Media Coverage

Tough times won't dim leader's view for Waterside Capital

By Tom Shean, The Virginian-Pilot, January 1, 2008

NORFOLK
When Franklin "Lin" Earley took over as Waterside Capital Corp.'s chief executive in April, he kept asking for manuals that described the investment company's procedures.

The retired president of Bank of America's Hampton Roads market joked about running a company without the abundance of committees and manuals that his former employer used.

"At Bank of America, there is a procedure for everything," said Earley, who joined Waterside in August 2006 as a part-time business development officer.

Culture shock has been the least of Earley's challenges. Waterside already was wrestling with mounting legal bills when he took over as its CEO. Some of its investments had soured, and lining up new investments had almost come to a standstill.

Waterside's financial results for the fiscal year that ended June 30 turned out to be more dismal than those posted for 2006: Its net operating loss swelled to $1.35 million, more than three times what it lost a year earlier. Meanwhile, its shareholders' equity plunged by $5.36 million, or 36 percent.

As a small business investment company chartered by the Small Business Administration, Waterside lends money and provides equity capital to small companies that are expanding, launching new products, buying out a partner or going through other changes. Unlike venture capital companies, which provide money for startups and young enterprises, Waterside concentrates on investing in established businesses.

Like other small business investment companies, Waterside generates part of its income from the spread between its cost of funds and the yield on its loans. It also seeks to profit on the appreciation of its equity investments.

However, recovering some of its investments has proved difficult. One recent legal battle involved efforts to recoup its investment in New Dominion Pictures, a Suffolk producer of TV programming. The dispute, which involved the value of New Dominion's film library, was settled days before a trial was scheduled to begin in early August.

Peter Meredith Jr., chairman of Waterside's board, credited Earley with resolving the dispute and addressing other problems.

"We've gone from fighting" with New Dominion "to being friends, and Lin helped broker that," he said.

While Earley was serving as Waterside's business development officer, "it was clear that he had lots of other skills," including those for negotiating and managing, Meredith Jr. recalled.

Earley, a 60-year-old native of Chesapeake, succeeded Alan Lindauer, when Lindauer, Waterside's founding CEO, retired earlier this year.

Another problem Earley encountered was the heightened scrutiny Waterside received from the Small Business Administration. The company's chronic losses and erosion of capital provoked concerns at the SBA, a major source of the money that Waterside invests. The company has met with the SBA and reviewed its strategic plan with the government agency, Earley said.

"Are we performing at a level with a gold star by our name? No," he said.

However, Waterside's capital ratios have improved from what they were a year ago, and the company has maintained what Earley described as a good relationship with the SBA. "They have been very good to work with," he said.

One way to strengthen Waterside's capital ratios would be to raise fresh capital. Part of Earley's plan for Waterside is to raise additional capital by means of a public stock offering. However, details about an offering have not yet been defined, he said. The company raised more than $8 million from an initial public offering in 1998.

Winning over Waterside's existing stockholders could be difficult. The company's shares, which trade in the Nasdaq market, closed Monday at $1.40. That was a low for the year and down almost 70 percent from their 52-week high of $4.78 in June.

The other way to improve the company's capital ratios requires generating sustained earnings, especially from interest income and fees. As part of his plan for reviving Waterside, Earley has sought to retrieve investments the company made during the 1990s and put that money to work in other companies.

His biggest surprise so far, Earley said, has been the difficulty finding investment opportunities in Hampton Roads that meet Waterside's criteria.

"We get a lot of unsolicited requests," but these usually have been sent to several prospective investors, he said. "The most attractive ones come through referrals, and they aren't around long before they're gobbled up."

For years, Waterside invested in companies throughout the eastern United States. Since taking over as CEO, Earley has narrowed its search for investment opportunities to Hampton Roads, the Richmond area and eastern North Carolina.

One challenge, said Earley, is the competition from a handful of small business investment companies based in Raleigh, Greensboro and Charlotte that do business in Virginia.

Despite the results for fiscal 2007 and the competitive environment, the veteran banker expressed optimism that Waterside will generate sustained operating income for the year ending June 30.

"We're not totally out of the woods yet, but I have a much higher degree of confidence today," Earley said.

Tom Shean, (757) 446-2379, tom.shean@pilotonline.com