Media Coverage


Firm refinances debt
Waterside Capital to seek to raise funds

By Michael Schwartz, Inside Business - Hampton Roads, Sept. 15, 2008
michael.schwartz@insidebiz.com

There’s a half empty/half full aspect to the kind of financial year Waterside Capital Corp. had in fiscal 2008. On one hand, the company was close to breaking even for the first time in many years. Its net operating loss was down to $309,232, an improvement over last year by more than $1 million.

Its realized loss on its investments was $1.89 million for the year, mostly attributed to a $1.94 million write-off from its investment in Texas-based International Wood.

Norfolk-based Waterside originated and funded $5.9 million in new investments during the year that ended June 30, $600,000 more than 2007.

On the other hand, the publicly traded small business investment company's stock has been trading under $2 a share since it first began its plunge in December. A year ago it was trading above $4 a share. As of press time it stood firm at $1.25. Stockholder equity, while it decreased $2.14 million for a loss of $1.12 per share, showed upward momentum compared to last year’s loss of $2.80 per share.

So Lin Earley, Waterside's CEO, is faced with being a manager who is somewhat pleased with the year’s results while at the same time dealing with shareholders whose stocks are barely worth more than a McDonald's double cheeseburger.

As usual, Earley remains upbeat as he looks ahead. He said the results showed "marked improvement, but not as much or as fast as I would have liked."

He said the $1.94 million International Wood loss came as a surprise and that mid-year, the company was on track to break even.

Waterside Capital made its first investment in International Wood in 2001. International Wood went under and Waterside, along with its frequent investment collaborator CapitalSouth Partners, bought IW out of bankruptcy court. Each took an equity stake in the company after selling it to a firm specializing in turnarounds. When a hurricane blew into the company's hometown, Earley said its doors were never reopened.

"You are always going to have some losses in this business because it's much higher risk."

The highlight of the year, Earley said, is that Waterside was able to refinance its $16 million worth of debt with the U.S. Small Business Administration.

The debt was set to mature in February at an interest rate of about 8 percent. Waterside was granted an additional 10 years on its terms with the SBA while lowering its interest rate. That could save the company as much as $300,000 a year.

In its earnings release, the company said its success is dependent on refinancing the debt. Earley said that is because the company needs additional capital it will likely raise from a stock offering. "It's hard to talk to an investor about additional funds when you have $16 million in debt," he said.

Waterside will soon seek to raise between $3 million and $10 million in additional capital through either private or public offerings of common or preferred stock.

The additional capital will help fund future investments and is necessary because of Waterside's losses.

On June 30, the company's loans and investments were valued at $20.9 million, down from $21.2 million from a year ago. It made $5.9 million in new investments during the year and collected $5.2 million from investments.

Earley did admit that the company's struggles have been preventing it from getting in on deals that it would normally go after. "We've not been able to capitalize to the fullest extent because of our own condition," he said.

And time is of the essence, he said, as banks and other equity firms have been tightening their standards and taking less risk. For a while as things were hot in the financial markets, banks and other firms that normally don't like the type of risk were invading Waterside's typically niche market of mezzanine finance.

In its search for new capital, Earley said he believes most will come "from within Hampton Roads and Richmond, where we're better known."

Raising capital could mean more bad news for shareholders in the short term because it dilutes the stakes of existing shareholders, which likely won't go over well because of the stock's performance.

"It's more of a concern to be able to explain to existing shareholders that it's needed and in their long-term best interest," he said. As for the stock's performance, Earley said the conditions of the financial marketplace aren't helping things as any stock labeled financial-related has been taking a hit. But Earley doesn't make excuses.

"I blame most of Waterside's problems on itself, not the market."