Media Coverage

Waterside Capital posts losses

But CEO has a plan to find new investments, break even on operations and turn a profit

By Michael Schwartz, Inside Business - Hampton Roads, September 24, 2007

Stockholder equity is down $5.3 million for the year.

The value of its investments is down $9 million from a year ago.

Nine of its 12 directors have resigned since May 2006.

Its share price is below $4 and the company just hired a new CFO.

Yet Lin Earley, Waterside Capital Corp.’s CEO who has been on the job just five months, somehow remains optimistic after the company filed its end-of-the-year financials earlier this month.

That optimism might exist because Earley has a plan.

“We started changing the way we were looking at things in the spring,” said Earley, who took the helm of the publicly traded SBA-licensed small business investment company in April when Alan Lindauer, Waterside’s founder, retired.

The results of those changes are still working their way through Waterside’s system. “It’s going to take a while for that to absorb,” Earley said.

The bottom line of Earley’s plan is bringing the company back to a level of profitability. He said the plan has three parts, or stool legs, as he likes to call them.

The first is finding new investments.

There are basically two ways Waterside makes money: through interest it charges its investment companies and by collecting its share of equity on the tail end of the investment.

Because those are its only two options, the company needs a continuous pipeline of companies to invest in.

“As you harvest investments you need to replace them,” Earley said.

Technology firms are no longer the popular target of firms like Waterside. Earley said the company is talking to senior-living firms, service companies, distribution firms, copier sales, advertising, business development and public relations companies. And at the moment, Earley said, Waterside is not looking at any technology firm.

“That’s not by design,” Earley said, “just happenstance.”

The drive for new investments is also taking place within a smaller geographic area than Waterside has historically operated in.

“We’ve had the beginnings of a fairly dramatic press for business in the local market,” Earley said.

Of the companies Waterside has been talking to, none are farther away than the Northern Virginia/Maryland area. And most are between Hampton Roads and Richmond, Earley said.

The second “leg of the stool,” Earley said, is breaking even on its monthly operations. Monthly income at an SBIC is pretty much left to interest payments from its investment companies. So until more investments are on the books, that means expenses must be watched carefully. Those include salaries, overhead and third-party pay-outs, Earley said.

The company said salary expenses are being reduced and its biggest hindrance, legal expenses, may finally be under control.

Because of its drawn-out disagreement with New Dominion Pictures, a Suffolk-based television production company in which Waterside invested $3 million, legal fees helped cause a net operating loss for the year of $1.35 million.

The costs associated with the legal dispute with New Dominion are close to being paid up as Waterside finally produced a tangible valuation of the company and its investment. In its year-end financial report, Waterside said it determined that New Dominion is worth $14.5 million and that Waterside’s interest in the company is worth $3.4 million.

“I’m looking forward to getting the last bill from the last attorney,” Earley said.

The last leg of the stool in returning to profitability, Earley said, “is what do we do with the investments we have?”

Exiting its investments has been a challenge and has led to lawsuits for the company in the past. Earley said it will likely exit two or three of its $21.2 million worth of investments.

The challenge, Earley said, is deciding which companies are appropriate for exit strategies and crafting those exits with the clients to assure profits and avoid disputes.

The company was actually able to collect on investments during fiscal year 2007, leaving the company with about $10 million in cash on hand. Rather than sit on all of it, the company reported that it prepaid $5.3 million of its debts with the SBA.

And in a time when everybody talks about a credit crunch and that easy money is gone, Earley said a lender like Waterside is in a good position.

“It should help us,” Earley said of the credit crunch. “If credit is tighter then we in theory should do better by our model.”

As interest remained low, Earley, a former banker, said the banks were getting aggressive and loaning money to companies that would normally fall under Waterside’s umbrella.

But now Earley said, “As it tightens, banks get more conservative.”

Earley wasn’t surprised when Waterside’s stock dropped nearly a dollar after its financial results came out.

“Certainly with results like that you’re gonna get a downward movement,” he said.

But he said he is concerned and that the only remedy will be instituting his three-legged plan.

Waterside’s stock price closed at press time at $3.60 per share. IB