Edgar Filing: WATERSIDE CAPITAL CORP

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-----------------------------

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED JUNE 30, 2001

COMMISSION FILE NO.: 333-36709
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WATERSIDE CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)

VIRGINIA 54-1694665
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)

300 East Main Street
Suite 1380
Norfolk, Virginia 23510
(Address of principal executive office) (Zip code)

Registrant's telephone number, including area code:
(757) 626-1111

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value per share

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]

The aggregate market value of voting stock held by non-affiliates of the
registrant as of August 31, 2001: Common Stock: $4,649,404.

The number of shares outstanding of the registrant's common stock as of
August 31, 2001: 1,581,430.

WATERSIDE CAPITAL CORPORATION
2001 FORM 10-K
TABLE OF CONTENTS

PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders

PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants

PART III
Item 10. Directors and Executive Officers of the Registrant; Section 16(a)
Beneficial Ownership Reporting Compliance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions

PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

Documents Incorporated by Reference

Portions of the registrant's Annual Report to Shareholders (the "Annual
Report") are incorporated by reference in Part II of this Form 10-K and portions
of the definitive Proxy Statement (the "2001 Proxy Statement") to be used in
connection with the 2001 Annual Meeting of Shareholders are incorporated by
reference in Part III of this Form 10-K.

PART I

This Report contains "forward-looking statements" as defined in the Private
Securities Litigation Reform Act of 1995. Any statements contained in this
Report that are not statements of historical fact are forward-looking
statements. Without limiting the foregoing, the words "believes," "anticipates,"
"plans," "expects" and similar expressions are intended to identify forward-
looking statements. The important factors discussed below in "Risk Factors,"
among others, could cause actual results to differ materially from those
indicated by forward-looking statements made in this Report and those presented
elsewhere by management from time to time. Please refer to the cautionary
statement that appears at the end of "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Annual Report for more
information.

Item 1. Business

The Company

Waterside Capital Corporation (the "Company") is a closed-end investment
company licensed by the Small Business Administration (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 11.64%. The Company
also provides long-term loans at similar rates. The weighted average annual
interest rates on its loans, at fair value, is currently 12.39%. To date, the
Company has made most of its investments in preferred stock because, as an SBIC,
its dividend income is non-taxable. 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.

The Company began business operations in July 1996 after receiving its SBA
license and closing its initial private placement of Common Stock. The Company
made its first portfolio investment in October 1996 and, as of the date of this
Report, has approximately $33.7 million in investments at fair value in 30
portfolio companies.

The Company targets potential portfolio companies that meet certain
investment criteria including potential for significant growth, product, market
size, experienced management teams and financial history with significant
ownership. 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 generally expects to 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 range. 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.

To expand its investment opportunities, 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 funds.

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. Its Private Capital includes approximately $1.5 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, 2001, 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 7.90%, including an annual service fee
of 1.0%, and mature between March 1, 2009 and September 1, 2011. The debentures
require semi-annual payments of interest only, with all principal due upon
maturity. 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.

Strategy

The Company seeks 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 have developed a level of
expertise in identifying and developing new investment opportunities in this
market. The Company targets portfolio companies that meet certain criteria,
including potential for significant growth, experienced management teams and
financial history with a significant ownership interest. 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 1980's and the
early 1990's, 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.

Investment Objectives

The investing formats of SBIC's can range from making long-term secured and
unsecured loans to providing equity capital. The Company has utilized, and
anticipates continuing to utilize, 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.

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 prefers to invest in preferred stock of portfolio
companies, as opposed to debt instruments, because, as an SBIC, it receives a
100% deduction for dividends received from taxable domestic corporations. 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
investments in small businesses, provided that their principals contribute the
requisite skill and dedication and the investment is appropriately structured.

Selection Of Investment Opportunities

The Company has invested, and expects to continue investing, in a wide
range of businesses -- from technology companies to 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
credit: 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 does not
focus 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 will 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 product, 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 company's growth potential, as well as historical financial
performance.

Settlement of Investments

The Company makes its equity investments with the intention of liquidating
for cash within five to seven years, although situations may arise in which it
may hold equity securities for a longer period. Its loans are made for a minimum
of five years as required by SBA regulations. The 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 company's 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. Management attempts to minimize any such losses through several
strategies.

Limitation On Investments In One Borrower. Except with prior SBA approval,
SBA regulations allow only up to 20% of an SBIC's 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 Company's largest
investment in any one portfolio company is currently $2.6 million.

Appropriate Underwriting Standards. Management analyzes each proposed
transaction. If analysis does not reveal an investment meeting the Company's
underwriting standards, management promptly notifies the applicant business of
the denial of its funding request. Management examines numerous applications for
every one recommended to the Executive Committee.

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
rejected a number of investments in fiscal 2001.

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.

Monitoring. 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.

Default Covenants. Typically, the Company's 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 the date of this Report, the Company has investments in 30 portfolio
companies, with a fair value of approximately $33.7 million.

SBA Leverage

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 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
SBIC's 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 SBIC's continued
regulatory compliance and sufficient SBA Leverage being available when the SBIC
applies to draw down SBA Leverage.

SBIC's may obtain up to $105.2 million in SBA Leverage in the following
ratios:

LEVERAGEABLE CAPITAL MATCHING RATIO SBA LEVERAGE

First $17.5 million 3:1 $52.5 million
Second $17.6 million 2:1 $35.2 million
Third $17.5 million 1:1 $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 will 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, deposits of which are insured by the Federal Deposit
Insurance Corporation (the "FDIC") (an "insured bank"), 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 in an
insured bank with maturities of one year or less, up to the amount of the
deposit insurance, (iv) deposit accounts in an 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 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.

Competition

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 Company's investment guidelines, but can offer attractive investment
returns to the Company's competitors who provide this type of financing. The
Company also competes, to a limited extent, with commercial banks and commercial
finance companies. Most of its competitors have substantially greater assets,
capital and personnel resources. The Company believes that because of its size
and structure it can tailor equity investment or loan terms to a portfolio
company's 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.

Employees

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, investment
analysis and due diligence reviews.

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 Company's 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.

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

(b) 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.

(c) 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. The vast majority of the Company's current equity
investments in Small Business Concerns are so restricted.

(d) 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.

(e) 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.

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

(g) 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.

(h) 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 Company's 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 Company's 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 Company's Regulatory Capital
except with prior SBA approval.

(c) The Company does not invest in companies for the purpose 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 Company's 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 of the Board of
Directors. 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 Company Act of 1940. 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 Company's 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.

Management

Powers of the Executive Committee. The Company's Articles of Incorporation
provide for the appointment by the Board of Directors of an Executive Committee
comprised of not less than five nor more than nine members, all of whom must be
a member of the Board of Directors. The Executive Committee was constituted by
the Board of Directors in December 1993 and, under Virginia law, may exercise
all the authority of the Board of Directors except that it may not (i) approve
or recommend to shareholders action that Virginia law requires to be approved by
shareholders, (ii) fill vacancies on the Board of Directors or any committee,
(iii) amend the Articles of Incorporation, (iv) adopt, amend or repeal the
Bylaws, (v) approve a plan of merger, (vi) authorize or approve a distribution,
except according to a general formula or method prescribed by the Board of
Directors or (vii) authorize or approve the issuance or sale or contract for
sale of shares, or determine the designation of relative rights, preferences and
limitations of a class or series of shares except within limits specifically
prescribed by the Board of Directors.

Members of the Executive Committee and Executive Officers. The following
table sets forth the names, addresses, ages and positions with the Company of
all members of the Executive Committee (who also are directors of the Company)
and Executive Officers of the Company. Information concerning their principal
occupation and background follows.

Name and Address Age Position and Offices with the Company
-------------------------- --- --------------------------------------------

J. W. Whiting Chisman, Jr. 60 Member of Executive Committee and Director
226 Creekview Lane
Hampton, VA 23669

Ernest F. Hardee 61 Member of Executive Committee and Director
100 E. 15th Street

Norfolk, VA 23510

J. Alan Lindauer 62 Chairman of Executive Committee, Director,
300 East Main Street President And Chief Executive Officer
Suite 1380
Norfolk, VA 23510

Robert I. Low 64 Member of Executive Committee and Director
P. O. Box 3297
Norfolk, VA 23514

Gerald T. McDonald 54 Chief Financial Officer, Secretary and Treasurer
1501 Layden Cove Way
Virginia Beach, VA 23454

Peter M. Meredith, Jr. 49 Member of Executive Committee, Chairman of the
P. O. Box 11265 Board of Directors
Norfolk, VA 23517

Charles H. Merriman, III 67 Member of Executive Committee and Director
5507 Cary Street Road
Richmond, VA 23226

R. Scott Morgan 56 Member of Executive Committee and Director
316 Court Street
Portsmouth, VA 23704

Richard G. Ornstein 59 Member of Executive Committee And Director
524 Fisherman's Bend
Virginia Beach, VA 23451

Martin N. Speroni 36 Vice President and Director of Research
300 East Main Street
Suite 1380
Norfolk, VA 23510

Lex W. Troutman 48 Vice President and Business Development Officer
300 East Main Street
Suite 1380
Norfolk, VA 23510

J. W. Whiting Chisman, Jr. has served as a director of the Company since
February 1994. Since 1988, he has been President of Dare Investment Company, a
land developer and investor in equities.

Ernest F. Hardee has served as a director of the Company since
September 1997. Since 1963, he has been President and Chief Executive Officer of
Hardee Realty Corporation, a real estate brokerage firm. He has also served as a
director of Branch Bank & Trust Corp. since 1995.

J. 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. Mr. Lindauer is a
Certified Management Consultant.

Robert I. Low has served as a director of the Company since July 1993. Mr.
Low is a senior partner of Goodman & Company, a firm of Certified Public
Accountants. He has been with that firm since 1969.

Gerald T. 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.

Peter M. Meredith, Jr. has served as a director of the Company and as
Chairman of the Board of Directors since May 1994. Since 1978, he has served in
various executive capacities with Meredith Construction Company, Inc. Since
1995, he has been the Chairman of the Board of Directors of Heritage Bank.

Charles H. Merriman, III, has served as a director of the Company since
March 1998. He is currently a Managing Director with Scott & Stringfellow, an
investment banking firm, where he has served in various capacities since 1972.

R. Scott Morgan, Sr. has served as a director of the Company since
September 1997. From 1995 through 1997, Mr. Morgan was Executive Vice President
and Corporate Banking Manager with the Corporate Banking Group of Branch Bank &
Trust Corp. Between 1992 and 1995, he was employed in various capacities with
Commerce Bank. Mr. Morgan has been President of Town Bank since 1999.

Richard G. Ornstein has served as a director of the Company and a member of
the Executive Committee since September 1997. Since 1964, Mr. Ornstein has been
privately engaged in real estate management and development.

Martin N. 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. Mr. Speroni holds an
MBA from Columbia University and an M.A. from the University of South Florida.

Lex W. 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. Mr. Troutman is a Certified Public
Accountant.

Other Members of the Board of Directors. The Company's existing Board of
Directors has 18 members of which 16 will be nominated for re-election at the
Company's 2001 Annual Meeting. Directors hold office until expiration of their
respective terms and until their successors are elected, or until death,
resignation or removal. Officers of the Company serve at the discretion of the
Board of Directors, subject to any employment contract rights. The following
table sets forth the names, addresses and ages of all directors of the Company
who are not members of the Executive Committee. Information concerning their
principal occupation and background follows.

Name and Address Age Position and Offices With the Company
-------------------------------- --- -------------------------------------

James E. Andrews 63 Director
109 East 40th Street
Norfolk, VA 23504

Jeffrey R. Ellis 57 Director
513 Kerry Lane
Virginia Beach, VA 23451

Eric L. Fox 54 Director
1412 Whittier Road
Virginia Beach, VA 23454

Marvin S. Friedberg 58 Director
8204 Ocean Front
Virginia Beach, VA 23451

Roger L. Frost 69 Director
1700 Grove Court
Norfolk, VA 23503

Henry U. Harris, III 48 Director
500 E. Main Street, Suite 1500
Norfolk, VA 23510

Harold J. Marioneaux, Jr. 45 Director
504 Mill Stone Road
Chesapeake, VA 23320

Augustus C. Miller 67 Director
1000 E. City Hall Avenue
Norfolk, VA 23504

Juan M. Montero, II 59 Director
2147 Old Greenbrier Road
Chesapeake, VA 23320

Jordan E. Slone 38 Director
555 E. Main Street
Norfolk, VA 23510

James E. Andrews has served as a director of the Company since May 1997.
Since 1974, Mr. Andrews has been the principal owner of Anzell Automotive, Inc.,
an automotive repair firm and franchisor of automotive repair shops.

Jeffrey R. Ellis has served as a director of the Company since August 1997.
Between 1973 and 1986, Mr. Ellis was the President and Chief Executive Officer
of Ridgewell Caterers, Inc. Since 1986, he has been a private investor.

Marvin S. Friedberg, has served as a director since May 1999. Since 1989,
he has served as a chief executive officer of Virginia Commonwealth Trading
Company, a firm engaged in international trading.

Roger L. Frost has served as a director of the Company since May 1997.
Between 1956 and 1997, he was an accountant with Goodman & Company, a firm of
Certified Public Accountants, from which he retired as a senior partner in 1997.

Henry U. Harris, III has served as a director of the Company since
September 1997. Since 1980, he has been Portfolio Manager of Virginia Investment
Counselors, Inc., a financial consulting firm, of which he is now President.
Since 1991, he has been the vice-chairman of the Board of Directors of Heritage
Bank & Trust.

Harold J. Marioneaux, Jr. has served as a director of the Company since
November 1994. Since 1990, he has practiced as a dental surgeon and since 1993
has acted as a certified financial planner.

Augustus C. Miller has served as a director of the Company since August
1994. Since 1977, he has been President and Chief Executive Officer of Miller
Oil Co., Inc., a distributor of fuels.

Juan M. Montero, II has served as a director of the Company since July
1995. Since 1972, he has engaged in the private practice of general and thoracic
surgery.

Jordan E. Slone has served as a director of the Company since July 1995.
Since 1987, Mr. Slone has been Chairman and Chief Executive Officer of the
Harbor Group Companies, a diversified real estate and financial services firm.

Audit Committee and Compensation/Stock Option Committee. The Board of
Directors has established a Compensation/Stock Option Committee and an Audit
Committee.

The Members of the Compensation/Stock Option Committee are Messrs.
Meredith, Chisman and Hardee. The Compensation/Stock Option Committee reviews
compensation arrangements for management and key employees and makes
recommendations concerning compensation to the Executive Committee. It also
administers the Company's 1998 Employee Stock Option Plan (the "Stock Option
Plan"). It also grants options to officers and key employees and sets the
exercise price, terms and other provisions of the options granted.

The Members of the Audit Committee are Messrs. Low, Frost and Meredith. The
Audit Committee recommends selection of the Company's independent accountants
and reviews the scope of the annual audit and the results of the audit with
management and the independent accountants.

Risk Factors

Prospective investors in the Company's Common Stock 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 Company's 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 Company's operations are subject to influences outside its
control. Any one or any combination of factors could have a material adverse
effect on the Company's 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 Company's 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 Company's 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." The Company's 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 stock. 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 Company's investment decisions. Typically, 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 Company's 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. During fiscal 2000, the Company
realized a loss of $527,500 on a privately held company in its portfolio. During
fiscal 2000 and 2001, the Company also incurred unrealized losses of
approximately $750,000 and $5.5 million, respectively, in privately held
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. See "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 company's 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 2001, five portfolio companies defaulted on
quarterly dividend payments and five portfolio companies defaulted on quarterly
interest payments. A deterioration in a portfolio company's 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 lender's 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. Since that time, it has made only 13 loans and 19 equity
investments. 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
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Determination of Net Asset Value." The Company has not operated
in recessionary economic periods when the operating results of small business
companies like those in the Company's portfolio often are adversely affected.

Fluctuations in Quarterly Operating Results. 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
Company's 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 Company's business, financial condition and results
of operations for the year. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

Valuation of Portfolio. 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 Company's portfolio is made by the good faith determination of the Company's
Executive Committee in accordance with the SBA's 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 Company's 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 investments. The Company currently has invested in three small
publicly-held portfolio companies whose stock prices have been, and will likely
continue to be, very volatile. This volatility impacts the Company's overall
valuation on a quarterly basis. See "Determination of Net Asset Value."

Illiquidity of Portfolio Investments. Most of the Company's investments
are, and will continue to be, securities acquired directly from small, privately
owned companies. The Company's 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 Company's 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 Price. The Company's 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 Company's 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 Company's 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. Alan Lindauer, the loss of whose services could have a material
adverse effect on the operations of the Company. Mr. Lindauer serves as
President and Chief Executive Officer, and as a Director and Chairman of the
Executive Committee of the Company. Although Mr. 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. See "Management." The Company does not maintain key man life
insurance on Mr. Lindauer.

Expansion. 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 its competitors have
greater resources and significantly more operating history.

Leverage. An important aspect of the Company's 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 Company's 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 Company's 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 the last two
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 Company's 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
principal and interest on loans. As such, losses on a small percentage of the
Company's investments and loans can result in a much larger percentage reduction
in shareholders' equity. See "Business--SBA 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 SBIC's
financial condition or misconduct. In certain 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 Company's 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 Company's plans for future operations and growth.

Absence of Dividends. 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 Company's earnings and its financial
condition and requirements.

Possible Issuance of Preferred Shares; Anti-Takeover Provisions. The
Company's 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 Company's 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.

Events of September 11, 2001. The Company does not have any direct
investments in companies directly affected by the tragic events of September 11,
2001. The Company has not completed its analysis of the indirect affects that
these events may have on its portfolio companies. As a result, the Company
cannot offer any assurance that direct or indirect consequences of these events
will not have an adverse impact on the Company's financial position or results
of operations or on the valuation of its portfolio investments.

Item 2. Properties

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.

Item 3. Legal Proceedings

The Company is a party to several legal actions which are ordinary, routine
litigation incidental to its business. The Company believes that none of those
actions, either individually or in the aggregate, will have a material adverse
effect on the results of operations or financial position of the Company.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the year ended June 30, 2001.

PART II

The information required by Part II, Items 5, 6, 7 and 8 has been
incorporated herein by reference to the Waterside Capital Corporation 2001
Annual Report as set forth below, in accordance with General Instruction G(2) of
Form 10-K.

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

Since February 2, 1998, Waterside Capital Corporation Common Stock has
traded on the NASDAQ Market under the symbol "WSCC." Share price information
with respect to the Common Stock is set forth in the "Selected Quarterly Data"
table included in the Waterside Capital Corporation 2001 Annual Report, which is
incorporated herein by reference.

As of August 31, 2001, there were approximately 698 holders of the Common
Stock, including approximately 98 holders of record. No cash dividends have been
paid with respect to the Common Stock since issuance. The Company has no current
plans to pay any cash dividends relating to the Common Stock in the foreseeable
future, although any dividends on the Common Stock will be at the sole
discretion of the Company's Board of Directors and will depend upon the
Company's profitability and financial condition, capital requirements, statutory
restrictions, requirements of the Small Business Administration, future
prospects and other factors deemed relevant by the Company's Board of Directors.
If any dividends are paid to the holders of Common Stock, all holders will share
equally on a per share basis.

The Company has not issued any of its authorized preferred stock.

Item 6. Selected Financial Data

Information included in the section entitled "Five-Year Summary of Selected
Financial Data" in the Waterside Capital Corporation 2001 Annual Report is
incorporated herein by reference.

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

Information included in the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Waterside
Capital Corporation 2001 Annual Report is incorporated herein by reference.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

The Company's business activities contain elements of risk. The Company
considers the principal types of market risk to be: risk of lending and
investing in small privately owned companies, valuation risk of portfolio, risk
of illiquidity of portfolio investments and the competitive market for
investment opportunities. The Company considers the management of risk essential
to conducting its businesses and to maintaining profitability. Accordingly, the
Company's risk management systems and procedures are designed to identify and
analyze the Company's risks, to set appropriate policies and limits and to
continually monitor these risks and limits by means of reliable administrative
and information systems and other policies and programs.

The Company manages its market risk by maintaining a portfolio of equity
interests that is diverse by industry, geographic area, size of individual
investment and borrower. The Company is exposed to a degree of risk of public
market price fluctuations as four of the Company's 30 investments are in thinly
traded, small public companies, whose stock prices have been volatile. The other
26 investments are in private business enterprises. Since there is typically no
public market for the equity interests of the small companies in which the
Company invests, the valuation of the equity interests in the Company's
portfolio of private business enterprises is based on estimates made by the
Company's Executive Committee. In the absence of a readily ascertainable market
value, the estimated value of the Company's portfolio of equity interests may
differ significantly from the values that would be placed on the portfolio if a
ready market for the equity interests existed. Any changes in estimated value
are recorded in the Company's statement of operations as "Net unrealized gains
(losses)." Each hypothetical 1% increase or decrease in value of the Company's
portfolio of equity interests of $33.7 million at June 30, 2001 would have
resulted in unrealized gains or losses and would have changed net increase
(decrease) in stockholders' equity resulting from operations for the year by 7%
and 17% respectively.

The Company's sensitivity to changes in interest rates is regularly
monitored and analyzed by measuring the characteristics of assets and
liabilities. The Company utilizes various methods to assess interest rate risk
in terms of the potential effect on interest income net of interest expense, the
market value of net assets and the value at risk in an effort to ensure that the
Company is insulated from any significant adverse effects from changes in
interest rates. Based on the model used for the sensitivity of interest income
net of interest expense, if the balance sheet were to remain constant and no
actions were taken to alter the existing interest rate sensitivity, a
hypothetical immediate 100 basis point change in interest rates would have a
negligible effect on the net increase (decrease) in stockholders' equity
resulting from operations over a twelve-month period. Although management
believes that this measure is indicative of the Company's sensitivity to
interest rate changes, it does not adjust for potential changes in credit
quality, size and composition of the balance sheet and other business
developments that could affect operating results. Accordingly, no assurances can
be given that actual results would not differ materially from the potential
outcome simulated by this estimate.

Item 8. Financial Statements and Supplementary Data

The Financial Statements of Waterside Capital Corporation, including notes
thereto, are presented in the Waterside Capital Corporation 2001 Annual Report
and are incorporated herein by reference.

Item 9. Changes in and Disagreements with Accountants

None.

PART III

The information required by Part III, Items 10, 11, 12, and 13 has been
incorporated herein by reference to the Company's 2001 Proxy Statement as set
forth below, in accordance with General Instruction G(3) of Form 10-K.

Item 10. Directors and Executive Officers of the Registrant; Section 16(a)
Beneficial Ownership Reporting Compliance

Information relating to directors of the Company and compliance with
Section 16(a) of the Exchange Act is set forth in the sections entitled
"Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's 2001 Proxy Statement and is incorporated herein by
reference. Pursuant to General Instruction G(3) of Form 10-K, certain
information concerning the executive officers of the Company is set forth under
the caption entitled "Executive Officers of the Company" in Part I, Item 1, of
this Form 10-K.

Item 11. Executive Compensation

Information regarding compensation of officers and directors of the Company
is set forth in the section entitled "Executive Compensation" in the Company's
2001 Proxy Statement and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

Information regarding ownership of certain of the Company's securities is
set forth in the section entitled "Security Ownership of Management and Certain
Beneficial Owners" in the Company's 2001 Proxy Statement and is incorporated
herein by reference.

Item 13. Certain Relationships and Related Transactions

Information regarding certain relationships and related transactions with
the Company is set forth in the section entitled "Certain Relationships and
Related Transactions" in Waterside's 2001 Proxy Statement and is incorporated
herein by reference.

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) Documents filed as part of this Report:

(1) Financial Statements

The Financial Statements of Waterside Capital Corporation and the
Auditor's Report thereon, are incorporated herein by reference.

Financial Statements:
Independent Auditors Report of KPMG LLP
Balance Sheets at June 30, 2000 and 2001
Statements of Operations for the Years ended June 30, 1999, 2000
and 2001
Statements of Changes in Stockholders' Equity for the Years ended
June 30, 1999, 2000 and 2001
Statements of Cash Flows for the Years ended June 30, 1999, 2000
and 2001
Notes to Financial Statements

(2) Financial Statement Schedule

The information required by Schedule I - Investments in
Securities of Unaffiliated Issuers is included in the Schedule of
Portfolio Investments which is an integral part of the financial
statements. The information required by Schedule VII - Valuation
and Qualifying Accounts is included in this report as Schedule
VII.

All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable and therefore have been omitted.

(3) Exhibits

The exhibits listed on the accompanying Exhibit Index are filed
or incorporated by reference as part of this Form 10-K and such
Exhibit Index is incorporated herein by reference.

(b) Reports on Form 8-K (filed during the fourth quarter of 2001):

None.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

WATERSIDE CAPITAL CORPORATION

By: /s/ J. Alan Lindauer
--------------------
J. Alan Lindauer
President and Chief Executive Officer

Dated: September 25, 2001

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

Signature Title Date
--------- ----- ----

/s/ J. Alan Lindauer Director, President September 25, 2001
-------------------- and Chief Executive Officer
J. Alan Lindauer

/s/ James E. Andrews Director September 25, 2001
--------------------
James E. Andrews

/s/ J. W. Whiting Chisman, Jr. Director September 25, 2001
------------------------------
J. W. Whiting Chisman, Jr.

/s/ Jeffrey R. Ellis Director September 25, 2001
--------------------
Jeffrey R. Ellis

/s/ Eric L. Fox Director September 25, 2001
---------------
Eric L. Fox

/s/ Roger L. Frost Director September 25, 2001
------------------
Roger L. Frost

/s/ Marvin S. Friedberg Director September 25, 2001
-----------------------
Marvin Friedberg

/s/ Ernest F. Hardee Director September 25, 2001
--------------------
Ernest F. Hardee

/s/ Henry U. Harris, III Director September 25, 2001
------------------------
Henry U. Harris, III

/s/ Robert I. Low Director September 25, 2001
-----------------
Robert I. Low

/s/ Harold J. Marioneaux, Jr. Director September 25, 2001
-----------------------------
Harold J. Marioneaux, Jr.

/s/ Peter J. Meredith, Jr. Chairman of the Board September 25,2001
-------------------------- and Director
Peter J. Meredith

/s/ Charles H. Merriman, III Director September 25, 2001
----------------------------
Charles H. Merriman, III

/s/ Augustus C. Miller Director September 25, 2001
----------------------
Augustus C. Miller

/s/ Juan M. Montero, II Director September 25, 2001
-----------------------
Juan M. Montero, II

/s/ R. Scott Morgan, Sr. Director September 25, 2001
------------------------
R. Scott Morgan, Sr.

/s/ Richard G. Ornstein Director September 25, 2001
-----------------------
Richard G. Ornstein

/s/ Jordan E. Slone Director September 25, 2001
-------------------
Jordan E. Slone

/s/ Gerald T. McDonald Chief Financial Officer September 25, 2001
---------------------- (Principal Accounting and
Gerald T. McDonald Financial Officer)

Independent Auditors' Report on Financial Statement Schedule

The Stockholders and Board of Directors
Waterside Capital Corporation:

Under date of July 31, 2001, we reported on the balance sheets of Waterside
Capital Corporation, including the schedule of portfolio investments, as of June
30, 2000 and 2001 and the related statements of operations, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended June 30, 2001, which are incorporated by reference. In connection
with our audits of the aforementioned financial statements, we also audited the
related financial statement schedule. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.

In our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.

/s/ KPMG

July 31, 2001
Norfolk, Virginia

Schedule VII

Waterside Capital Corporation
Valuation and Qualifying Accounts
Years Ended June 30, 1999, 2000 and 2001

Balance at Additions Balance at
beginning of charged to costs end of
period and expenses Deductions period
---------------- ---------------- ---------------- ----------------

Year ended December 31, 1999
-------------------------------

Valuation allowance (included
net in deferred tax asset) for
deferred tax asset $ - $ - $ - $ -

Year ended December 31, 2000
-------------------------------

Valuation allowance (included
net in deferred tax asset) for
deferred tax asset $ - $ - $ - $ -

Year ended December 31, 2001
-------------------------------

Valuation allowance (included
net in deferred tax asset) for
deferred tax asset $ - $ 2,492,000 $ - $ 2,492,000

EXHIBIT INDEX

Exhibit
No. Description
------- -----------

1 Amended and Restated Articles of Incorporation of the Registrant,
incorporated by reference to Exhibit 1 to Financial Statements and
Exhibits on Form N-5/A as filed with the Securities and Exchange
Commission on January 9, 1999.
2 Amended and Restated Bylaws of the Registrant, incorporated by
reference to Exhibit 2 to Financial Statements and Exhibits on
Form N-5/A as filed with the Securities and Exchange Commission on
January 9, 1999.
8 The Registrant's License From the Small Business Administration,
incorporated by reference to Exhibit 8 to Financial Statements and
Exhibits on Form N-5/A as filed with the Securities and Exchange
Commission on January 9, 1999.
10.1 Employment Agreement, dated as of January 1, 2001, between the
Registrant and J. Alan Lindauer, incorporated by reference to exhibit
10.1 to the Company's Quarterly Report on Form 8-K filed by the
registrant on February 14, 2001.
10.2 Employment Agreement, dated as of January 1, 2001, between the
Registrant and Gerald T. McDonald, incorporated by reference to
exhibit 10.2 to the Company's Quarterly Report on Form 8-K filed by
the registrant on February 14, 2001.
10.3 Employment Agreement, dated as of January 1, 2001, between the
Registrant and Martin N. Speroni, incorporated by reference to exhibit
10.3 to the Company's Quarterly Report on Form 8-K filed by the
registrant on February 14, 2001.
10.4 Employment Agreement, dated as of January 1, 2001, between the
Registrant and Lex W. Troutman, incorporated by reference to exhibit
10.4 to the Company's Quarterly Report on Form 8-K filed by the
registrant on February 14, 2001.
10.5 1998 Employee Stock Option Plan, incorporated by reference to Exhibit
B to the proxy statement on Form DEF 14A filed by the registrant on
September 16, 1998.
*13 Annual Report to Shareholders.
*99.1 The Financial Statements and notes thereto which appear in Waterside
Capital Corporation 2001 Annual Report to Shareholders (filed as
Exhibit 13 to this Form 10-K) are incorporated herein by reference.

_____________

* Filed herewith.

WATERSIDE CAPITAL CORPORATION

2001 Annual Report