Media Coverage


Waterside Capital to wring out more expenses

By Michael Schwartz, Inside Business - Hampton Roads, Nov. 24, 2008
michael.schwartz@insidebiz.com

Lin Earley, CEO of Norfolk-based Waterside Capital Corp., began his presentation at the company’s shareholder meeting last week with a joke.

Addressing a room of about 20 executives, directors and shareholders of the publicly traded small business investment company, Earley said that while he wishes he could report a stellar year of financial performance, at least for one brief period over the past year, Waterside stock was trading higher than Wachovia stock.

That was in September and it didn't last long.

A year ago, the closely held and thinly traded Waterside stock was worth well over $3 a share. For the past week it has sat unchanged at $0.65 a share, trading as low as $0.40 at the beginning of the month.

"Last year this time I told you I was excited about the future of the company and its potential return to profitability," Earley said. "Despite the economy I'm still pretty optimistic about that. We are moving forward rather than backward."

Earley told those in attendance he was proud to report the company has taken steps to cut expenses.

"We've wrung a lot of expense out of the company," he said. And there is still more of that expense control to come, he added.

Waterside reduced executive salaries by $100,000 and lowered litigation expenses from $1 million to $50,000, he said. According to the company's recent proxy, a portion of that $100,000 in salary reduction resulted from the fact that this year for the first time the company no longer had to pay the salary of its retired founder and former president and CEO, Alan Lindauer. Waterside also paid its retired CFO, Gerald McDonald, $78,000 less than last year. While those figures were off the books, the reductions were partially offset by the raises received by Waterside executives.

Litigation is an expense category that has plagued Waterside during the past few years because of costly lawsuits dealing with some of the companies it has invested in.

Earley said the company is reassessing its methods of underwriting, record keeping and how it monitors the performance of its investment companies.

Given the economic times, Earley said, Waterside believes it is important to call on its portfolio companies to see how they are dealing with the situation and planning for hardships likely in the near future.

As of Sept. 30, the value of the company's loan and investment portfolio was $20.84 million, down from $23.22 million a year ago.

The value of some of Waterside's investments has decreased; it had to devalue some because of the downturn in the economy.

"As the economy tips down we are having to adjust valuations," Earley said.

For its fiscal quarter that ended Sept. 30, Waterside reported a net operating loss of $164,000, a loss greater than the $113,000 it lost a year ago. It released these figures the day after its annual meeting last week, reporting earnings on a quarterly basis for the first time. The company has historically reported semiannually.

During this most recent quarter, the company originated $190,000 in new investments, down considerably from the $4 million it originated in the same period last year. It took in proceeds of $30,000 from investments during the quarter, down from $2 million in proceeds it generated a year ago.

Part of the reason for that slowdown in production, Earley said, is that Waterside and its small staff were focused on the time-consuming process of refinancing its debt with the Small Business Administration. It had $16.1 million of outstanding debentures that were set to mature at the end of the year.

Waterside refinanced that $16.1 million for an additional 10 years at a lowered interest rate of 6.5 percent, an all-time low rate for its SBA debt, Earley said. The company believes it will save about $300,000 a year by refinancing.

While that process slowed efforts at generating new business opportunities, it was necessary. Had this amount matured as scheduled, Earley said, "the company would have had to go through a controlled liquidation."

In the near future Waterside has its sites set on raising additional capital with which to fund new investments.

"If we can open the investment gates again," Earley said, it will push the company back in the black.