Media Coverage

Waterside files proxy and annual report
New CEO Lin Earley addresses turnaround goal in letter to shareholders

By Michael Schwartz, Inside Business - Hampton Roads, November 5, 2007

A lot has happened since Waterside Capital last held an annual shareholders meeting.

Its founder, Alan Lindauer, retired as president and CEO and soon after resigned as chairman of the board.

Taking his place as CEO was Lin Earley, who joined the Norfolk-based publicly traded small business investment company in August 2006. Six of Waterside's directors resigned in fiscal year 2007. A seventh, Augustus “Gus”Miller, recently informed the company that he did not want to be re-elected to the board of directors when his term ends at the annual meeting this month, according to its proxy filed with the Securities and Exchange Commission on Oct. 26.

Longtime CFO Gerald McDonald announced his retirement and his replacement Julie Stroh was quickly hired in August.

Since its shareholders last formally met face to face with management, the company filed and ultimately settled what became a costly, seven-month legal dispute with one of its investment companies, Suffolk-based New Dominion Pictures. And during that time, Waterside has being losing money, recording a net operating loss of $1.35 million or $0.71 per share as of June 30. Its share price has sunk to its lowest level in four years, closing at $2.78 on Oct. 29.

But on Nov. 20, shareholders will finally be formally introduced to the company's new leadership at its 2007 annual meeting at 150 West Main St. in Norfolk.

Many shareholders will not only meet Earley and Stroh for the first time; they will also hear Earley explain his plans for the future of Waterside.

Earley broke the ice in a letter to shareholders included in the company's annual report that was filed with the SEC on Oct. 26.

“I joined Waterside in August 2006 as the business development officer because I felt the company had potential for solid and sustained growth,”Earley said in the letter.

Earley has always talked openly about the company's recent struggles and the letter to shareholders was no different.

“When I took the helm as Waterside's CEO in April 2007, I implemented a plan designed to bring the company back to profitability,” Earley's letter said. “We're getting there, but not quite yet. As you will see from the 2007 financial earnings report, the numbers are not pretty.”

The letter then outlined his plans to turn things around.

The first move, he explained, was hiring Stroh, whose experience at the Small Business Administration and dealing with SBICs should be an asset.

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

Part of that expense control is reducing salaries. According to its latest proxy, the company will no longer have to pay any salary to Lindauer, who earned total compensation of $104,347 during fiscal year 2007. But Waterside still must pay Earley and its president Martin Speroni. Earley and Speroni earned total compensation of $105,738 and $159,521 in 2007 respectively. Earley's annual salary as fulltime CEO is $150,000. Former CFO McDonald earned a total of $156,445 in 2007. The proxy did not state how much Stroh will earn.

Ending its lawsuit and successfully ending its investment with New Dominion will also benefit the company in the coming year.

The annual report said the company suffered an unrealized investment valuation loss on its investments of $2,673,289, due primarily to a write-down in New Dominion Pictures of $3,647,758.

As for growing its loan and investment portfolio, which as of June 30 had a fair value of $21.2 million compared with $30.2 million reported on June 30, 2006, Earley's letter said the company plans to apply in May to the SBA to refinance its exiting debentures with a new 10-year commitment.

“We also will continue to explore new sources of capital to re-establish our capital position, which is critical for a successful future,”he said.

Before closing out its fiscal year, the company did originate new investments of $5.3 million compared to just $300,000 during the prior year.

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

At the annual meeting, shareholders will also elect seven directors to the company's board to replace the 10 that will have left since 2006. The proxy also showed that Kenneth Lindauer, son of the company's founder, became a director July 1 and owns 7.7 percent of Waterside's stock. IB