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Item 1. Business

2018-04-12 compared with 2002-09-27 · 288 added, 480 removed, 0 unchanged (100% of the section changed)

Waterside Capital Corporation (the Company) began business

operations in July 1996 after receiving its Small Business Administration (SBA) license and closing its initial private placement of Common Stock.

The Company made its first portfolio investment in October 1996 and, as of June 30, 2002,

has approximately $27.6 million in investments at fair value in 29 portfolio companies.

The Company is a

closed-end investment company licensed by the SBA as a small business investment company (an SBIC) under the Small Business Investment Act of 1958, as amended (the SBA Act).

The Company invests in equity and debt securities

of small businesses to finance their growth, expansion and modernization.

Its equity investments have generally been in the form of preferred stock bearing current-pay dividends.

The weighted average dividend on its preferred stock investments, at

fair value, is currently 9.08%.

The weighted average annual interest rates on its loans, at fair value, is currently 11.55%.

To date, the Company has made most of its investments in preferred stock because, as an SBIC, its dividend income is

Its equity and debt financings are generally coupled with warrants to acquire common stock representing a minority interest in its portfolio companies.

The Company seeks to achieve current income from origination fees, preferred stock

dividends and interest on loans, as well as long-term growth in the value of its net assets through the appreciation of its common stock positions in portfolio companies.

Although the Company continues to consider new investment opportunities, as a

result of the current downturn in the economy, the Company is currently devoting most of its management resources toward assisting its existing portfolio companies.

As the economy improves, the Company expects that it will return its focus toward

seeking new investment opportunities.

After it returns its focus toward finding attractive new investment

opportunities, the Company expects to generally make future investments ranging from $500,000 to $2,500,000 in equity and debt securities of small businesses, although under special circumstances, its investments may be less than or exceed this

The Company believes that investments of this size will be appropriate given the size of its Private Capital (defined as eligible capital paid for capital stock and additional paid-in capital) base and that non-traditional lenders and

investors often focus on larger investments and reject attractive companies with funding needs in this range.

When evaluating potential investment opportunities, the Company targets portfolio companies that meet certain investment criteria including potential for significant growth, experienced management teams with significant ownership

interests and strong financial histories.

The Company believes that the market for financing small businesses, either through equity or debt, is underserved by traditional sources of capital and that many of its potential competitors are burdened

with overhead, administrative and regulatory structures that hinder them from competing more effectively in this market.

The Company raised its Private Capital through private investments by individuals, businesses, financial institutions and governmental entities located primarily in eastern Virginia and through its January 1998 public offering.

Private Capital includes approximately $5.5 million invested by certain accredited investors.

In addition, the Company obtained $8,083,536 of net proceeds from its initial public offering in February 1998.

To fund its equity investments

and debt financings, the Company has used its private and public offering proceeds as well as borrowed funds from the SBA (SBA Debentures) which are available to the Company for up to 10 years.

At June 30, 2002, the Company had drawn

down debentures totaling $25.4 million payable to the SBA.

The $25.4 million outstanding debentures bear interest at a weighted average fixed interest rate of 7.97%,

including an annual service fee of 1.0%, and mature between March 1, 2009 and September 1, 2012.

The debentures require semi-annual payments of

interest only, with all principal due upon maturity.

During the first five years outstanding, the SBA Debentures are subject to a prepayment penalty.

In addition to the periodic interest rate described above, the Company pays a 1.0% one-time fee on

all SBA Debentures at the time of approval by the SBA and a 2.5% one-time fee on amounts actually drawn by the Company.

Incorporated in Virginia on July 13, 1993, the Company is registered under the Investment Company Act of 1940 (the Investment Act).

Its main office is located at 300 East Main Street, Suite 1380, Norfolk, Virginia 23510,

and its telephone number is (757) 626-1111.

Although the Company continues to consider new investment opportunities, as a result of the current downturn in the economy, the Company is currently devoting most of its

management resources toward maximizing the return provided by its existing portfolio companies.

As the economy improves, the Company expects that it will return its focus toward seeking new investment opportunities.

These opportunities include

seeking to provide growth capital financing to small businesses.

Primarily through their experience in business and with financial institutions, management and members of the Executive Committee of the Companys Board of Directors (the

Executive Committee) have developed a level of expertise in identifying and developing new investment opportunities in this market.

When evaluating potential investment opportunities, the Company targets portfolio companies that meet

certain criteria, including potential for significant growth, experienced management teams with a significant ownership interest and strong financial histories.

The Company believes the market for small commercial loans is underserved by traditional

lending sources.

Traditionally, small businesses have relied on commercial banks to provide debt financing to fund growth.

In the latter half of the 1980s and the early 1990s, funds from these traditional lending sources diminished as

commercial banks consolidated market share and sought to limit both credit exposure and administrative expense associated with monitoring numerous small company loans.

The Company also believes that many of its competitors are burdened with

overhead, regulatory and administrative structures that hinder them from competing more effectively in this market.

As a result of these fundamental changes, a significant opportunity has developed for nontraditional lenders to provide not only debt

financing to, but also equity infusions in, small companies, creating the potential for attractive risk-adjusted returns.

To expand its investment opportunities after it returns its focus toward finding new investments, the Company is also

investigating the possibility of restructuring its operations to enable it to pursue investment opportunities not available to SBICs because of regulatory constraints, as well as seeking to acquire SBIC-eligible investments from other investment

Investment Objectives

The investing formats of SBICs can range from making long-term secured and unsecured loans to providing equity capital.

The Company has utilized, and anticipates continuing to utilize after it

returns its focus toward seeking new investments, both types of investments to achieve a balanced portfolio of both equity and debt investments structured to meet the individual needs of, and the investment opportunities associated with, its

portfolio companies.

With each investment, the Company seeks to achieve current income through origination fees,

preferred stock dividends and loan interest and long-term growth in the value of its assets through appreciation of its common stock interests in portfolio companies.

The Company attempts to structure its asset portfolio for relative safety and

soundness, while, at the same time, provide for equity features that will permit it to achieve returns commensurate with its risks.

Management believes that an attractive return can be obtained on appropriately structured investments in small businesses, provided that the principals of such business contribute the requisite skill and dedication.

Selection Of Investment Opportunities

The Company has invested, and after the economy improves expects to continue investing, in a wide range of businesses including manufacturing and service firms.

Since making its first investment in

late 1996, the Company has identified certain key elements for investing in emerging growth small businesses.

The Company initiates its investment decisions by analyzing traditional criteria for making any equity or debt investment or granting any

character, collateral, growth potential, capacity to repay, financial and credit history and other factors.

After an initial screening based on these factors, management recommends to the Executive Committee investments in those small

businesses it believes will succeed and contribute to the profitability of the Company.

In general, although obviously involving substantially more risk, providing growth capital to small businesses can generate a higher return on investment because

these companies often have higher growth rates of revenues and profits than larger, more established firms.

The Company generally has not focused on making loans to, or investments in start-up

companies that may have difficulty making current dividends or interest payments, although most investments are in early-stage companies and the

Company expects to continue to make such investments in the future.

Traditional lenders require certain standards

before affirmatively considering a loan.

Among others, these standards include debt service coverage ratios, profit history, adequate working capital and collateral security.

The Company includes these factors in its decision-making process, but

also attributes significant weight to products, market size, growth potential, capability of management and exit strategies for the equity portion of its investment.

To identify an exit strategy, management carefully studies the portfolio

companys growth potential, as well as historical financial performance.

Settlement of Investments

The Company has made, and after it returns its focus toward finding new investment opportunities expects to continue to make its equity

investments with the intention of liquidating the investment for cash within five to seven years, although situations may arise in which it may hold equity securities for longer periods.

Its loans are generally made for a minimum of five years.

Company expects that a successful investment will result in the redemption of preferred stock with dividends or the repayment of a loan with interest, and a gain on the sale of the portfolio companys common stock, generally through the

exercise of warrants acquired in connection with the investment or the conversion of convertible securities.

Preferred stock purchased by the Company generally bears a put option, exercisable after five years, requiring the portfolio company to repurchase the shares at par, together with any unpaid dividends.

The warrants it

acquires often carry a similar put option, also exercisable generally after five years, requiring a repurchase of the underlying common stock at fair market value.

The warrants typically also contain anti-dilution provisions and are detachable and

transferable.

Before making any investment, the Company analyzes the potential for the portfolio company to

experience a liquidity event that will allow the Company to recover the purchase price of its preferred stock investments or to have its loan repaid and to realize appreciation in its common stock positions.

Liquidity events include, not only the

exercise of put options or loan maturity, but an initial public offering or the sale, merger or recapitalization of the portfolio company.

Asset/Risk Management

Investment in a small business, whether by debt or equity,

necessarily involves the risk that the debt will not be repaid or that the equity component will remain illiquid even if the portfolio company performs and underlying value is present.

The Company has recorded realized and unrealized losses on some

of its investments and expects that losses will occur in its investments in the future.

Such losses, net of gains, amounted to $2.9 million during the Companys 2002 fiscal year as compared to $5.98 million in fiscal 2001.

Management attempts

to minimize any such losses through several strategies.

Limitation On Investments In One

Except with prior SBA approval, SBA regulations allow only up to 20% of an SBICs Regulatory Capital (defined as Private Capital less certain non-cash assets) to be committed to one portfolio company.

Currently, this would allow the Company to invest up to $3.2 million in one portfolio company.

The Company has adopted a policy allowing an investment to approach this outside limit only in rare circumstances.

The Companys largest investment

in any one portfolio company is currently $3.1 million.

Appropriate Underwriting

Management analyzes each proposed transaction.

If the analysis does not reveal an investment meeting the Companys underwriting standards, management promptly notifies the applicant business of the denial

of its funding request.

Management examines numerous applications for every investment recommended to the Executive Committee.

Management rejected a number of investments in fiscal 2002.

Executive Committee Approval .

If the investment appears to management to meet Company underwriting standards, it must be presented to the

Executive Committee for additional evaluation and approval.

The Executive Committee may reject any investment presented by Management.

Board Representation .

The Company generally requires portfolio companies to have a majority of the members of its boards of directors who are not shareholders or employees.

The Company also

requires that it have the right to designate one or more members of the board.

Management closely and frequently monitors the performance of each portfolio company through its board representation and otherwise.

The Company requires the submission of financial

statements on a periodic basis, but it understands that such submission alone does not provide the timely information necessary to evaluate current performance.

The Company believes that, by the time financial statements are submitted and analyzed,

many problems may be out of control and beyond solution.

Accordingly, it attempts to stay in contact with its portfolio companies on a regular basis.

As a result of the recent

economic downturn, most of the Companys management resources have been devoted to monitoring and assisting the Companys existing portfolio companies

Default Covenants .

Typically, the Companys investment documents contain covenants allowing the Company

to acquire control of the board of directors of the portfolio company and replace its management, if necessary, in the event certain financial standards are not met or maintained.

Portfolio Companies

As of June 30, 2002, the Company has

investments in 29 portfolio companies, with a fair value of approximately $27.6 million.

The SBA raises capital to enable it to provide funds to SBICs by guaranteeing certificates or bonds that are pooled and sold to purchasers

of government-guaranteed securities.

The amount of funds that the SBA may lend is determined by annual Congressional appropriations of amounts necessary to cover anticipated losses in the program (the Subsidy Rate).

If the Subsidy Rate

is reduced, the same level of Congressional appropriations will support higher levels of SBA Leverage available to SBICs.

Congress authorizes appropriations to the extent it determines to fund SBIC borrowings from the SBA.

To be eligible to use funds provided by the SBA, an SBIC must obtain a license and satisfy other requirements.

The need for SBA Leverage

must be established.

To establish need, an SBIC must invest 50% of its Leverageable Capital (defined as Regulatory Capital less unfunded commitments and federal funds) and any outstanding SBA Leverage.

Other requirements include compliance with SBA

regulations, adequacy of capital and meeting liquidity standards.

An SBICs license entitles an SBIC to apply for SBA Leverage, but does not assure it will be available or that, if available, it will be available at the level of the relevant

matching ratio.

Availability depends on the SBICs continued regulatory compliance and sufficient SBA Leverage being available when the SBIC applies to draw down SBA Leverage.

SBICs may obtain up to $105.2 million in SBA Leverage in the following ratios:

Leverageable Capital

Matching Ratio

First $17.5 million

$52.5 million

Second $17.6 million

$35.2 million

Third $17.5 million

$17.5 million

SBA Debentures are issued with 10-year maturities.

Interest only is

payable semi-annually until maturity.

Ten-year SBA Debentures may be prepaid with a penalty during the first 5 years, and then are prepayable without penalty.

The Company currently has been approved to obtain SBA Leverage at the 2:1 Matching Ratio

and management does not believe that it is likely that it will be approved at the 3:1 Matching Ratio in the foreseeable future.

Temporary Investments

Pending investment in portfolio company securities, the Company has,

and will continue to invest its otherwise uninvested cash in (i) federal governmental or agency issued or guaranteed securities that mature in 15 months or less, (ii) repurchase agreements with banks with maturities of seven days or less, the

underlying instruments of which are securities issued or guaranteed by the federal government, (iii) certificates of deposit which are insured by the Federal Deposit Insurance Corporation (the FDIC) with maturities of one year or less,

up to the amount of the deposit insurance, (iv) deposit accounts in an FDIC insured bank subject to withdrawal restrictions of one year or less, up to the amount of deposit insurance or (v) certificates of deposit or deposit accounts in an FDIC

insured bank in amounts in excess of the insured amount if the insured bank is deemed well-capitalized by the FDIC.

Investment Adviser

The Company has no investment adviser.

The Company competes with so-called angel investors, venture capital investment firms, other SBICs and non-traditional investors that, like the Company, take

equity positions in small businesses.

Some of its competitors invest in earlier stage companies that typically cannot pay dividends and interest on a current basis.

These types of investments do not generally fit within the Companys investment

guidelines, but can offer attractive investment returns to the Companys competitors who provide this type of financing.

The Company also competes, to a limited extent, with commercial banks and commercial finance companies.

competitors have substantially greater assets, capital and personnel resources than the Company.

The Company believes that because of its size and structure it can tailor equity investment or loan terms to a portfolio companys needs and

circumstances better than many of its larger competitors.

The Company also believes that it competes effectively on the basis of its reputation, responsiveness and the quality of its service in its timely analysis and decision-making processes.

The Company has six full-time employees.

The Company has maintained, and intends to continue to maintain, low personnel overhead by extensively utilizing, in particular, the members of the Executive Committee and the members of its

Board of Directors for business referrals, marketing, and investment analysis.

Investment Policies

The following policies of the Company with respect to the activities described below are matters of fundamental policy in accordance with

Sections 8(b) and 13(a) of the Investment Act.

These policies may not be changed without the approval of the lesser of (i) 67% of the Companys shares present or represented at a shareholders meeting at which the holders of more than 50%

of such shares are present or represented or (ii) more than 50% of the outstanding shares of the Company.

The Company is permitted to issue the maximum amount of SBA Debentures permitted by the SBA Act and SBA regulations.

The Company is permitted to borrow money only for the purpose of investing in, and making loans to, Small Business Concerns, as defined below.

It is, however,

permitted to finance the acquisition of capital assets used in its ordinary business operations.

The Company is not permitted to engage in the business of underwriting the securities of other issuers.

It anticipates that substantially all of its investments

in Small Business Concerns will be in securities that may not be sold to the public without registration, or an exemption from registration, under the Securities Act of 1933.

The vast majority of the Companys current equity investments in

Small Business Concerns are so restricted.

The Company is prohibited from concentrating more than 25% of the value of its assets, determined at the time an investment is made, exclusive of U.S.

government securities, in securities issued by companies engaged primarily in the same industry.

The Company is prohibited from engaging in the business of purchasing or selling real estate.

The Company may bring mortgage foreclosure actions and take title

to and possession of property with respect to which it is the mortgagee in accordance with applicable mortgage foreclosure laws.

Additionally, the Company may purchase office facilities, although, at present, it leases its office facilities.

The Company is not permitted to engage in the purchase or sale of commodities or commodity contracts.

The Company is permitted to make loans and loans with equity features to, as well as equity investments in, Small Business Concerns to the extent allowed by the

SBA Act and SBA regulations.

The Company is also permitted to extend credit to shareholders to finance the purchase of its or their capital stock.

So long as the Company is licensed as an SBIC, it may only conduct those activities permitted by the SBA Act and SBA regulations and policies.

The Companys policies with respect to the following matters are not

fundamental policies and may be changed, subject to the SBA Act and SBA regulations, by the Companys Executive Committee without shareholder approval.

(a) The Company may make investments in equity and debt securities of Small Business Concerns as approved by the Executive Committee.

(b) The Company has no strict policy regarding the percentage of its

assets that may be invested in any specific type of security.

The Company follows SBA regulations prohibiting investment in any single Small Business Concern and its affiliates exceeding 20% of the Companys Regulatory Capital except with prior

SBA approval.

of exercising control of management and does not intend to do so in the future.

Except where necessary to protect an investment, where there has been a breach of the financing agreements, where there has been a substantial change in the Small

Business Concerns operation or when financing a start-up company, SBA regulations prohibit SBICs from controlling a Small Business Concern.

(d) The Company does not invest in securities of other investment companies and does not intend to do so in the future.

(e) The Company intends to hold its portfolio debt securities for a minimum of five years, to the extent required by SBA regulations

or until maturity.

It anticipates retaining its equity investments from five to seven years.

Determination of Net Asset Value

The Board of Directors has delegated to the Executive Committee the sole responsibility for determining the

asset value of each of the Companys equity investments and loans and of its portfolio in the aggregate.

The Executive Committee determines the value of its portfolio companies quarterly, as soon as practicable after and as of the end of each

calendar quarter.

Investments are carried at fair value, as determined by the Executive Committee.

The Company, through its Board of Directors, has adopted the Model Valuation Policy, as published by the SBA, in Appendix III to Part 107 of Title 12

of the Code of Federal Regulations (the Policy).

The Policy, among other things, presumes that loans and investments are acquired with the intent that they are to be held until maturity or disposed of in the ordinary course of business.

Except for interest-bearing securities which are convertible into common stock, interest-bearing securities are valued at an amount not greater than cost, with unrealized depreciation being recognized when value is impaired.

Equity securities of

private companies are presumed to represent cost unless the performance of the portfolio company, positive or negative, indicates otherwise in accordance with the Policy guidelines.

The fair value of equity securities of publicly traded companies

are generally valued at their quoted market price discounted due to the investment size or market liquidity concerns and for the effect of restrictions on the sale of such securities.

Discounts range from 15% to 40% for investment size and market

liquidity concerns.

Discounts for restriction on the sale of the investments are 15% in accordance with the provisions of the Policy.

The Company maintains custody of its investments as permitted by the Investment Act.

Pursuant to SBA regulations,

investments are deemed to be fair value if such values are determined by the Executive Committee in accordance with SBA valuation policy.

This requirement is consistent with the procedure for determining fair value contained in the

Investment Act.

The Companys policy is that equity investments be held for five to seven years and loans for a minimum of five years (as required by SBA regulations) or until maturity.

Executive Officers

The following table sets

forth the names, addresses, ages and positions with the Company of all executive officers of the Company.

Information concerning their principal occupation and background follows.

Name and Address

Position and Offices With the Company

Alan Lindauer

300 East Main Street Suite

Norfolk, VA 23510

President and Chief Executive Officer

300 East Main

Virginia Beach, VA 23454

Chief Financial Officer, Secretary and Treasurer

300 East Main

Vice President and Director of Research

Norfolk, VA 23510

300 East Main

Norfolk, VA 23510

Vice President and Business Development Officer

Alan Lindauer has served as a director since July 1993

and as Chairman of the Executive Committee of the Company since December 1993 and since March 1994 as its President and Chief Executive Officer.

Since 1986, Mr.

Lindauer has been President of JTL, Inc., a business consulting firm.

Lindauer is a

Certified Management Consultant.

McDonald serves as Secretary, Treasurer and Chief Financial

Officer of the Company effective February 1, 1998.

During 1997, Mr.

McDonald was Virginia Financial Manager of Branch Bank & Trust Corp.

From 1987 through July 1996, Mr.

McDonald was Chief Financial Officer of Commerce Bank

Speroni has served as Director of Research since November 1998.

Between 1993 and 1997 Mr.

Speroni traded fixed

income securities for Raymond James & Associates.

Before that he was a financial analyst with Continental Grain Company, a New York based international conglomerate.

Speroni holds an MBA from Columbia University and an M.A.

University of South Florida.

Troutman has served as a Business Development Officer since May 1998.

From 1981 to 1992, he served as a Senior Vice President of Crestar Bank.

From July 1992 to May 1998, he served as Principal of Meridian Investment Company, Inc., a business consulting firm.

Troutman is a Certified Public Accountant.

Readers of this Report should consider carefully the specific factors set forth below as well as the other information included in this Report.

All statements and information in this Report, other than statements of

historical fact, are forward-looking statements based on a number of assumptions concerning future conditions that ultimately may prove to be inaccurate.

These forward-looking statements may be identified by the use of words like

believe, expect, intend, target and anticipate and concern, among other things, the Companys ability to identify profitable investments in small businesses, manage payment defaults,

value its portfolio accurately and realize value from its investments in the securities of small businesses.

Many phases of the Companys operations are subject to influences outside its control.

Any one or any combination of factors could have

a material adverse effect on the Companys business, financial condition and results of operations.

These factors include competitive pressures, local, regional and national economic conditions, governmental regulation and policies and other

conditions affecting capital markets.

The following factors should be carefully considered, together with other information in this Report.

Investments in Small, Privately Owned Companies .

The Companys portfolio consists of equity and debt securities issued by small, privately owned businesses that,

under SBA regulations, must have a tangible net worth of less than $18 million and average net income after federal income tax for the preceding two years of $6 million or less (computed without benefit of any carryover loss).

Furthermore, 20% of

the Companys portfolio must consist of investments in smaller enterprises with a net worth of not more than $6 million and average net income after federal income tax for the preceding two years of $2 million or less (computed without benefit

of any carryover loss).

See Regulation as an SBIC. The Companys equity investments in these small businesses have primarily been in the form of preferred stock or subordinated debt, coupled with warrants to acquire shares of common

There is generally no publicly available information about such companies, so the Company must rely on the diligence of its employees and agents to obtain information in connection with the Companys investment decisions.

small businesses depend for their success on the management talents and efforts of one person or a small group of persons, and the death, disability or resignation of one or more of these persons could have a material adverse impact on the

Companys business, financial condition and results of operations.

Moreover, small businesses frequently have smaller product lines and market shares than their competitors, may be more vulnerable to economic downturns and often need

substantial additional capital to expand or compete.

Such companies may also experience substantial variations in operating results.

Many of the Companys existing portfolio companies have experienced declining revenues and profits due to the

current economic downturn.

During fiscal 2002, the Company realized net losses of $3.2 million on companies held in its portfolio.

During fiscal 2000 and 2001, the Company recorded an increase in its net unrealized depreciation of $2.4 million and

$6.1 million, respectively, in portfolio company investments.

Investment in small businesses therefore involves a high degree of business and financial risk, can result in substantial losses and should be considered highly speculative.

Investment Policies.

Payment Defaults .

Generally, the Company makes

current-pay, dividend-bearing preferred stock investments in, and nonamortizing, five-year term loans with fixed or variable rates of interest to, small businesses that have limited financial resources and are able to obtain only limited financing

from traditional sources.

Its loans may or may not be secured by the assets of the borrower.

A portfolio companys ability to pay preferred stock dividends or to repay its loan may be adversely affected by numerous factors, including the

failure to meet its business plan, the death, disability or resignation of senior management, a

downturn in its industry or negative economic conditions.

During fiscal 2002, six portfolio companies defaulted on quarterly dividend payments and six portfolio companies defaulted on quarterly

interest payments.

A deterioration in a portfolio companys financial condition and prospects usually will be accompanied by a deterioration in the value of its preferred stock or any collateral for a loan.

As a holder of preferred stock, the

Company is always subordinate to any indebtedness of the portfolio company and, when the Company is not the senior lender, any collateral for a loan will be subordinate to another lenders security interest.

Limited Operating History .

The Company obtained its license from the SBA in May 1996 and made its first

portfolio investment in October 1996.

The vast majority of its investments have been made since the closing of its initial public offering in February 1998.

Accordingly, its operating history is extremely limited.

The Company continues to hold its

equity positions, and anticipates holding them for an extended period of time.

See Investment Policies. The Company has a very limited history of realized profits in its investments.

See Managements Discussion and Analysis of

Financial Condition and Results of Operations and Determination of Net Asset Value. Until recently, the Company has not operated in recessionary economic periods when the operating results of small business companies like those in

the Companys portfolio often are adversely affected.

Fluctuations in Quarterly Operating

The Company has experienced, and expects to continue experiencing, quarterly variations in net operating income as a result of many factors.

Accordingly, it is possible that the Companys results of

operations, including quarter to quarter results, will be below the expectations of public market analysts and investors.

In addition, the Company plans its operating expenditures based on operating income forecasts, and an operating income

shortfall below its forecasts in any quarter would likely adversely affect the Companys business, financial condition and results of operations for the year.

See Managements Discussion and Analysis of Financial Condition and

Results of Operations in the Annual Report.

Typically, no public market exists for the equity or debt securities of small, privately owned companies.

As a result, in the absence of readily ascertainable market values, the valuation of securities in the

Companys portfolio is made by the good faith determination of the Companys Executive Committee in accordance with the SBAs model valuation policy, which the Company has adopted.

The estimated values may differ significantly from

the values that would have been established had a ready market for the securities existed, and the differences could be material.

Unlike commercial lending institutions, the Company does not establish reserves for investment losses, but revalues its

portfolio on a quarterly basis to reflect the Companys estimate of the current fair value of the investment portfolio.

There can be no assurance that this estimate is accurate and that the Company will not ultimately suffer losses on its

The Company currently holds investments in three small publicly-held portfolio companies whose stock prices have been, and will likely continue to be, very volatile.

This volatility impacts the Companys overall valuation on a

quarterly basis.

See Determination of Net Asset Value.

Illiquidity of Portfolio

Investments .

Most of the Companys investments are, and will continue to be, securities acquired directly from small, privately owned companies.

The Companys portfolio securities are, and will continue to be,

subject to restrictions on resale or otherwise have no established trading market.

The illiquidity of most of the Companys portfolio securities may adversely affect its ability to dispose of such securities in a timely manner and at a fair

price when necessary or advantageous.

Limited Public Market;

Volatility of Stock

The Companys Common Stock is listed on the Nasdaq SmallCap Market under the symbol WSCC. Continued inclusion requires that the Company satisfy a minimum tangible net worth or net income standard

and that the Common Stock satisfy minimum standards of public float, bid price and market makers.

The Common Stock has been, and is expected to continue to be thinly traded with a significant differential between the bid and ask price and a highly

volatile trading price that will be subject to wide fluctuations in response to factors, many of which are beyond the Companys control.

These may include fluctuations in the operating results of its portfolio companies, sales of the Common

Stock in the marketplace, shortfalls in revenues, earnings or other operating results of the Company, general financial conditions and other factors.

There can be no assurance that the market price of the Common Stock will not experience significant

fluctuations that are material, adverse and unrelated to the Companys performance.

In addition, the stock

market has from time to time experienced extreme price and volume fluctuations that often have been unrelated to the operating performance of particular companies.

Changes in earnings estimates by analysts and economic and other external factors and

period-to-period fluctuations in financial results of the Company may have a significant impact on the market price of the Common Stock.

Fluctuations or decreases in its trading price may adversely affect the liquidity of the trading market for the

Common Stock.

Reliance on Management .

Management is a key factor in the successful

development and operation of an SBIC.

The Company depends for the selection, structuring, closing and monitoring of its loans and investments on the diligence and skill of management and members of the Executive Committee, particularly J.

Lindauer, the loss of whose services could have a material adverse effect on the operations of the Company.

Lindauer serves as President and Chief Executive Officer, and as a Director and Chairman of the Executive Committee of the Company.

Lindauer is a Certified Management Consultant and has experience in business evaluation and small business investing, until his election as President of the Company

in March 1994, he had never served as an executive officer of an SBIC prior to joining the Company.

The Company does not maintain key man life insurance on Mr.

Although the Company continues to consider new investment opportunities as they arise, as a

result of the current downturn in the economy, the Company has elected to devote most of its management resources toward assisting its existing portfolio companies.

However, as the economy improves, the Company intends to continue expanding its

small business investment activities, both in size, and geographic scope, but not as quickly as in the past due to restrictions on available capital.

In addition, it is investigating the possibility of restructuring its operations to enable it to

pursue investment opportunities not available to SBICs because of regulatory constraints, as well as seeking to acquire SBIC-eligible investments from other investment funds.

No assurance can be given that the Company will restructure its operations

in this manner, or that if it does, that the restructuring will benefit shareholders.

If the Company accomplishes these objectives, no assurance can be given that it will be able to develop sufficient administrative personnel, management and

operating systems to manage its expansion effectively.

Competition .

A large number

of institutions and individuals compete to make the types of investments made by the Company.

There can be no assurance that the Company will be able to identify and make investments that satisfy its investment objectives or that it will be able to

invest fully its available capital.

The Company competes with other SBICs, other non-bank financial companies and, to a limited extent, commercial banks and venture capital investors and venture capital investment firms.

Most of the Companys

competitors have greater resources and significantly more operating history.

An important aspect of the Companys long term strategy in achieving investment returns is the use of SBA Debentures.

Obtaining a license as an SBIC does not insure that the Company will

be able to obtain funds from the SBA (SBA Leverage) in the amounts required to optimize investment returns.

The amount of available SBA Leverage is determined by annual Congressional appropriations.

While the Companys management

believes that adequate SBA Leverage will be available, there can be no assurance that there will be sufficient SBA Leverage available to satisfy the demands of the Company and other SBICs.

In addition, given the Companys current capital

structure, it is unlikely that additional SBA Leverage will be available to the Company unless the Company is able to raise additional capital.

Absent additional capital, it is unlikely that the Company will be able to continue to grow the size of

its portfolio through additional investments at the rate it has over prior fiscal years.

The Company has

currently issued $25.4 million of SBA Debentures.

This issuance involves associated fixed costs.

SBA Debentures require that interest be paid on a current basis and the income from the Companys investments may not be sufficient to make the

required payments.

Leverage increases the risk of loss because increased operating revenues are needed to make required payments of interest on loans.

As such, losses on a small percentage of the Companys investments and loans can result in a

much larger percentage reduction in shareholders equity.

See BusinessSBA Leverage.

Regulation as an SBIC .

As an SBIC, the Company is subject to a variety of regulations concerning, among other things, the size and nature of the companies in which it may invest and the structure of

those investments.

SBA regulations provide a variety of remedies if an SBIC fails to comply with these regulations.

These remedies are graduated in severity depending on the severity of the SBICs financial condition or misconduct.

circumstances, the SBA may prohibit an SBIC from making new investments or distributions to shareholders, require the removal of one or more officers or directors or obtain the appointment of a receiver for the SBIC.

It is likely that new

regulations governing SBICs will be adopted in the future and the Company cannot offer any assurance that any such new regulations will not have a material adverse effect on the Companys business and results of operations.

Although the Company

is not aware of any pending legislation to eliminate the SBA or restrict or terminate the specific program of the SBA in which the Company participates, any significant restrictions on funds available to the Company from the SBA may adversely affect

the Companys plans for future operations and growth.

The Company has not declared or paid any cash dividends in the past and does not expect to pay cash dividends in the foreseeable future.

The Company currently intends to retain its future earnings, if any, to

finance the development and expansion of its business.

Any future dividend policy will be determined by the Board of Directors in light of conditions then existing, including the Companys earnings and its financial condition and requirements.

Possible Issuance of Preferred Shares;

Anti-Takeover Provisions .

The Companys

Articles of Incorporation authorize the Board of Directors to issue, without shareholder approval, 25,000 shares of preferred stock with voting, conversion and other rights and preferences that could materially and adversely affect the voting power

or other rights of the holders of Common Stock.

The Company presently has no plans or commitments to issue any shares of preferred stock.

The issuance of preferred stock or of rights to purchase preferred stock, as well as certain provisions of the

Companys Articles of Incorporation and Virginia law, could delay, discourage, hinder or preclude an unsolicited acquisition of the Company, make it less likely that shareholders receive a premium for their shares as a result of any such

attempt and adversely affect the market price, and voting and other rights of the holders of Common Stock.

The Company currently leases approximately 3,418 square feet of space in Norfolk, Virginia.

The Company believes that its Norfolk office is adequate for its current

and near-term future requirements.

Organizational

Capital Corporation (the “Company”) was incorporated in the Commonwealth of Virginia on July 13, 1993 and was

a closed-end investment company licensed by the Small Business Administration (the “SBA”) as a Small Business Investment

Corporation (“SBIC”).

The Company previously made equity investments in, and provided loans to, small businesses to

finance their growth, expansion, and development.

Under applicable SBA regulations, the Company was restricted to investing only

in qualified small businesses as contemplated by the Small Business Investment Act of 1958.

As a registered investment company

under the Investment Company Act of 1940, as amended (the “Investment Company Act”), the Company’s investment

objective was to provide its shareholders with a high level of income, with capital appreciation as a secondary objective.

Company made its first investment in a small business in October 1996.

March 30, 2010, the SBA notified the Company that its account had been transferred to liquidation status and that the outstanding

debentures of $16.1 million plus accrued interest (the “

Debentures ”) were due and payable within fifteen

days of the date of the letter.

The Company did not possess adequate liquid assets to make this payment.

The Company negotiated

terms of a settlement agreement with the SBA effective September 1, 2010, which allowed the Company’s management

to liquidate the portfolio so long as there are no events of default.

The Debentures were repurchased by the SBA in September

2010, represented by a Note Agreement between the SBA and the Company.

The Note Agreement had a maturity of March 31, 2013.

In the event of a default, the SBA had the ability to seek receivership.

May 24, 2012 the SBA delivered to the Company a notice of an event of default for failure to meet the principal repayment

schedule under the Note Agreement (the “

Notice ”).

Under the terms of the Notice and the Note Agreement the

SBA maintained a continuing right to terminate the Note Agreement and appoint a receiver to manage the Company’s assets.

November 20, 2013 the SBA filed a complaint in the United States District Court for the Eastern District of Virginia seeking,

among other things, receivership for the Company and a judgment in the amount outstanding under the Note Agreement plus continuing

The complaint alleged that as of October 31, 2013 there remained an outstanding balance of $11,762,634.58 under

the Note Agreement, including interest, which continued to accrue at the rate of $2,021.93 per day.

The SBA, in filing the complaint,

requested that the court take exclusive jurisdiction of the Company and all of its assets wherever located and appoint the SBA

as permanent receiver of the Company for the purpose of liquidating all of the Company’s assets and satisfying the claims

of its creditors in the order of priority as determined by the court.

Company initially took steps to contest the legal action initiated by the SBA and to oppose the receivership action.

29, 2014 the Board of Directors of the Company, as then constituted (the “

Board ”), met to reconsider

the decision to contest the SBA’s legal action.

In light of developments occurring since December of 2013, including projections

of its portfolio companies and discussions with the SBA, the Board determined, after consultation with and advice of its counsel,

that it was not in the best interests of the Company and its shareholders to continue to contest the legal action.

informed of this determination.

The Board also decided to consent to the receivership process.

May 28, 2014, with the Company’s consent, the court having jurisdiction over the action filed by the SBA (the “

Court ”)

entered a Consent Order and Judgment Dismissing Counterclaim, Appointing Receiver, Granting Permanent Injunctive Relief and Granting

Money Judgment (the “

Order ”).

The Order appointed the SBA receiver of the Company for the purpose of marshaling

and liquidating in an orderly manner all of the Company’s assets and entered judgment in favor of the United States of America,

on behalf of the SBA, against the Company in the amount of $11,770,722.31.

Such amount represents $11,700,000 in principal and

$70,722.31 in accrued interest.

The Court assumed jurisdiction over the Company and the SBA was appointed receiver effective May

Company effectively stopped conducting an active business upon the appointment of the SBA as receiver and the commencement of

the court ordered receivership (the “

Receivership ”).

Over the course of the Receivership the activity of the

Company was limited to the liquidation of the Company’s assets by the receiver and the payment of the proceeds therefrom

to the SBA and for the expenses of the Receivership.

SBIC license granted to the Company by the SBA was revoked by the SBA effective March 20, 2017, in conjunction with the

entry by the court of the Order Approving the Procedures for Winding Up and Terminating the Receivership Estate.

2017 the Receivership was terminated with the entry of a Final Order by the Court (the “

Final Order ”).

The Final Order specifically stated that “Control of Waterside shall be unconditionally transferred and returned to its

shareholders c/o Roran Capital, LLC (“Roran”) upon notification of entry of this Order”.

At that time the

Company had, and continues to have, effectively zero (0) assets, and a liability owed to the SBA in an amount exceeding $10,000,000.

of Receivership

termination of the Receivership, Roran took possession of all books and records made available to it by the SBA, and Roran expended,

and has continued to expend, its own funds to maintain the viability of the Company.

The termination of the Receivership

also caused a new board of directors to be appointed (the “

New Board ”).

The New Board considered

a variety of options for the Company, including bankruptcy.

The New Board determined that such action made scant sense as the

Receivership had the same basic result as bankruptcy.

Another option was to merely liquidate and legally dissolve the Company,

which would result in the complete loss of investment by all shareholders.

Roran provided assurances that it would fund reasonable

expenses of the Company so long as progress was being made to reorganize the Company and to identify either (i) a new business

to undertake;

or, (ii) an existing business with which to merge or otherwise acquire.

The New Board has continued to work toward

achieving that goal.

With no assets and no SBIC license from the SBA, no income, and liabilities in excess of $10,000,000,

the New Board concluded that continuing to operate as a registered investment company was impossible.

the entry of the Final Order (June 28, 2017) and the termination of the Receivership the Company has been maintained for

the benefit of its shareholders and pursuant to the Final Order.

The Company has no assets of any value, and the Company no longer

has the SBIC license from the SBA.

The Company is no longer operating as a registered investment company under the Investment

While it would have been easy for the Company to merely dissolve, the Company has instead decided to reconstitute

itself as a viable business.

The Company has engaged, and intends to continue to engage, qualified professionals and personnel

in order to bring the Company current in its SEC filings and audits.

Roran paid for the Company to file all delinquent SEC filings

as a registered investment company.

The Company believes that as of June 28, 2017 it ceased to be a registered investment

company under the Investment Company Act so it did not file as a registered investment company for the period ended June 30,

Instead, the Company is filing this Form 10-K for that period.

Prior to the filing of this 10-K, the Company filed with

the SEC an Application pursuant to Section 8(f) of the Investment Company Act for an order declaring that the Company has ceased

to be a registered investment company.

current status of the Company is consistent with the Company’s pronounced intention of converting from a registered investment

company to an operating company.

Although the Company may historically have operated as a registered investment company, the result

of the Receivership is that the Company can no longer operate as a registered investment company.

The only chance for the

shareholders of the Company to recognize any value from their investment in the Company is to allow the Company to change the

nature of its business such that it should no longer be a registered investment company under the Investment Company Act.

Business Strategy and Operations

Company will now seek to either (i) enter into a new business;

or, (ii) merge with, or otherwise acquire, an active business which

would benefit from operating as a public entity.

The New Board has undertaken a search to identify the best possible candidate(s)

in order to provide value to the shareholders of the Company.

The Company believes that it no longer qualifies as an “investment

company”

within the meaning of the Investment Company Act, and has engaged in a strategy to convert from a registered investment

company to an operating company.

The Company will file to register under the Securities Exchange Act of 1934, as amended (the

“Exchange Act”), thereby becoming a mandatory filer under the Exchange Act.

It will continue to list its common stock

on the Pink OTC Markets for the benefit of its shareholders.

As a result of these efforts, the Company is and holds itself out

as being engaged primarily in the business of seeking either (i) a new business to enter into;

or, (ii) merger or acquisition

candidates which would benefit from being public.

are a shell company as that term is defined under federal securities laws.

Our business plan is to seek (i) a new business to

or, (ii) acquire assets or shares of an entity actively engaged in business that generates revenues in exchange for

our securities.

We will not restrict our search to any specific business, industry, or geographical location and we may participate

in a business venture of virtually any kind or nature.

This discussion of our new business is purposefully general and is not

meant to be restrictive of our virtually unlimited discretion to search for and enter potential business opportunities.

anticipates that it may be able to participate in only one potential business venture because we have nominal assets and limited

financial resources.

This lack of diversification should be considered a substantial risk to our shareholders because it will

not permit us to offset potential losses from one venture against gains from another.

of Operations

currently plan to investigate and, if such investigation warrants, either (i) enter into a new business;

or, (ii) acquire assets

or shares of an entity actively engaged in business and which is seeking the perceived advantages of being a publicly held corporation.

Our principal business objective for the next 12-months and beyond will be to achieve long-term growth potential through either

entry into a new business or a combination with an existing business, rather than immediate, short-term earnings.

restrict our search for potential candidate target companies to any specific business, industry or geographical location and,

thus, may acquire, or enter into, any type of business.

analysis of new business opportunities will be undertaken by or under the supervision of the New Board.

We have not had any material

conversations with potential merger or acquisition targets nor have we entered into any definitive agreement with any party.

our efforts to analyze and evaluate a prospective target business, we will consider several factors, including, without limitation,

the following:

and skill of management and availability of additional personnel of the target business;

associated with effecting the business combination;

interest retained by our shareholders in the merged entity;

potential of the target business;

requirements of the target business;

available to the target business;

of development of the target business;

features and degree of intellectual property or other protection of the target business;

financial statements of the target business;

regulatory environment in which the target business operates.

foregoing criteria are not intended to be exhaustive and any evaluation relating to the merits of a particular target business

will be based, to the extent relevant, on the above factors, as well as other considerations we deem relevant.

In connection with

our evaluation of a prospective target business, we anticipate that we will conduct a due diligence review which will encompass,

among other things, meeting with incumbent management as well as a review of financial, legal and other information.

time and costs required to select and evaluate a target business (including conducting a due diligence review) and to structure

and consummate the business combination (including negotiating and documenting relevant agreements and preparing requisite documents

for filing pursuant to applicable corporate and securities laws) cannot be determined at this time.

Our sole officer and director

intends to devote only a very small portion of his time to our affairs, and, accordingly, the consummation of a business combination

may require a longer time than if he devoted his full time to our affairs.

However, he will devote such time as he deems reasonably

necessary to carry out our business and affairs.

The amount of time devoted to our business and affairs may vary significantly

depending upon, among other things, whether we have identified a target business or are engaged in active negotiation of a business

anticipate that various prospective target businesses will be brought to our attention from various sources, including securities

broker-dealers, investment bankers, venture capitalists, bankers and other members of the financial community, including, possibly,

impediments to a business combination or an entry into a new business may arise, such as appraisal rights afforded the shareholders

of a target business under the laws of its state of organization.

This may prove to be deterrent to a particular combination.

way we participate in an opportunity will depend upon the nature of the opportunity, our respective needs and desires as well

as those of the promoters of the opportunity, and the relative negotiating strength of ourselves and such promoters.

is likely that we will acquire our participation in a business opportunity through the issuance of common stock or other securities.

Although the terms of any such transaction cannot be predicted, it should be noted that in certain circumstances the criteria

for determining whether or not an acquisition is a so-called “tax free”

reorganization under Section 368(a)(1) of

the Internal Revenue Code of 1986, as amended (the “Code”), depends upon the issuance to the shareholders of the acquired

company of at least 80% of the common stock of the combined entities immediately following the reorganization.

If a transaction

were structured to take advantage of these provisions rather than other “tax free”

provisions provided under the Code,

all prior shareholders would in such circumstances retain 20% or less of the total issued and outstanding shares.

circumstances, depending upon the relative negotiating strength of the parties, prior shareholders may retain substantially less

than 10% of the total issued and outstanding shares.

This could result in substantial additional dilution to the equity of those

who were our shareholders prior to such reorganization.

present shareholders will likely not have control of a majority of our voting shares following a reorganization transaction.

part of such a transaction, our current director may resign and new directors may be appointed without any vote by shareholders.

the case of an acquisition, the transaction may be accomplished upon the sole determination of our management without any vote

or approval by shareholders.

In the case of a statutory merger or consolidation directly involving our Company, it will

likely be necessary to call a shareholders’

meeting and obtain the approval of the holders of a majority of the outstanding

The necessity to obtain such stockholder approval may result in delay and additional expense in the consummation of any

proposed transaction and will also give rise to certain appraisal rights to dissenting shareholders.

Most likely, management will

seek to structure any such transaction so as not to require stockholder approval, if possible.

is anticipated that the investigation of specific business opportunities and the negotiation, drafting and execution of relevant

agreements, disclosure documents and other instruments will require substantial management time and attention and substantial

cost for accountants, attorneys and others.

If a decision is made not to participate in a specific business opportunity, the costs

theretofore incurred in the related investigation would not be recoverable.

Furthermore, even if an agreement is reached for the

participation in a specific business opportunity, the failure to consummate that transaction may result in our loss of the related

costs incurred.

the year ended June 30, 2017, and the interim fiscal quarters since that time, we have essentially been dormant.

not currently engage in any business activities that provide us with positive cash flows.

As such, the costs of investigating

and analyzing business combinations for the next 12-months and beyond will be paid with funds raised through other sources, which

may not be available on favorable terms, if at all.

The Company, at this time, does not intend to obtain funds in one or more

private placements to finance the operation of any acquired business opportunity until such time as the Company has successfully

consummated such a merger or acquisition or entered into a new business.

Rather, the Company intends to borrow money from Roran

to finance ongoing operations.

the Company intends to no longer operate as a registered investment company though remain as a public company, it will be subject

to the reporting requirements of the Exchange Act, which includes the preparation and filing of periodic, quarterly and annual

reports on Forms 8-K, 10-Q and 10-K.

The Exchange Act specifically requires that any merger or acquisition candidate comply with

all applicable reporting requirements, which include providing audited financial statements to be included within the numerous

filings relevant to complying with the Exchange Act.

Company’s common stock is a “penny stock,”

as defined in Rule 3a51-1 under the Exchange Act.

The penny stock

rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized

risk disclosure document that provides information about penny stocks and the nature and level of risks in the penny stock market.

The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of

the broker-dealer and its sales person in the transaction, and monthly account statements showing the market value of each penny

stock held in the customer’s account.

In addition, the penny stock rules require that the broker-dealer, not otherwise exempt

from such rules, must make a special written determination that the penny stock is suitable for the purchaser and receive the

purchaser’s written agreement to the transaction.

These disclosure rules have the effect of reducing the level of trading

activity in the secondary market for a stock that becomes subject to the penny stock rules.

So long as the Company’s common

stock is subject to the penny stock rules, it may be more difficult to sell our common stock.

Trademarks, Franchises, Royalty Agreements or Labor Contracts

have no current plans for any registrations such as patents, trademarks, copyrights, franchises, concessions, royalty agreements

or labor contracts.

We will assess the need for any copyright, trademark or patent applications on an ongoing basis.

for Government Approval of Products or Services

are not required to apply for or have any government approval for our products or services.

and Development Costs During the Last Two Years

have not expended funds for research and development costs since inception.

Company will remain an insignificant participant among the firms which engage in the acquisition of business opportunities.

are many established venture capital and financial concerns which have significantly greater financial and personnel resources

and technical expertise than the Company.

In view of the Company’s extremely limited financial resources and limited management

availability, the Company will continue to be at a significant competitive disadvantage compared to the Company’s competitors.

Company currently has no employees.

The business of the Company will be managed by its sole officer and director and such officer

and director may join the Company as an employee in the future.

The Company does not anticipate a need to engage any full-time

employees at this time.

Company expects to file annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, proxy

statements and other information with the SEC.

Any materials filed by the Company with the SEC may be read and copied at the SEC’s

Public Reference Room at 100 F Street, NE, Washington, D.C.

Information on the operation of the SEC’s Public Reference

Room is available by calling the SEC at 1-800-SEC-0330.

The SEC maintains a website that contains annual, quarterly and current

reports, proxy statements and other information that issuers (including the Company) file electronically with the SEC.

address of the SEC’s website is http://www.sec.gov .

At some point in the near future we intend to make

our reports, amendments thereto, and other information available, free of charge, on a website for the Company.

At this time,

the Company does not maintain a website and there is no estimate for when such a website will be maintained by the Company.

corporate offices are located at 140 West 31 st Street, Second Floor, New York, New York, 10001.

Our telephone

number is 212-686-1515.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business