Media Coverage

Waterside CEO predicts a profitable future, soon
Stock price tanked, directors resigned in 2007

By Philip Newswanger, Inside Business - Hampton Roads, November 26, 2007

In his first major address as CEO, Franklin Earley assured shareholders at its annual meeting in Norfolk that Waterside Capital Corp. is an economic catalyst for Hampton Roads and Virginia and that the company will return to profitability.

“We are getting there,” Earley said, “but not quite yet.”

The numbers weren’t pretty for 2007, Earley said.

The publicly traded small business investment corporation posted a net income of $27,000 for the quarter, which ended Sept. 30, prior to gains and losses on investments, compared to a loss of $204,000 for the same period in 2006.

Accounting for gains and losses on investments, Waterside posted a $101,000 loss at the end of the quarter compared to a $1.4 million loss for the same period in 2006.

“We believe that Waterside’s financial performance can show marked improvement and that we can reach profitability on a quarterly basis by the end of 2008,” Earley said.

Waterside’s stock, which is traded on the Nasdaq stock exchange, has consistently fallen over the past seven years, from a high of $8.50 a share in May of 2000 to $3.10 a share as of Nov. 19. As of last Tuesday, Nov. 20, the company had 1,915,548 shares.

As a mezzanine investor, Waterside puts together debt and equity packages for later-stage companies that have revenues ranging from $500,000 to $3.5 million and with sales above $10 million.

Waterside’s goal is to finance a company for six to eight years, generate a return for its shareholders and then spin off the company on its own.

“As an SBIC, we love our clients,” Earley said, “but we want them to move [to the next level].”

This year was a transitional one for Waterside Capital. A slew of longtime directors resigned in 2007 while the stock price continued to drop amid poor financial performance. Most directors resigned for personal reasons, according to statements filed with the Securities and Exchange Commission.

Earley, retired from Bank of America, joined Waterside as a business development manager in August 2006, signaling a change in leadership at Waterside.

J. Alan Lindauer, the company’s founder, CEO and president, resigned March 31 after running the company since 1993. Earley was appointed as the company’s CEO.

Martin Speroni was appointed president after serving as the company’s research director for six years and Julie Stroh, formerly with the Small Business Administration, was appointed the company’s chief financial officer.

Joining Waterside recently is Joel McIntyre, a financial analyst.

The management changes, Earley stressed to shareholders, are part of his effort to return the company to profitability.

The other part is operational changes.

“We are also focusing on expense control, harvesting investments and ramping up business development activities to generate new risk-appropriate investments,” Earley said.

To reduce its interest expense and improve operating performance, Waterside pre-paid $5.3 million it owes the SBA.

Waterside also reduced salary expenses by $100,000 and curtailed legal expenses, with further reductions in 2008, Earley said.

“We will fall back to our historical average” in legal expenses, Earley said. According to Waterside’s annual report, legal and accounting expenses rose from $129,882 in 2005 to $995,840 in 2007. Accounting fees amounted to $66,525 in 2006 and $58,000 in 2007.

“Our pipeline of prospective deals that we give a 50 percent probability of closing in 90 days is $2.5 million,” Earley said.

Since the beginning of fiscal year 2007, July 1, Waterside has closed two investments for a total of $1.75 million, Earley said.

Shareholders approved the ratification of PKF Witt Mares as the firm’s accountant and approved by a vote of 1.48 million shares to an estimated 12,000 shares the appointment of seven directors, including Earley and Kenneth Lindauer, Alan Lindauer’s son.

The senior Lindauer, who owns more than 200,000 shares of Waterside, wasn’t present at the meeting.

“He’s smarter than any of us,” Earley said. “He’s on his new boat and enjoying the outdoors.” IB