =========== =========== =========== =========== Net operating income per share--basic and diluted................ $ 0.10 $ 0.22 $ 0.66 $ 0.88 $ 0.85 Net increase (decrease) in stockholders' equity resulting from operations per share-- basic and diluted...... $ 0.44 $ 0.54 $ 0.66 $ 0.83 $ (3.06) Weighted average number of shares outstanding.. 625,636 1,013,094 1,581,430 1,581,430 1,581,430 At June 30, ---------------------------------------------------------------- 1997 1998 1999 2000 2001 ---------- ----------- ----------- ----------- ----------- Balance Sheet Information: Investments in portfolio companies, at fair value (3): Equity securities...... $1,142,410 $ 6,724,337 $17,070,782 $23,237,050 $23,146,571 Debt securities........ -- 1,575,264 6,894,468 8,877,766 6,514,395 Options and warrants... 388,890 206,624 377,000 3,752,744 4,025,942 ---------- ----------- ----------- ----------- ----------- Total investments..... 1,481,300 8,506,225 24,342,250 35,867,560 33,686,908 Cash and cash equivalents............ 2,329,148 4,393,501 1,269,409 118,314 1,089,386 Total assets............ 3,963,648 13,374,729 27,109,870 39,098,743 38,378,758 Debentures payable...... -- -- 12,300,000 19,300,000 25,400,000 Total stockholders' equity................. 3,856,417 13,034,288(4) 14,071,269 16,834,391 11,999,011
------- (1) Amount presented net of income tax expense of $144,000 for 1999, $873,000 for 2000 and $40,000 for 2001. (2) Amounts have been presented net of deferred income tax expense (benefit) of $129,600, $198,920, $(145,000), $(926,000) and $191,000, respectively, for the years ended June 30, 1997, 1998, 1999, 2000 and 2001. (3) The Company's portfolio investments are presented at fair value, as de- termined by the Executive Committee of the Board of Directors, using the Model Valuation Policy as published by the Small Business Administration (SBA). The valuation policy includes estimates made by management in the absence of readily ascertainable market values. These estimated values may differ from those that would have been used had a ready market for the securities existed. See the Notes to the Company's Financial State- ments included elsewhere herein. The cost of the portfolio investments was $1,140,000, $7,640,893, $23,860,295, $37,826,396 and $41,702,728 at June 30, 1997, 1998, 1999, 2000 and 2001, respectively. (4) In January 1998, the Company completed an initial public offering of 852,000 shares of common stock at $11 per share. The net proceeds for the offering after $1,288,464 of expenses, were $8,083,536. 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following analysis of the financial condition and results of operations of the Company should be read in conjunction with the Company's fiscal year 2001 financial statements and the notes thereto and the other information in- cluded elsewhere in this report. General Waterside Capital Corporation ("Waterside" or the "Company") is a specialty finance company headquartered in Norfolk, Virginia. The Company invests in eq- uity 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 Corpora- tion. Through June 30, 1996, the Company operated as a development stage com- pany focused primarily on preparation to commence operation. The Company was licensed in 1996 by the Small Business Administration (SBA) as a Small Busi- ness 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 op- erating income comes from interest earned on cash equivalents. The Company's operating expenses primarily consist of payroll, interest expense on SBA de- bentures and the Company's lines of credit and other expenses incidental to the operation. Waterside currently has 6 full time employees. Portfolio Composition The Company's primary business is investing in and lending to privately owned businesses through investments in subordinated debt, preferred stock and common stock. Substantially all of the Company's investments in subordinated debt securities and preferred stock also include detachable warrants or con- version features. The portfolio composition at June 30, 2001, and 2000 is shown in the following table:
Cost Fair Value June 30, June 30, ------------ ------------ 2000 2001 2000 2001 ----- ----- ----- ----- Subordinated Debt.............................. 23.5% 27.0% 24.8% 19.3% Preferred Stock................................ 63.8 59.2 63.7 66.6 Warrants and Options........................... 10.1 10.4 10.5 12.0 Common Equity.................................. 2.6 3.4 1.0 2.1 ----- ----- ----- ----- Total........................................ 100.0% 100.0% 100.0% 100.0% ===== ===== ===== =====
The weighted effective yield on the investment portfolio was 9.31% at June 30, 2001 and 11.21% at June 30, 2000. The following tables show the Portfolio Composition by geographic region and industry grouping:
Cost Fair Value June 30, June 30, ------------ ------------ 2000 2001 2000 2001 Geographic Region ----- ----- ----- ----- Mid Atlantic................................... 54.3% 59.8% 56.7% 68.6% Southeast...................................... 16.7 12.8 15.2 0.3 Midwest........................................ 11.7 10.7 12.0 12.6 Northeast...................................... 13.3 12.2 11.9 12.9 West........................................... 4.0 4.5 4.2 5.6 ----- ----- ----- ----- Total......................................... 100.0% 100.0% 100.0% 100.0% ===== ===== ===== =====
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Cost Fair Value June 30, June 30, ------------ ------------ 2000 2001 2000 2001 Industry Grouping ----- ----- ----- ----- Service..................................... 35.6% 30.4% 32.7% 23.4% Manufacturing............................... 23.5 26.7 26.5 29.9 Telecommunications.......................... 16.1 17.7 14.6 19.1 Information technology...................... 13.3 12.9 14.0 11.5 Media....................................... 6.1 7.3 6.5 9.9 Education................................... 4.3 4.0 4.6 5.0 Wholesale and retail........................ 1.1 1.0 1.1 1.2 ----- ----- ----- ----- Total...................................... 100.0% 100.0% 100.0% 100.0% ===== ===== ===== =====
Management intends to continue to diversify the portfolio and will explore new investment opportunities in a variety of industries as market conditions permit. Results of Operations 2001 Compared to 2000 For the year ended June 30, 2001, total operating income was $4.2 million compared to the $3.9 million generated during 2000. The increase in operating income is due to the increased dividends as a result of the growth in the Company's investment portfolio during the prior period. This increase was par- tially offset by a decrease in fee and other income resulting from lower in- vestment origination in 2001 than 2000. The 2001 operating income consisted of dividends of $2.9 million, interest on debt securities of $1.0 million, fee and other income of $355,000 and interest on cash equivalents of $18,000. Total operating expenses for the year ended June 30, 2001 were $3.6 million, an increase of $713,000 from the $2.9 million for fiscal 2000. The majority of the increase is attributable to increased interest expense due to additional borrowings necessary to fund the growth in the investment portfolio. We addi- tionally experienced a significant increase in legal expenses from $96,000 in- curred in fiscal 2000 to the $274,000 incurred for fiscal 2001. The signifi- cant increase in expense was due to the additional legal costs associated with the collection effort of various portfolio companies experiencing deteriorat- ing financial condition, two of which filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. Somewhat offsetting the increases in interest expense and legal expense were reductions in salaries and benefits, from $995,000 for fiscal 2000 to $903,000 for fiscal 2001, and travel from $193,000 for fiscal 2000 to $81,000 for fiscal 2001 due to the Company's cost containment program. Total operating expenses (excluding interest expense) as a percentage of total operating revenue declined to 38% for fiscal 2001 from 42% in the previous year. Net operating income after taxes for the year 2001 was $1.3 million compared to the $1.4 million reported for fiscal 2000. The realized gain on investments, net of income taxes, of $1.4 million for the year ended June 30, 2000 was primarily due to the sale of a significant block of stock in one of the publicly held securities (The Netplex Group, Inc.). This significant gain was partially offset by a realized loss of $527,000 in one of our privately held companies. Unrealized depreciation on investments, net of taxes, was $6.2 million for the year ended June 30, 2001 as compared to $1.5 million for the year ended June 30, 2000. The significant change for the year ended June 30, 2001 is pri- marily due to the deteriorating financial condition of four portfolio compa- nies, two of which filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. The decrease of $1.5 million, net of taxes, for the year ended June 30, 2000 was due to a combination of the negative impact of the weakness in the high tech sector of the stock market between March and June 2000, causing an unrealized decline in the value of the Company's publicly traded investments as well as a write down in two portfolio companies who had operational performance below expectations and had not made the required divi- dend payments to the company on a timely basis. Management is pursuing recov- ery of the various write downs through all available channels, including re- structuring and litigation where appropriate. The potential for recovery is uncertain at this time due to the current economic environment. 4 2000 Compared to 1999 For the year ended June 30, 2000, total operating income was $3.9 million compared to the $2.9 million generated during fiscal 1999. The increase in to- tal operating income is due to increased dividends and interest income as a result of the growth in the company's investment portfolio. The 2000 operating income consisted of dividends of $2.2 million, interest on debt securities of $1.0 million, fee and other income of $677,000 and interest on cash equiva- lents of $37,000. Total operating expenses for the year ended June 30, 2000, were $2.9 mil- lion, an increase of $1.1 million or 61.1% from the $1.8 million for fiscal 1999. The increase in operating expenses is primarily attributable to an ap- proximate $800,000 increase in interest expense due to additional borrowings necessary to fund the growth in the investment portfolio. The remainder of the increase is attributable to increases in other expenses necessary to support the growth in the investment portfolio such as salaries (increased $81,000), legal and accounting expenses (increased $45,000) and other expenses (in- creased $132,000). Total operating expenses (excluding interest expense) as a percentage of total operating revenue declined to 42% for fiscal 2000 from 48% in the previous year. Net operating income for the year 2000 was $1.4 million, which compared fa- vorably to the $1.0 million generated during fiscal 1999 for the reasons dis- cussed above. The realized gain on investments, net of income taxes, of $1.4 million for the year ended June 30, 2000 was primarily due to the sale of a significant block of stock in one of the publicly held securities (The Netplex Group, Inc.). This significant gain was partially offset by a realized loss of $527,000 in one of our privately held companies. The unrealized depreciation on investments, net of taxes was $1.5 million for the year ended June 30, 2000 as compared to $238,000 for the year ended June 30, 1999. The decrease for the year ended June 30, 2000 was due to a com- bination of the negative impact of the weakness in the high tech sector of the stock market between March and June, 2000 causing an unrealized decline in the value of the company's publicly traded investments as well as a write down in two portfolio companies who had operational performance below expectations and had not made the required dividend payments to the Company on a timely basis. The decrease in unrealized appreciation on investments, net of taxes, of $238,000 for the year ended June 30, 1999 was due primarily to the changing stock price of two publicly traded portfolio companies. The Company issued a 6% stock dividend during the quarter ended March 31, 2000. Financial Condition, Liquidity and Capital Resources The Company utilizes cash flow from operations, proceeds from borrowings un- der lines of credit and approved SBA leverage, and proceeds from investment repayments and sales to fund its operations and grow its investment portfolio. Based on its current regulatory capital, the SBA has approved the issuance of up to $32.4 million of debentures for the Company, of which $25.4 million have been issued at June 30, 2001. The Company also maintains two short-term line of credit agreements which allow for maximum borrowing of $4.0 million at June 30, 2001. There were no borrowings under the lines of credit at June 30, 2001. The company expects to draw on the remaining $7 million of approved SBA lever- age in fiscal 2002. Under the regulations governing the SBIC programs avail- able, SBA leverage is determined based on the SBIC's regulatory capital and investment portfolio mix. Therefore, additional SBA leverage, beyond the amounts currently approved, is unlikely to be available to the Company unless it raises additional capital. Without additional SBA leverage or other alter- native sources of capital, the Company will not be able to continue to grow its investment portfolio or provide additional funding to existing portfolio companies at its historical rate. Management is continuing to evaluate various strategic alternatives for the Company, including but not limited to raising additional equity capital through private sources, exploring other sources of financing and managing the existing investment portfolio and reinvesting pro- ceeds from repayments and liquidations. During the year ended June 30, 2001, the Company funded $2.5 million in new equity investments and $3.5 million in debt securities as compared to the $10.8 million of equity investments and $6.1 million of debt securities made during the fiscal year ended June 30, 2000. To fund the new investments in 2001 and repay borrowings under the lines of credit, the Company borrowed $6.1 million from the SBA in debentures and received $2.4 million as principal re- payment on existing outstanding debt securities. The Company received $1.5 million in proceeds from the repayment of stockholders' notes receivable and $5.5 million from the repayment or redemption from certain of its investments during the year ended June 30, 2000. 5 Net asset value per common share declined to $7.59 per share at June 30, 2001 from $10.65 per share at June 30, 2000 due to the recognition of unrealized depreciation on investments of $6.2 million, net of income taxes, for the year. During the year ended June 30, 2001 cash provided by operating activities was $465,000 as compared to $142,000 of cash used in operating activities for the year ended June 30, 2000. The increase is primarily due to taxes paid on realized gains in 2000 and changes in operating assets and liabilities. The Company used $3.2 million in investing activities during the year ended June 30, 2001 as compared to $10.0 million used during the year ended June 30, 2000. The decrease is due to a reduction in investment originations, net of investment redemptions. Cash flows provided by financing activities for the year ended June 30, 2001 were $3.7 million compared to $9.0 million for the year ended June 30, 2000. Both amounts resulted primarily from net borrowings necessary to finance the growth in the Company's investment portfolio. Quantitative and Qualitative Disclosure About Market Risk The Company's business activities contain elements of risk. The Company con- siders the principal types of market risk to be: risk of lending and investing in small privately owned companies, valuation risk of portfolio, risk of illi- quidity of portfolio investments and the competitive market for investment op- portunities. The Company considers the management of risk essential to con- ducting its business and to maintaining profitability. Accordingly, the Company's risk management systems and procedures are designed to identify and analyze the Company's risks, to set appropriate policies and limits and to continually monitor these risks and limits by means of reliable administrative and information systems and other policies and programs. The Company manages its market risk by maintaining a portfolio of invest- ments that is diverse by industry, geographic area, size of individual invest- ment and borrower. The Company is exposed to a degree of risk of public market price fluctuations as four of the Company's thirty investments are in thinly traded, small public companies, whose stock prices have been volatile. The other twenty-six 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 ascertain- able 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 $33.7 million at June 30, 2001, and $35.9 mil- lion at June 30, 2000, would have resulted in unrealized gains or losses and would have changed net increase (decrease) in stockholders' equity resulting from operations for the year by 7% and 17% respectively. The Company's sensitivity to changes in interest rates is regularly moni- tored 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 Com- pany is insulated from any significant adverse effects from changes in inter- est rates. Based on a 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 im- mediate 100 basis point change in interest rates would have a negligible ef- fect on the net increase (decrease) in stockholders' equity resulting from op- erations over a twelve-month period. 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 composi- tion 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 esti- mate. 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-an- nual shareholder letters, filings with the Commission, news releases and in- vestor 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 in- vestments, the quality of the Company's due diligence efforts, its financing plans, its vendors, suppliers, and portfolio companies, future financial per- formance and other matters that reflect management's expectations as of the date made. 6 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--in- cluding, but not limited to, the average maturity of our investments, the po- tential to realize investment gains as these investments mature, investment opportunities, results, performance or expectations--may not materialize. Ac- tual results may differ materially from those projected or implied in any for- ward-looking statements. In addition to the above factors, other important factors that may affect the company's performance include: the risks associ- ated with the performance of the Company's portfolio companies, dependencies on key employees, interest rates, the level of economic activity, and competi- tion, as well as other risks described from time to time in the Company's fil- ings with the Securities Exchange Commission, press releases, and other commu- nications. The Company disclaims any intent or obligation to update these for- ward-looking statements, whether as a result of new information, future events, or otherwise. PRICE RANGE OF COMMON STOCK The Company's Common Stock is quoted on the NASDAQ Stock Market under the symbol WSCC. As of August 31, 2001, the Company had 98 stockholders of record and approximately 600 beneficial owners. The following table sets forth the range of high and low bid prices of the Company's common stock as reported on the NASDAQ stock market for the period from February 2, 1998, when public trading of the common stock commenced pursuant to the IPO, through June 30, 2001.
Bid Price Net Asset ----------------------- Value Per Share(1) High Low Close ------------------ ------- ------- ------- 1998 Third Quarter....................... $ 8.18 $11.750 $10.750 $10.875 Fourth Quarter...................... 8.24 11.375 10.125 11.125 1999 First Quarter....................... $ 8.25 $11.375 $ 9.000 $ 9.250 Second Quarter...................... 8.37 10.620 7.500 8.500 Third Quarter....................... 8.72 8.750 6.500 7.250 Fourth Quarter...................... 8.90 7.875 6.000 6.750 2000 First Quarter....................... $ 8.98 $ 7.063 $ 6.625 $ 6.875 Second Quarter...................... 11.13 9.438 6.625 9.000 Third Quarter....................... 12.16 10.750 7.563 8.375 Fourth Quarter...................... 10.65 8.500 6.500 6.500 2001 First Quarter....................... $10.44 $ 7.000 $ 4.000 $ 6.250 Second Quarter...................... 9.75 6.250 2.531 3.750 Third Quarter....................... 8.35 5.250 3.250 3.250 Fourth Quarter...................... 7.59 4.000 3.000 3.650
------- (1) Net asset value per share is determined as of the last day in the calendar quarter and therefore may not reflect the net asset value per share on the date of the high or low sales prices for the specific quarter. The net as- set values shown are based on outstanding shares at the end of each quar- ter and the previously reported values have been restated to reflect the 5% stock dividend declared on February 5, 1999 and the 6% stock dividend declared on December 7, 1999. 7 INDEPENDENT AUDITORS' REPORT The Stockholders and Board of Directors Waterside Capital Corporation: We have audited the accompanying balance sheets of Waterside Capital Corpo- ration, including the schedule of portfolio investments, as of June 30, 2000 and 2001 and the related statements of operations, changes in stockholders' equity and cash flows for each of the years in the three-year period ended June 30, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these fi- nancial statements based on our audits. We conducted our audits in accordance with auditing standards generally ac- cepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the finan- cial statements are free of material misstatement. An audit includes examin- ing, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting princi- ples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits pro- vide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Waterside Capital Corpora- tion as of June 30, 2000 and 2001, and the results of its operations and its cash flows for each of the years in the three-year period ended June 30, 2001 in conformity with accounting principles generally accepted in the United States of America. [LOGO OF KPMG LLP] July 31, 2001 Norfolk, Virginia 8 BALANCE SHEETS JUNE 30, 2000 AND 2001
2000 2001 ----------- ----------- ASSETS: Investments in portfolio companies, at fair value (note 2): Equity securities................................... $23,237,050 $23,146,571 Debt securities..................................... 8,877,766 6,514,395 Options and warrants................................ 3,752,744 4,025,942 ----------- ----------- Total investments, cost of $37,826,396 and $41,702,728 at June 30, 2000 and 2001, respectively..................................... 35,867,560 33,686,908 ----------- ----------- Current Assets: Cash and cash equivalents........................... 118,314 1,089,386 Current portion of dividends receivable............. 654,767 719,188 Interest receivable................................. 222,517 101,304 Note receivable (note 3)............................ 237,550 237,550 Refundable income taxes............................. 323,322 533,225 Prepaid expenses.................................... 15,445 131,891 Other current assets................................ 124,958 50,466 ----------- ----------- Total Current Assets............................... 1,696,873 2,863,010 Dividends receivable, excluding current portion...... -- 278,583 Property and equipment, net (note 4)................. 167,919 133,217 Deferred income taxes, net (note 7).................. 650,000 550,000 Deferred financing costs, net........................ 716,391 867,040 ----------- ----------- Total Assets....................................... $39,098,743 $38,378,758 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY: Current Liabilities: Lines of credit..................................... $ 2,200,000 $ -- Accounts payable.................................... 31,310 85,224 Accrued interest.................................... 485,574 657,514 Accrued expenses (note 5)........................... 247,468 237,009 ----------- ----------- Total Current Liabilities.......................... 2,964,352 979,747 Debentures payable (note 6).......................... 19,300,000 25,400,000 ----------- ----------- Total Liabilities.................................. 22,264,352 26,379,747 ----------- ----------- Stockholders' Equity (note 8): Common stock, $1 par value, 10,000,000 shares authorized, 1,581,430 issued and outstanding....... 1,581,430 1,581,430 Preferred stock, $1 par value, 25,000 shares authorized, no shares issued and outstanding....... -- -- Additional paid-in capital.......................... 14,618,719 14,618,719 Net unrealized depreciation on investments, net of income taxes....................................... (1,216,357) (7,464,341) Undistributed accumulated earnings.................. 1,850,599 3,263,203 ----------- ----------- Total Stockholders' Equity......................... 16,834,391 11,999,011 Commitments and contingencies (notes 2, 11, 12 and 13) Total Liabilities and Stockholders' Equity......... $39,098,743 $38,378,758 =========== =========== Net asset value per common share (note 8).......... $10.65 $7.59 =========== ===========
See accompanying notes to financial statements. 9 STATEMENTS OF OPERATIONS YEARS ENDED JUNE 30, 1999, 2000 AND 2001
1999 2000 2001 ---------- ----------- ----------- Operating Income: Dividends.............................. $1,071,899 $ 2,189,862 $ 2,865,832 Interest on debt securities............ 717,437 1,009,744 1,008,202 Interest on cash equivalents........... 160,889 37,203 17,642 Fee and other income................... 947,013 677,205 354,827 ---------- ----------- ----------- Total Operating Income................ 2,897,238 3,914,014 4,246,503 ---------- ----------- ----------- Operating Expenses: Salaries and benefits.................. 913,786 994,717 902,874 Legal and accounting................... 122,080 167,580 338,681 Interest expense....................... 417,605 1,224,066 1,956,330 Other operating expenses (note 10)..... 351,659 483,021 384,386 ---------- ----------- ----------- Total Operating Expenses.............. 1,805,130 2,869,384 3,582,271 ---------- ----------- ----------- Net operating income before income taxes................................ 1,092,108 1,044,630 664,232 Income tax expense (benefit) (note 7)... 51,000 (352,000) (675,000) ---------- ----------- ----------- Net Operating Income.................. 1,041,108 1,396,630 1,339,232 Realized gain on investments, net of income taxes of $144,000, $873,000 and $40,000 for 1999, 2000 and 2001, respectively........................... 234,312 1,426,474 73,372 Change in unrealized appreciation (depreciation) on investments, net of income tax expense (benefit) of $(145,000), $(926,000) and $191,000 for 1999, 2000 and 2001, respectively...... (238,376) (1,514,791) (6,247,984) ---------- ----------- ----------- Net Increase (Decrease) in Stockholders' Equity Resulting From Operations........................... $1,037,044 $ 1,308,313 $(4,835,380) ========== =========== =========== Net increase (decrease) in stockholders' equity resulting from operations per share -- basic and diluted (notes 8 and 9)........................ $ 0.66 $ 0.83 $ (3.06) ========== =========== ===========
See accompanying notes to financial statements. 10 STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (NOTE 8) YEARS ENDED JUNE 30, 1999, 2000 AND 2001
Net Unrealized Common Stock Additional Appreciation Undistributed Stockholders' Total -------------------- Paid-in (Depreciation) on Accumulated Notes Stockholders' Shares Amount Capital Investments Earnings Receivable Equity --------- ---------- ----------- ----------------- ------------- ------------- ------------- Balance at June 30, 1998................... 1,420,900 $1,420,900 $12,272,636 $ 536,810 $ 258,942 $(1,455,000) $13,034,288 5% stock dividend....... 71,037 71,037 497,259 -- (568,359) -- (63) Net operating income.... -- -- -- -- 1,041,108 -- 1,041,108 Net realized gain on investments, net of income taxes........... -- -- -- -- 234,312 -- 234,312 Decrease in net unrealized appreciation on investments, net of income taxes........... -- -- -- (238,376) -- -- (238,376) --------- ---------- ----------- ----------- ----------- ----------- ----------- 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............. -- -- -- -- -- 1,455,000 1,455,000 Net operating income.... -- -- -- -- 1,396,630 -- 1,396,630 Net realized gain on investments, net of income taxes........... -- -- -- -- 1,426,474 -- 1,426,474 Decrease in net unrealized appreciation on investments, net of income taxes........... -- -- -- (1,514,791) -- -- (1,514,791) --------- ---------- ----------- ----------- ----------- ----------- ----------- 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.... -- -- -- -- 1,339,232 -- 1,339,232 Net realized gain on investments, net of income taxes........... -- -- -- -- 73,372 -- 73,372 Increase in net unrealized depreciation on investments, net of income taxes........... -- -- -- (6,247,984) -- -- (6,247,984) --------- ---------- ----------- ----------- ----------- ----------- ----------- Balance at June 30, 2001................... 1,581,430 $1,581,430 $14,618,719 $(7,464,341) $ 3,263,203 $ -- $11,999,011 ========= ========== =========== =========== =========== =========== ===========
See accompanying notes to financial statements. 11 STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1999, 2000 AND 2001
1999 2000 2001 ------------ ------------ ----------- Cash flows from operating activities: Net increase (decrease) in stockholders' equity resulting from operations.......................... $ 1,037,044 $ 1,308,313 $(4,835,380) Adjustments to reconcile net increase (decrease) in stockholders' equity resulting from operations to net cash provided by (used in) operating activities: Unrealized depreciation on investments...................... 383,376 2,440,791 6,056,984 Realized gain on investments...... (378,312) (2,299,474) (113,372) Accretion of preferred stock and loan investments................. (71,823) (356,423) (570,190) Depreciation and amortization..... 42,185 66,959 85,307 Deferred income tax expense (benefit)........................ (63,000) (845,000) 100,000 Loss on disposal of property and equipment........................ -- 828 -- Changes in assets and liabilities increasing (decreasing) cash flows from operating activities: Dividends receivable........... (138,895) (343,030) (343,004) Interest receivable............ (207,166) 5,921 121,213 Refundable income taxes........ (43,322) (280,000) (209,903) Prepaid expenses and other current assets................ (32,779) (62,487) (41,954) Accounts payable and accrued expenses...................... 347,529 334,382 215,395 Deferred revenue............... 113,631 (113,631) -- ------------ ------------ ----------- Net cash provided by (used in) operating activities............. 988,468 (142,851) 465,096 ------------ ------------ ----------- Cash flows from investing activities: Investments in equity securities made................................ (12,872,180) (10,778,709) (2,495,113) Investments in debt securities made.. (5,633,270) (6,074,509) (3,491,249) Principal collected on debt securities.......................... 66,163 1,254,587 2,421,877 Issuance of note receivable.......... (150,000) (727,500) -- Proceeds from collection of note receivable.......................... -- 639,950 -- Proceeds from repayment of stockholders' notes receivable...... -- 1,455,000 -- Proceeds from sales of investments... 2,670,021 4,288,427 371,715 Acquisition of property and equipment........................... (24,731) (92,299) (8,754) Proceeds from sale of property and equipment........................... -- 2,000 -- ------------ ------------ ----------- Net cash used in investing activities....................... (15,943,997) (10,033,053) (3,201,524) ------------ ------------ ----------- Cash flows from financing activities: Proceeds from (repayments of) lines of credit........................... -- 2,200,000 (2,200,000) Proceeds from debentures payable..... 12,300,000 7,000,000 6,100,000 Payment of deferred financing costs.. (468,500) (175,000) (192,500) Payments in lieu of fractional shares associated with stock dividend...... (63) (191) -- ------------ ------------ ----------- Net cash provided by financing activities....................... 11,831,437 9,024,809 3,707,500 ------------ ------------ ----------- Net increase (decrease) in cash and cash equivalents..................... (3,124,092) (1,151,095) 971,072 Cash and cash equivalents, beginning of year.............................. 4,393,501 1,269,409 118,314 ------------ ------------ ----------- Cash and cash equivalents, end of year................................. $ 1,269,409 $ 118,314 $ 1,089,386 ============ ============ =========== Supplemental disclosure of cash flow information: Cash paid during the year for interest............................ $ 196,462 $ 908,775 $ 1,741,604 ============ ============ =========== Cash paid during the year for income taxes............................... $ 160,000 $ 720,000 $ -- ============ ============ ===========
See accompanying notes to financial statements. 12 NOTES TO FINANCIAL STATEMENTS JUNE 30, 1999, 2000 AND 2001 (1) Summary of Significant Accounting Policies Description of Business Waterside Capital Corporation (the "Company") was incorporated in the Com- monwealth 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. The Company made its first loan to a small business concern in October 1996 and its first equity investment in No- vember 1996. In January 1998, the Company completed an Initial Public Offering ("IPO") of 852,000 shares of common stock at a price of $11.00 per share. The net pro- ceeds, after $1,288,464 of offering costs, were $8,083,536. Cash and Cash Equivalents The Company considers all highly liquid securities purchased with insignifi- cant interest rate risk and original maturities of three months or less at the acquisition date to be cash equivalents. Cash and cash equivalents consisted of the following at June 30, 2000 and 2001:
2000 2001 -------- ---------- Cash in banks........................................ $118,314 $1,075,635 Cash deposits in brokerage accounts.................. -- 13,751 -------- ---------- Total............................................. $118,314 $1,089,386 ======== ==========
The brokerage accounts reflected above consist of deposit accounts held with three brokerage houses to facilitate the trading of stock. Investment Valuation Investments are carried at fair value, as determined by the Executive Com- mittee 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 ac- quired 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 val- ued 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 guide- lines. 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 portfo- lio at June 30, 2001 ranged from 15% to 40%. Discounts for restriction on the sale of the investments are 15% in accordance with the provisions of the Poli- cy. The Company maintains custody of its investments as permitted by the In- vestment Company Act of 1940. Realized and Unrealized Gain or Loss on Investments Realized gains or losses recorded upon disposition of investments are calcu- lated as the difference between the net proceeds and the cost basis determined using the specific identification method. All other changes in the value of investments are included as changes in the unrealized appreciation or depreci- ation in the statement of operations. Recognition of Interest and Dividend Income Interest income is recorded on the accrual basis. In the case of dividends on preferred stock investments where the Company has an agreement stipulating dividends payable, the Company accrues the dividends in income on a pro-rata basis 13 NOTES TO FINANCIAL STATEMENTS -- Continued (1) Summary of Significant Accounting Policies -- Continued during the year. Otherwise, dividends are recorded as income on the ex-divi- dend date. The Company ceases to accrue dividends and interest income if the investee is more than 120 days delinquent in their payments. Accretion of loans and preferred stock investments are recorded as a component of interest and dividend income in the statement of operations. Fee Income Portfolio investment processing fees are recognized as income upon consummation of the related investment transaction. Property and Equipment Property and equipment is stated at cost. Depreciation and amortization of property and equipment is calculated using the straight-line method over the estimated useful lives of the assets ranging from five to seven years. Prop- erty and equipment held under leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or estimated useful life of the asset. Deferred Financing Costs Deferred financing costs consist of origination and processing fees paid in connection with the issuance of SBA debentures. The origination and processing fees are amortized using the effective interest method over the life of the related debentures. Accumulated amortization was $50,859 and $93,645 at June 30, 2000 and 2001, respectively. Income Taxes Income taxes are accounted for under the asset and liability method. De- ferred tax assets and liabilities are recognized for the future tax conse- quences attributable to differences between the financial carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are ex- pected to be recovered or settled. The effect on deferred tax assets and lia- bilities of a change in tax rates is recognized in income in the period that includes the enactment date. Net Increase (Decrease) in Stockholders' Equity Resulting From Operations per Share Basic earnings per share has been computed by dividing net increase (de- crease) in stockholders' equity resulting from operations by the weighted av- erage number of common shares outstanding. Diluted earnings per share reflects the potential dilution that could occur assuming the inclusion of common share equivalents and has been computed by dividing net increase (decrease) in stockholders' equity resulting from operations by the weighted average number of common shares and dilutive common shares outstanding. Dilutive common shares include all outstanding stock options and warrants after applying the treasury stock method. Stock Option Plan As permitted under Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock Based Compensation , the Company has chosen to ac- count for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB Opinion No. 25), and related interpretations. Accordingly, com- pensation cost for stock options is measured as the excess, if any, of the es- timated fair value of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. Use of Estimates The preparation of financial statements in conformity with accounting prin- ciples generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and ex- penses during the reporting period. Actual results could differ from those es- timates. Reclassification Certain reclassifications have been made to the 2000 balance sheet to conform to the 2001 financial statement presentation. 14 NOTES TO FINANCIAL STATEMENTS -- Continued (2) Investments Investments consist primarily of preferred stock and debt securities ob- tained from portfolio companies in accordance with SBIC investment regula- tions. The financial statements include securities valued at $35,867,560 and $33,686,908 at June 30, 2000 and 2001 (91.7% and 87.8% of assets), respective- ly. 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. (3) Note Receivable At June 30, 2000 and 2001, the Company has a note receivable due from a guarantor of one of its liquidated investments. The note earns interest at 9.25% per annum and is due on demand. (4) Property and Equipment Property and equipment at June 30, 2000 and 2001 consists of the following:
2000 2001 -------- -------- Furniture and fixtures................................. $ 86,895 $ 90,216 Computer equipment and software........................ 119,818 125,251 Leasehold improvements................................. 31,298 31,298 -------- -------- 238,011 246,765 Less accumulated depreciation and amortization......... 70,092 113,548 -------- -------- Property and equipment, net........................... $167,919 $133,217 ======== ======== (5) Accrued Expenses Accrued expenses at June 30, 2000 and 2001 consist of the following: 2000 2001 -------- -------- Accrued accounting and legal expense................... $ 40,856 $130,040 Accrued salaries and benefits.......................... 163,502 104,108 Other accrued expenses................................. 43,110 2,861 -------- -------- Total accrued expenses................................ $247,468 $237,009 ======== ========
(6) Debentures Payable Based on its existing regulatory capital, the SBA has approved the issuance of up to $32.4 million of debentures for the Company. All debentures, if and when issued, bear interest payable semi-annually at a fixed rate and are due at maturity, which is generally 10 years from the date the interest rate is fixed. The debentures are subject to a prepayment penalty for the first five years they are outstanding. During 1999, the Company utilized $12,300,000 of the available facility, $6,000,000 of which bears interest at 7.24% and ma- tures on March 1, 2009 and $6,300,000 of which bears interest at 8.22% and ma- tures on September 1, 2009. During 2000, the Company utilized an additional $7,000,000, which bears interest at 8.64% and matures on March 1, 2010. During fiscal 2001, the Company has drawn an additional $6,100,000 of the available facility, $3,100,000 of which bears interest at 8.45% and matures on September 1, 2010 and $3,000,000 of which bears interest at an interim rate of 6.25% and matures on September 1, 2011. 15 NOTES TO FINANCIAL STATEMENTS -- Continued (7) Income Taxes The Company's provision for income taxes for the years ended June 30, 1999, 2000 and 2001 was allocated as follows:
1999 2000 2001 --------- --------- --------- Income tax expense (benefit) attributable to operations............. $ 51,000 $(352,000) $(675,000) Deferred tax expense (benefit) attributable to change in unrealized appreciation on investments............ (145,000) (926,000) 191,000 Current tax expense attributable to realized gain on investments........... 144,000 873,000 40,000 --------- --------- --------- Total income tax expense (benefit)... $ 50,000 $(405,000) $(444,000) ========= ========= ========= The Company's income tax expense (benefit) attributable to operations for the years ended June 30, 1999, 2000 and 2001 is as follows: 1999 2000 2001 --------- --------- --------- Current: Federal................................ $ (25,000) $(364,500) $(485,000) State.................................. (6,000) (68,500) (99,000) --------- --------- --------- Total current taxes................... (31,000) (433,000) (584,000) --------- --------- --------- Deferred: Federal................................ 68,000 67,000 (76,000) State.................................. 14,000 14,000 (15,000) --------- --------- --------- Total deferred taxes.................. 82,000 81,000 (91,000) --------- --------- --------- Total income tax expense (benefit) attributable to operations........... $ 51,000 $(352,000) $(675,000) ========= ========= ========= The 1999, 2000 and 2001 actual tax expense (benefit) attributable to opera- tions differs from the amount which would be provided by applying the statu- tory federal rate to net operating income before income taxes as follows: 1999 2000 2001 --------- --------- --------- Computed "expected" tax expense......... $ 371,000 $ 355,000 $ 226,000 State taxes, net of federal impact...... 5,000 (36,000) (75,000) Nontaxable dividend income.............. (348,000) (674,000) (835,000) Other................................... 23,000 3,000 9,000 --------- --------- --------- Total income tax expense (benefit) attributable to operations............ $ 51,000 $(352,000) $(675,000) ========= ========= =========
The Company's deferred tax assets and liabilities at June 30, 2000 and 2001 are as follows:
2000 2001 -------- ----------- Deferred tax assets: Investments, due to recognition of unrealized depreciation and accretion for financial statement purposes.............................. $645,000 $ 2,790,000 Organization costs, due to the differing amortization methods and implementation of SOP 98-5............................................ 8,000 -- Net operating loss carryforward.................. -- 254,000 -------- ----------- Total gross deferred tax assets................ 653,000 3,044,000 Less valuation allowance......................... -- (2,492,000) -------- ----------- Total net deferred tax assets.................. 653,000 552,000 -------- ----------- Deferred tax liabilities: Property and equipment due to differing depreciation methods............................ (3,000) (2,000) -------- ----------- Net deferred tax assets........................ $650,000 $ 550,000 ======== ===========
16 NOTES TO FINANCIAL STATEMENTS -- Continued (7) Income Taxes -- Continued The Company's valuation allowance increased $2,492,000 for the year ended June 30, 2001. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax as- sets is dependent upon the generation of future taxable income during the pe- riods in which those temporary differences become deductible. Management con- siders projected future taxable income and tax planning strategies in making this assessment. Because the Company's dividend income is not taxable, the primary source of future taxable income available to the Company will be real- ized gains on sales of investments, the realization of which are uncertain. As a result, management has recognized deferred tax assets it believes are more likely than not to be realized based on existing scenarios under which the Company is likely to realize a gain on the settlement of an investment. The amount of the deferred tax asset considered realizable, however, could be re- duced in the near term if estimates of future taxable income are reduced. (8) Stockholders' Equity Stock Dividend On February 5, 1999, the Company declared a 5% stock dividend to sharehold- ers of record as of February 26, 1999. On March 15, 1999, the Company issued 71,037 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 capital- ized as common stock and additional paid-in capital. Historical earnings per share, weighted average shares outstanding and net asset value per share have been restated to reflect the 5% stock dividend. On December 7, 1999, the Company declared a 6% stock dividend to sharehold- ers 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 capital- ized as common stock and additional paid-in capital. Historical earnings per share, weighted average shares outstanding and net asset value per share have been restated to reflect the 6% stock dividend. Undistributed Accumulated Earnings Undistributed accumulated earnings at June 30, 2000 and 2001 consist of the following:
2000 2001 ---------- ---------- Undistributed accumulated investment income........ $1,389,813 $2,729,045 Undistributed accumulated net realized gains....... 460,786 534,158 ---------- ---------- Undistributed accumulated earnings................. $1,850,599 $3,263,203 ========== ==========
Effective December 7, 1999, the Executive Committee of the Company's Board of Directors and the SBA approved the capitalization of $1,200,000 of the Company's undistributed accumulated earnings, which reduced the undistributed accumulated net realized gains disclosed above. Stock Option Plan During 1998, the Company adopted the Waterside Capital Corporation 1998 Em- ployee Stock Option Plan (the "Plan") pursuant to which the Company may grant stock options to officers and key employees. The Plan, as amended, authorizes the grant of options to purchase up to 212,000 shares of authorized but unissued common stock. Stock options are granted with an exercise price equal to the stock's fair market value at the date of grant. All stock options have ten-year terms and vest on a graded schedule, at which time they become fully exercisable. At June 30, 2001, there were 18,055 additional shares available for future grant under the Plan. The per share weighted-average fair value of all stock options granted is $3.3823. The fair value of each grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: ex- pected life 17 NOTES TO FINANCIAL STATEMENTS -- Continued (8) Stockholders' Equity -- Continued of five years, expected volatility of 17.3%, expected dividend yield of 0% and risk-free interest rate of 6.01% for options granted in fiscal 1999; expected life of five years, expected volatility of 51.01%, expected dividend yield of 0% and risk-free interest rate of 6.23% for options granted in fiscal 2000; and expected life of five years, expected volatility of 67.64%, expected divi- dend yield of 0% and risk-free interest rate of 4.82% for options granted in fiscal 2001. Under the Plan, the employee stock options are dividend protected. As a re- sult, the exercise price of the outstanding options was adjusted downward and the number of options increased so as to equalize the holder's value before and after a stock dividend or split. As a result of the stock dividends de- scribed above, all options outstanding were adjusted in accordance with the Plan. The Company applies APB Opinion No. 25 in accounting for its Plan and, ac- cordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net increase (decrease) in stockholders' equity resulting from operations would have been reflected at the pro forma amounts indicated below:
1999 2000 2001 ---------- ---------- ----------- Net increase (decrease) in stockholders' equity resulting As reported $1,037,044 $1,308,313 $(4,835,380) from operations............... Pro Forma 855,516 1,154,537 (5,011,656) Net increase (decrease) in stockholders' equity resulting from As reported $ 0.66 $ 0.83 $ (3.06) operations per share -- basic and diluted.................. Pro Forma 0.54 0.73 (3.17)
Stock option activity during the periods indicated is as follows:
Number of Weighted-Average Shares Exercise Price --------- ---------------- Balance at June 30, 1998....................... 86,258 $9.900 Granted........................................ 22,260 7.750 Exercised...................................... -- -- Forfeited...................................... -- -- Expired........................................ -- -- ------- Balance at June 30, 1999....................... 108,518 9.459 Granted........................................ 83,100 8.190 Exercised...................................... -- -- Forfeited...................................... (25,043) 9.883 Expired........................................ -- -- ------- Balance at June 30, 2000....................... 166,575 8.762 Granted........................................ 50,000 4.125 Exercised...................................... -- -- Forfeited...................................... (22,630) 9.053 Expired........................................ -- -- ------- Balance at June 30, 2001....................... 193,945 7.533 =======
At June 30, 1999, 2000 and 2001, 79,951, 96,715 and 133,036 options, respec- tively, were exercisable. The difference between the weighted average exercise prices for all outstanding options and those exercisable on June 30, 2001 was not significant. The weighted average remaining contractual life of outstanding options at June 30, 2001 is 8.3 years. 18 NOTES TO FINANCIAL STATEMENTS -- Continued (9) Net Increase (Decrease) in Stockholders' Equity Resulting From Operations per Share The following table sets forth the calculation of basic and diluted net in- crease (decrease) in stockholders' equity resulting from operations per share for the years ended June 30, 1999, 2000 and 2001:
1999 2000 2001 ---------- ---------- ----------- Basic net increase (decrease) in stockholders' equity resulting from operations per share: Net increase (decrease) in stockholders' equity resulting from operations....... $1,037,044 $1,308,313 $(4,835,380) ========== ========== =========== Weighted average number of common shares outstanding............................ 1,581,430 1,581,430 1,581,430 ========== ========== =========== Basic net increase (decrease) in stockholders' equity resulting from operations per share................... $0.66 $0.83 $(3.06) ========== ========== =========== Diluted net increase (decrease) in stockholders' equity resulting from operations per share: Net increase (decrease) in stockholders' equity resulting from operations....... $1,037,044 $1,308,313 $(4,835,380) ========== ========== =========== Weighted average number of common shares outstanding............................ 1,581,430 1,581,430 1,581,430 Dilutive effect of stock options (as determined by using the treasury stock method)................................ -- 1,677 -- ---------- ---------- ----------- Weighted average number of common shares and dilutive common shares outstanding. 1,581,430 1,583,107 1,581,430 ========== ========== =========== Diluted net increase (decrease) in stockholders' equity resulting from operations per share................... $0.66 $0.83 $(3.06) ========== ========== ===========
(10) Related Party Transactions For the fiscal years ended June 30, 1999, 2000 and 2001, the Company paid fees of approximately $88,000, $126,000 and $70,000, respectively, to an offi- cer and director of the Company and to a partnership owned by an officer and director of the Company for the use of an airplane. (11) Leases The Company has two noncancelable operating leases, primarily for office space, that expire over the next three years. Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) as of June 30, 2001 are:
Year ending June 30, 2002......................................................... $ 67,156 2003......................................................... 35,110 2004......................................................... 1,637 -------- Total minimum lease payments................................ $103,903 ========
Net rental expense for operating leases for the years ended June 30, 1999, 2000 and 2001 was $68,376, $62,468 and $68,056, respectively. Sublease income for the years ended June 30, 1999 and 2000 was $4,900 and $5,400, respective- ly. (12) Commitments and Contingencies Employment Agreements The Company has employment agreements with four active members of manage- ment. These agreements provide for a specified annual base salary and certain discretionary and performance-based bonuses. The contracts also provide for stock 19 NOTES TO FINANCIAL STATEMENTS -- Continued (12) Commitments and Contingencies -- Continued options to be granted to the executives, where the executives may purchase common shares of the Company at the fair value of the Company's common stock at the time of grant. Annual base salaries under these agreements range from $100,000 to $150,000. The agreements expire on January 31, 2004. If the em- ployees are terminated by the Executive Committee without cause, these employ- ees will receive compensation equal to two times their annual base salary in effect at the time of termination and two times their average bonus received during the previous two years. The Company's commitment for termination bene- fits is approximately $1,200,000. Lines of Credit The Company has open lines of credit with two financial institutions with a total availability of $4,000,000. The lines bear interest at the banks' prime rates. There were no outstanding borrowings under the lines of credit at June 30, 2001. The $2,500,000 and $1,500,000 lines of credit expire on November 1, 2001 and October 31, 2001, respectively. (13) Concentration of Credit Risk Most of the Company's portfolio investment companies are located in the Mid- Atlantic region of the United States. In addition, three of the Company's portfolio investment companies are in the telecommunications industry. As a result, any adverse impact on the economy of that region or the telecommunica- tions industry could adversely impact the Company's results of operations and financial position. (14) Fair Value of Financial Instruments The following summary disclosures are made in accordance with the provisions of SFAS No. 107, Disclosures About Fair Value of Financial Instruments. Fair value is defined in the statement as the amount at which an instrument could be exchanged in a current transaction between willing parties. The following methods and assumptions were used to estimate the fair value of each class of financial instruments at June 30, 2000 and 2001: Cash and cash equivalents, dividends receivable, interest receivable, note receivable, accounts payable and accrued expenses: The carrying amounts approximate fair value because of the short maturity of these instruments. Investments in portfolio companies: The Company's investments are reflected at fair value in the Company's bal- ance sheets. The fair value of portfolio investments is determined by the Ex- ecutive Committee of the Board of Directors or by current market prices, if available, in accordance with the Company's valuation policy (see note 2). Debentures payable: The fair value of the debentures payable is estimated by discounting the fu- ture cash flows using current interest rates at which similar notes would be made to borrowers with similar credit ratings. The fair value of the $19,300,000 debentures at June 30, 2000 was estimated to be $18,612,743. At June 30, 2001, the fair value of the debentures issued was estimated to be $28,199,882. (15) Employee Benefit Plan Effective July 1, 1998, the Company adopted the Waterside Capital Corpora- tion Defined Contribution Plan (the Plan). The Plan is available to all em- ployees of the Company, regardless of age, who have completed at least three months of service. Eligible employees may contribute up to 8% of their compen- sation annually with the Company providing contributions of 50% of the first 6% of participating employees' contributions. In addition, the Company has the ability to make discretionary contributions which will be determined by a res- olution of the Board of Directors. Total employer expense for the Plan for the years ended June 30, 2000 and 2001 was $20,721 and $21,248, respectively. 20 SCHEDULE OF PORTFOLIO INVESTMENTS JUNE 30, 2000 AND 2001 The Company's investment portfolio at June 30, 2000 consisted of the follow- ing:
Cost or Number of Contributed Fair Market Equity Securities: Shares Value Value ------------------ --------- ----------- ----------- Publicly Traded Companies: Avery Communications, Inc. Common Stock..... 245,000 $ 249,900 $ 156,310 Netplex Group, Inc. Common Stock (a)........ 66,400 464,800 129,281 Netplex Group, Inc. Preferred Stock......... 1,500,000 1,151,784 1,151,784 Electronic Business Systems, Inc. (formerly Triangle Imaging Group, Inc.) Convertible Preferred Stock (b)(c)..................... 700 2,046,004 1,346,004 Electronic Business Systems, Inc. (formerly Triangle Imaging Group, Inc.) Common Stock (b)(c)..................................... 500,000 225,000 28,000 Electronic Business Systems, Inc. (formerly Triangle Imaging Group, Inc.) Common Stock (b)(c)..................................... 1,423,821 60,484 60,484 Private Companies: Real Time Data Management Services, Inc. Preferred Stock............................ 300 286,859 463,500 Delta Education Systems, Inc. Preferred Stock...................................... 1,625 1,594,283 1,594,283 Diversified Telecom, Inc. Preferred Stock (c)........................................ 1,500 1,500,000 750,000 Crispies, Inc. Preferred Stock.............. 400 398,320 398,320 Triangle Biomedical Sciences Preferred Stock...................................... 2,000 1,988,481 1,988,481 JMS Worldwide, Inc. Preferred Stock......... 1,500 1,500,000 1,500,000 EPM Development Systems Corp. Preferred Stock...................................... 1,500 1,492,847 1,492,847 Fire King International Preferred Stock..... 2,000 2,000,000 2,000,000 SECC (formerly MilleCom, Inc.) Common Stock. 840,000 60 60 Eton Court Asset Management, Ltd. Preferred Stock...................................... 1,000 973,397 973,397 Fairfax Publishing Co., Inc. Preferred Stock...................................... 1,100 1,042,347 1,042,347 DigitalSquare.com Preferred Stock........... 1,210,739 1,513,425 1,513,425 Answernet, Inc. Preferred Stock............. 550 303,194 303,194 Answernet, Inc. Preferred Stock............. 700 376,926 376,926 ISR Solutions, Inc. Preferred Stock......... 500 497,407 497,407 Capital Markets Group, Inc. Preferred Stock. 1,500 1,500,000 1,500,000 Jubilee Tech International, Inc. Convertible Preferred Stock............................ 2,200,000 1,971,000 1,971,000 VentureCom, Inc. Preferred Stock............ 278,164 2,000,000 2,000,000 ----------- ----------- Total equity securities................... 25,136,518 23,237,050 ----------- ----------- 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.......... 7/22/03 900,000 900,000 Extraction Technologies of VA, LLC.......... 8/31/04 202,316 202,316 Extraction Technologies of VA, LLC.......... 11/2/04 373,711 373,711 Extraction Technologies of VA, LLC.......... 2/7/05 263,742 263,742 Extraction Technologies of VA, LLC.......... 2/25/05 97,409 97,409 Extraction Technologies of VA, LLC.......... 3/14/05 95,584 95,584 JMS Worldwide, Inc. ........................ 7/31/03 950,000 950,000 Diversified Telecom, Inc. .................. Demand 84,250 84,250 Diversified Telecom, Inc. .................. 5/19/02 156,387 156,387 SECC (formerly MilleCom, Inc.).............. 3/31/04 900,000 900,000 SECC (formerly MilleCom, Inc.).............. 5/11/04 360,000 360,000 ISR Solutions, Inc. ........................ 6/30/04 742,167 742,167 Fire King International..................... Demand 550,000 550,000 TABET Manufacturing Co., Inc. .............. 12/31/04 283,230 283,230 National Assisted Living, LP................ 12/31/04 1,408,689 1,408,689 Electronic Business Systems, Inc. (formerly Triangle Imaging Group, Inc.) (b)(c)..................................... 1/31/05 424,931 424,931 New Dominion Pictures LLC................... 4/30/06 735,350 735,350 ----------- ----------- Total debt securities..................... 8,877,766 8,877,766 ----------- -----------
21 SCHEDULE OF PORTFOLIO INVESTMENTS -- continued
Cost or Number of Percentage Contributed Fair Market Stock Options and Warrants: Shares Ownership Value Value --------------------------- --------- ---------- ----------- ----------- Publicly Traded Companies: Avery Communications, Inc. ...... 161,000 0.00 $ -- $ -- Netplex Group, Inc. (a).......... 300,000 2.10 900,000 171,600 Electronic Business Systems, Inc. (formerly Triangle Imaging Group, Inc.) (a)(b)............. 56,000 0.39 -- -- Private Companies: Real Time Data Management Services, Inc. ................. 125 29.41 115,000 139,573 Delta Education Systems, Inc. ... 639 39.00 48,200 69,546 Diversified Telecom, Inc. ....... 8,998 15.00 -- -- Crispies, Inc. .................. 524 6.37 2,800 3,235 Triangle Biomedical Sciences..... 50,743 11.70 127,449 127,449 Extraction Technologies of VA, LLC............................. -- 39.00 337,567 337,567 JMS Worldwide, Inc. ............. 199 5.00 -- -- EPM Development Systems Corp. ... 87 8.00 11,600 634,278 Fire King International.......... 4 4.00 -- -- SECC (formerly MilleCom, Inc.)... 150,000 3.15 -- -- Eton Court Asset Management, Ltd. ........................... 14,943 13.00 34,700 34,700 Fairfax Publishing Co., Inc. .... 526 16.50 73,600 73,600 ISR Solutions, Inc. ............. 550,973 7.20 12,936 12,936 DigitalSquare.com................ 81,074 5.70 -- -- Answernet, Inc. ................. 69,837 17.64 268,615 268,615 TABET Manufacturing Co., Inc. ... 500,000 20.00 175,400 175,400 National Assisted Living, LP..... -- 15.00 667,000 667,000 Capital Markets Group, Inc. ..... 2,294,118 15.00 -- -- Jubilee Tech International, Inc. ........................... 400,000 1.60 240,000 240,000 Signius Investment Corporation... 12 11.67 332,595 332,595 VentureCom, Inc. ................ 38,943 0.37 -- -- New Dominion Pictures LLC........ -- 9.00 464,650 464,650 ----------- ----------- Total options and warrants...... 3,812,112 3,752,744 ----------- ----------- Total investments............... $37,826,396 $35,867,560 =========== ===========
The Company's investment portfolio at June 30, 2001 consisted of the follow- ing:
Cost or Number of Contributed Fair Market Equity Securities: Shares Value 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 Electronic Business Systems, Inc. (formerly Triangle Imaging Group, Inc.) Common Stock (b)(c)..................................... 500,000 225,000 -- Electronic Business Systems, Inc. (formerly Triangle Imaging Group, Inc.) Common Stock (b)(c)..................................... 1,423,821 60,484 -- Primal Solutions, Inc. Common Stock......... 715,167 9,503 11,404
22 SCHEDULE OF PORTFOLIO INVESTMENTS -- continued
Cost or Number of Contributed Fair Market Equity Securities: Shares Value Value ------------------ --------- ----------- ----------- 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 SECC (formerly MilleCom, Inc.) 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 DigitalSquare.com Convertible Preferred Stock (c).................................. 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. 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 Mayfair Enterprises, Inc. .................. 7/18/05 243,519 243,519 DigitalSquare.com (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 (c).............. 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 Electronic Business Systems, Inc. (formerly Triangle Imaging Group, Inc.) (b)(c)....... -- 2,038,287 92,284 ----------- ----------- Total debt securities..................... 11,229,040 6,514,395 ----------- -----------
23 SCHEDULE OF PORTFOLIO INVESTMENTS -- continued
Cost or Number of Percentage Contributed Fair Market Stock Options and Warrants: Shares Ownership Value Value --------------------------- --------- ---------- ----------- ----------- Publicly Traded Companies: Netplex Group, Inc. (a)............. 300,000 2.10 $ 900,000 $ -- Electronic Business Systems, Inc. (formerly Triangle Imaging Group, 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 -- -- 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. ....... 1,026 20.30 123,238 426,638 ISR Solutions, Inc. ................ 588,334 5.90 12,936 12,936 DigitalSquare.com................... 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 =========== ===========
(a) Rule 144A restricted securities. (b) This entity, which was considered an affiliate of the Company as of June 30, 2000, 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. 24
Shareholder Information Corporate Office Stock Transfer Agent and Investor Relations Stock Listing Registrar Norfolk, Virginia Investors with questions Investors requiring information Waterside Capital Corporation 300 E. Main Street, Suite 1380 concerning account about the company should Common Stock is traded on Norfolk, Virginia 23510 information, replacing lost or contact: the Nasdaq Stock Market Telephone: 757-626-1111 stolen certificates, under the symbol WSCC. Facsimile: 757-626-0114 transferring securities or Gerald T. McDonald waterside@watersidecapital.com processing a change of Chief Financial Officer Independent Public address should contact: Telephone: 757-626-1111 Accountants Facsimile: 757-626-0114 Registrar and Transfer gmcdonald@watersidecapital.com KPMG LLP Company Norfolk, Virginia Annual Meeting of 10 Commerce Drive Shareholders Corporate Counsel Cranford, New Jersey 07016-3572 Telephone: 800-368-5948 The annual shareholders' Williams, Mullen, Clark & Facsimile: 908-497-2310 meeting will be held Dobbins, P.C. Monday, October 29, 2001 at Virginia Beach, Virginia 11:00 a.m. at Nauticus, One Waterside Drive, Norfolk, Virginia All shareholders are invited to attend.
Directors and Officers Directors Officers Peter M. Meredith, Jr./1/,/2/,/3/ Roger L. Frost/2/ Augustus C. Miller J. Alan Lindauer Chairman of the Board Retired President and Chief President and Chief President Executive Officer Executive Officer Meredith Construction Co., Inc. Ernest F. Hardee/1/,/3/ Miller Oil Co., Inc. President and Chief Executive Gerald McDonald J. Alan Lindauer/1/ Officer Juan N. Montero, II Secretary and Chief President and Chief Executive Hardee Realty Corporation General and Thoracic Surgery Financial Officer Officer Henry U. Harris, III R. Scott Morgan, Sr../1/ Martin N. Speroni James E. Andrews President President Vice President and Director Principal Owner Virginia Investment TowneBank of Research Anzell Automotive, Inc. Counselors, Inc. Richard G. Ornstein/1/ Lex W. Troutman J.W. Whiting Chisman, Jr./1/,/3/ Robert I. Low/1/,/2/ Real Estate Management and Vice President and Business President Senior Partner Development Development Officer Dare Investment Company Goodman & Company Jordan E. Slone Marvin S. Friedberg Charles H. Merriman, III/1/ Chairman and Chief Chief Executive Officer Vice President and Managing Executive Officer Virginia Commonwealth Director Harbor Group Companies Trading Company BB&T Capital Markets Eric L. Fox Portfolio Manager Pain Webber
/1/ Executive Committee /2/ Audit Committee /3/ Compensation/Stock Option Committee WATERSIDE CAPITAL CORPORATION 300 East Main Street . Suite 1380 . Norfolk, Virginia 23510 www.waterside@watersidecapital.com