(9) | | Includes 31,130 shares which Mr. Troutman has the right to acquire within 60 days through the exercise of options granted under the 1998 Employee Stock Option Plan and 2,537(7) | Includes 31,130 shares which Mr. Speroni has the right to acquire within 60 days through the exercise of options granted under the 1998 Employee Stock Option Plan (10,000 of which are also deemed to be beneficially owned by Mr. Lindauer by virtue of a contractual option arrangement enter into between Mr. Speroni and Mr. Lindauer) and 12,174 shares held under the Company’s 401(k) plan. |
*Represents less than one percent (1%) interest.
(8) | Includes 31,130 shares which Mr. Troutman has the right to acquire within 60 days through the exercise of options granted under the 1998 Employee Stock Option Plan (10,000 of which are also deemed to be beneficially owned by Mr. Lindauer by virtue of a contractual option arrangement enter into between Mr. Troutman and Mr. Lindauer) and 2,448 held under the Company’s 401(k) plan. |
(9) | Includes 40,300 shares which Mr. Lindauer has the right to acquire within 60 days through the exercise of options granted under the 1998 Employee Stock Option Plan, 3,129 shares held under the Company’s 401(k) plan, and 20,000 shares which Mr. Lindauer has the right to acquire immediately by virtue of contractual option arrangements entered into with each of Messrs. Speroni and Troutman. |
Meetings and Committees of the Board of Directors Meetings/Annual Meeting Attendance The business of the Company is managed under the direction of the Board of Directors. The Executive Committee of the Board of Directors has been delegated the power, with certain exceptions, to act in place of the full Board during all periods between regular meetings of the Board. The Board of Directors held 12 meetings during fiscal year 2005. All members of the Board of Directors except Mr. Lindauer and Mr. Litton, are independent directors. Each member of the Board of Directors attended at least 75% of the Board Meetings during fiscal year 2005, other than Messrs. Chisman, Harris, Low, Miller, Montero, Morgan and Slone. The Board of Directors does not have a policy regarding attendance at annual shareholders’ meetings, however Directors are encouraged to attend such meetings. During the Company’s last annual meeting of shareholders held on December 6, 2004, ten Board members were in attendance. Committees The Board of Directors has established an Executive Committee, an Audit Committee, and a Compensation/Stock Option 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 members 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 the relative rights, preferences and limitations of a class or series of shares within limits specifically prescribed by the Board of Directors. The Executive Committee meets on call to review significant developments affecting the Company and to act on matters requiring approval. It also holds special meetings when an important matter requires action between scheduled meetings. 9
The Executive Committee did not meet during fiscal year 2005. The members of the Executive Committee are Messrs. Chisman, Hardee, Lindauer, Litton, Low, Meredith and Morgan. The Audit Committee held two meetings during fiscal year 2005. Its members were James E. Andrews, J. W. Whiting Chisman Jr., Roger L. Frost and Peter M. Meredith, Jr. See “Audit Committee Report” below. Mr. Frost resigned June 30, 2005. The Compensation Committee makes recommendations to the Board of Directors as to, among other things, the compensation of the Chief Executive Officer, each officer who is also a director of the Company and designated other members of senior management, as well as new compensation and stock plans. The Compensation Committee met one time during fiscal year 2005. The members of the Compensation Committee are Messrs. Chisman, Hardee, and Meredith. See “Compensation Committee Report” below. Director Nominations The Board of Directors of the Company does not maintain a nominating committee, rather the entire Board is responsible for selecting nominees for election as Directors. The Company believes that the Board is able to fully consider and select qualified nominees for election to the Board without delegating that responsibility to a committee of independent Directors or adopting formal procedures. A majority of the independent Directors then serving on the Board must approve any nominee to be recommended by the Board to the Company’s shareholders. The Board does not currently have a committee charter or written policy with regard to the nomination process. Candidates have traditionally been recommended to the Board by its members, and there is not a formal process for identifying or evaluating new director nominees. Any recommendations for potential Director nominees received from shareholders will be evaluated in the same manner that potential nominees recommended by Board members, management or other parties are evaluated. Nominations should be addressed to: Gerald T. McDonald, Secretary, Waterside Capital Corporation, 500 East Main Street, Suite 800, Norfolk, Virginia 23510. Qualifications for consideration as a Director nominee may vary according to the particular areas of expertise being sought as a complement to the existing Board composition. However, in making its nominations, the Board of Directors considers, among other things, an individual’s business experience, community involvement, industry experience, financial background, breadth of knowledge about issues affecting the Company, time available for meetings and consultation regarding Company matters, and other particular skills and experience possessed by the individual. Meetings and Committees of the Board of Directors
Meetings
The business of the Company is managed under the direction of the Board of Directors. The Executive Committee of the Board of Directors has been delegated the power, with certain exceptions, to act in place of the full Board during all periods between regular meetings of the Board, and the Executive Committee meets on a regularly scheduled basis during the year. The Board of Directors held one meeting during fiscal year 2003. All of the members of the Board of Directors except Mr. Lindauer are independent directors. Each member of the Board of Directors attended the meeting during fiscal year 2003, other than Messrs. Chisman and Ornstein, who were absent from the meeting.
Committees
The Board of Directors has established an Executive Committee (“Executive Committee”), an Audit Committee (“Audit Committee”) and a Compensation/Stock Option Committee (“Compensation 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 members 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 the relative rights, preferences and limitations
7
of a class or series of shares within limits specifically prescribed by the Board of Directors. The Executive Committee meets on a regularly scheduled basis during the year to review significant developments affecting the Company and to act on matters requiring approval. It also holds special meetings when an important matter requires action between scheduled meetings.
The Executive Committee met nine times during fiscal year 2003. All members of the Executive Committee attended at least 75% of all Executive Committee meetings in fiscal year 2003, except for Messrs. Chisman, Hardee, Low Morgan and Ornstein. The members of the Executive Committee are Messrs. Chisman, Hardee, Lindauer, Low, Meredith, Merriman, Morgan, and Ornstein.
The Audit Committee held six meetings in 2003. At year-end, its members were James E. Andrews, J. W. Whiting Chisman Jr., Roger L. Frost and Peter M. Meredith, Jr. See “Audit Committee Report.”
The Compensation Committee makes recommendations to the Board of Directors as to, among other things, the compensation of the Chief Executive Officer, each officer who is also a director of the Company and designated other members of senior management, as well as new compensation and stock plans. The Compensation Committee met one time during fiscal year 2003. The members of the Compensation Committee are Messrs. Chisman, Hardee, and Meredith. See “Compensation Committee Report.”
Identification of Director-Nominees
The Company has no nominating committee. The duties of selecting nominees for Directors and executive officers is performed by the entire Board of Directors. The Company will consider director-nominees recommended by shareholders, although it has not actively solicited recommendations from shareholders for nominees, nor has the Company established any procedure for this purpose for the Annual Meeting.
Audit Committee Report The Audit Committee of the Board of Directors is composed of four (4)three directors, each of whom is an “independent director” as that term is defined under the Nasdaq listing standards. To be an independent director under this definition, a director may not be an officer or an employee of the Company or have any other relationship with the Company that interferes with the exercise of independent judgment. Because we are an investment company registered under the Investment Company Act, any director who is an “interested person” of the Company within the meaning of § 2(a)(19) of the Investment Company Act will not be deemed independent under Nasdaq rules. As discussed above, the Audit Committee held sixtwo meetings during fiscal year 2003.2005. Responsibilities of 10
the Audit Committee are set forth in its Charter, which is reviewed and amended periodically by the Company’s Board of Directors, as appropriate. A copy of the Company’s Audit Committee Charter was attached to the Proxy Statement prepared by the Company and distributed to shareholders in connection with the Company’s 2001 Annual Meeting of Shareholders. Among other things, the Audit Committee: serves as an independent and objective monitor of the Company’s financial reporting process and internal control systems; appraises the efforts and effectiveness of the Company’s independent auditors, including their independence and professionalism; provides an efficient means for communication among the Board, the independent auditors, and the Company’s financial and senior management; 8
recommends to the Board of Directors the engagement of, and the fees to be paid to, the Company’s independent auditor; and supervises the Company’s compliance with applicable legal and regulatory requirements. The Audit Committee reviews the Company’s financial reporting process on behalf of the Board of Directors. Management has the primary responsibility of the financial statements and the reporting process, including the system of internal controls. In this context, the Audit Committee has met and held discussions with management and the independent auditors. Management represented to the Audit Committee that the Company’s financial statements were prepared in accordance with generally accepted accounting principles, and the Audit Committee has reviewed and discussed the financial statements with management and the independent auditors. The Audit Committee discussed with the independent auditors the matters required to be discussed by Statement of Auditing Standards No. 61 (Communication(Communication with Audit Committees)Committees). In addition, the Audit Committee has discussed with the independent auditors the auditors’ independence from the Company and its management, including the matters in the written disclosures required by the Independence Standards Board Standards No. 1 (Independence(Independence Discussions With Audit Committees)Committees). The Audit Committee discussed with the Company’s independent auditor the overall scope and specific plans for their respective audits. The Audit Committee meets with the independent auditors, with and without management present, to discuss the results of their examinations, the evaluations of the Company’s internal controls, and the overall quality of the Company’s financial reporting. The meetings also are designed to facilitate any private communications with the Audit Committee desired by the independent auditors. In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors, and the Board has approved, that the audited financial statements of the Company be included in the Annual Report to Shareholders for the fiscal year ended June 30, 2005. The Audit Committee and the Board have also appointed, subject to shareholder ratification, the selection of the Company’s independent auditor, Witt Mares Eggleston Smith, PLC. | | • James E. Andrews
• J. W. Whiting Chisman, Jr.
• Roger L. Frost
• Peter M. Meredith, Jr
| | |
James E. Andrews J. W. Whiting Chisman, Jr. Peter M. Meredith, Jr. 11
EXECUTIVE AND DIRECTOR COMPENSATION The table below sets forth certain information regarding cash and other compensation paid during the fiscal years ended June 30, 2001, 20022003, 2004 and 20032005 to each of the Named Executive Officers (the Chief Executive Officer and the three highest compensated Officers receiving more than $60,000$100,000 in annual compensation) in all capacities in which they served. 9
Summary Compensation Table | | | | | | | | | | | | | | | | | Annual Compensation
| | (1)
Long-term
Compensation
Awards
Securities
Underlying
Options /
SARs(#)
| | (2)
All Other
Compensation
| Name and Principal Position
| | Year
| | Salary
| | Bonus
| | All Other Annual Compensation(1)
| | Aggregate Compensation From the Company
| J. Alan Lindauer CEO & President
| | 2005 2004 2003 2002
2001
| | $
| 171,600 167,750 165,000
165,000
150,000
| | $
| —
27,000 —
35,000
| | —
— $
—
| 11,726 11,636 11,779 | | — $
—
15,000
| 183,260 206,386 176,779 | | $
| 11,779
8,809
5,328
| | | | Gerald T. McDonald CFO, Treasurer & Secretary
| | 2005 2004 2003
2002
2001 | | | 125,801 112,250 121,000
121,000
110,000
| |
| —
—
35,000
| | —
—
—
| | —
—
15,000
| | | 8,821—
8,70718,000
4,811
| Lex W. Troutman
Business Development
Officer — | | 2003
2002
2001 | 9,116 7,898 8,821 | | | 121,000134,917
121,000138,148
100,000 129,821 | | | | | | | — Lex W. Troutman
—
30,000 Business Development Officer
| | — 2005
— 2004
— 2003 | | —
—
10,000
| | 130,317
| 9,108123,000
8,256
5,969
| Martin N. Speroni
Director of Research
| | 2003
2002
2001121,000 | | | 110,000—
110,00018,000
100,000 — | |
| 9,387 8,533 9,108 | |
| 139,704 149,533 130,108 | | | | | | | — Martin N. Speroni
—
30,000 Director of Research
| | — 2005
— 2004
— 2003 | | —
—
10,000
| 124,800 120,333 110,000 | |
| 8,019
8,556—
4,65618,000
|
(1)— | | Amount represents stock options granted in the year indicated.
| 8,914 8,268 8,019 | |
| 133,714 146,601 118,019 |
(2) | (1) | Includes 401(k) match and term life insurance premiums paid on behalf of the Named Executive Officers. |
The following table contains information concerning exercises of stock options by the Named Executive Officers during the fiscal year ended June 30, 2003 and the fiscal year-end value of all unexercised stock options held by the Named Executive Officers. There were no exercises of stock options by, or grants of stock options to, the Named Executive Officers during the fiscal year ended June 30, 2003.2005. 12
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year- End Option/SAR Values | | | | | | | | | | Name
| | Shares Acquired on Exercise(#)
| | Value Realized($)
| | Number of Securities Underlying Unexercised Options/SARs at FY-end(#) Exercisable/ Unexercisable
| | Value of Unexercised In- the-Money options/SARs at FY-end(1) Exercisable/ Unexercisable
| J. Alan Lindauer CEO & President | | — | | — | | 60,300/0 | | $ | 2,975 | | | | | | Gerald T. McDonald CFO, Treasurer & Secretary | | — | | — | | 40,300/0 | | | 1,275 | | | | | | Lex W. Troutman Business Development Officer | | — | | — | | 31,130/0 | | | 850 | | | | | | Martin N. Speroni Director of Research | | — | | — | | 31,130/0 | | | 850 |
| | | | | | Number of
Securities
Underlying
Unexercised
Options/SARs at
FY-end(#)(1)
| | Value of
Unexercised In-
the-Money
options/SARs at
FY-end($)(1)
| Name
| | Shares Acquired
on Exercise(#)
| | Value
Realized($)
| | Exercisable/
Unexercisable
| | Exercisable/
Unexercisable
| J. Alan Lindauer
CEO & President
| | — | | — | | 40,300/0 | | -/- | Gerald T. McDonald
CFO, Treasurer & Secretary
| | — | | — | | 40,300/0 | | -/- | Lex W. Troutman
Business Development Officer
| | — | | — | | 31,130/0 | | -/- | Martin N. Speroni
Director of Research
| | — | | — | | 31,130/0 | | -/- |
10
| (1) | | Under Securities and Exchange Commission rules, an option is only considered in-the-money for purposes of the chart if the per share exercise price is less than $2.67,$4.21, the last reported sales price of our common stock on the Nasdaq SmallCap Market on June 30, 2003,2005, the last business day of the Company’s 20032005 fiscal year. None of the stock options held by the Named Executive Officers are exercisable for less than $2.67 per share. |
Employment Agreements
Mr. Lindauer is employed as the Company’s President and Chief Executive Officer under an employment agreement dated January 1, 2001 (the “Lindauer Employment Agreement”). The Lindauer Employment Agreement expires on January 31, 2004, unless terminated earlier in accordance with its terms. In addition, if a change of control of the Company occurs during the period covered by the Lindauer Employment Agreement, the term is automatically extended for a period of 36 months beyond the month in which the change of control occurred. Mr. Lindauer is paid an annual salary of $165,000. The Lindauer Employment Agreement provides, should Mr. Lindauer leave employment with the Company, a two-year covenant not to compete with the Company within the Commonwealth of Virginia and a one-year employee non-solicitation clause. It also imposes certain non-disclosure obligations on Mr. Lindauer with respect to the Company’s confidential and proprietary information.
Mr. McDonald is employed as the Company’s Treasurer and Chief Financial Officer under an employment agreement dated January 1, 2001 (the “McDonald Employment Agreement”). The McDonald Employment Agreement expires on January 31, 2004, unless terminated earlier in accordance with its terms. In addition, if a change of control of the Company occurs during the period covered by the McDonald Employment Agreement, the term is automatically extended for a period of 36 months beyond the month in which the change of control occurred. Mr. McDonald is paid an annual salary of $121,000. The McDonald Employment Agreement provides, should Mr. McDonald leave employment with the Company, a two-year covenant not to compete with the Company within the Commonwealth of Virginia and a one-year employee non-solicitation clause. It also imposes certain non-disclosure obligations on Mr. McDonald with respect to the Company’s confidential and proprietary information.
Mr. Troutman is employed as the Company’s Vice President and Business Development Officer under an employment agreement dated January 1, 2001 (the “Troutman Employment Agreement”). The Troutman Employment Agreement expires on January 31, 2004, unless terminated earlier in accordance with its terms. In addition, if a change of control of the Company occurs during the period covered by the Troutman Employment Agreement, the term is automatically extended for a period of 36 months beyond the month in which the change of control occurred. Mr. Troutman is paid an annual salary of $121,000. The Troutman Employment Agreement provides, should Mr. Troutman leave employment with the Company, a two-year covenant not to compete with the Company within the Commonwealth of Virginia and a one-year employee non-solicitation clause. It also imposes certain non-disclosure obligations on Mr. Troutman with respect to the Company’s confidential and proprietary information.
Mr. Speroni is employed as the Company’s Vice President and Director of Research under an employment agreement dated January 1, 2001 (the “Speroni Employment Agreement”). The Speroni Employment Agreement expires on January 31, 2004, unless terminated earlier in accordance with its terms. In addition, if a change of control of the Company occurs during the period covered by the Speroni Employment Agreement, the term is automatically extended for a period of 36 months beyond the month in which the change of control occurred. Mr. Speroni is paid an annual salary of $110,000. The Speroni Employment Agreement provides, should Mr. Speroni leave employment with the Company, a two-year covenant not to compete with the Company within the Commonwealth of Virginia
11
and a one-year employee non-solicitation clause. It also imposes certain non-disclosure obligations on Mr. Speroni with respect to the Company’s confidential and proprietary information.
401(k) Plan In July of 1998, the Company adopted a profit sharing and thrift plan qualified under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”). All employees of the Company may elect to participate and contribute up to 8% of their annual salary in the 401(k) Plan. The Company may make matching contributions and the amount of such contributions, if any, will be determined by the Company each year. The Company made 100% matching contributions of the first 6% of each participating employee’s contributions to the 401(k) Plan during the fiscal year ended June 30, 2003.2005. Stock Option Plan The Waterside Capital Corporation 1998 Employee Stock Option Plan (the “Option Plan”) was approved by the shareholders of the Company on October 22, 1998. The shareholders of the Company approved an amendment to the Plan on October 25, 1999. The Option Plan provides for the issuance of stock option awards to employees of the Company. The purpose of the Option Plan is to promote the long-term growth and profitability of the Company by providing employees with incentives to improve stockholdershareholder value and contribute to the growth and financial success of the Company, and by enabling the Company to attract, retain, and reward highly motivated and qualified employees. The maximum number of shares of the Company’s Common Stock that may be issued with respect to awards granted under the Option Plan is 212,000. The maximum number of shares that may be issued with respect to awards under the Plan to an individual in a calendar year may not exceed 25,000 shares. The Option Plan is administered by the Compensation Committee and the Option Plan authorizes the Compensation 13
Committee to make all awards. The Compensation Committee determines the prices, vesting schedules, expiration dates, and other material conditions under which such awards may be exercised. Directors’ Compensation During 2003,2005, Directors and members of the committees of the Board of Directors received $100 for each meeting they attended. In lieu of receiving cash, all Directors who were entitled to receive fees for meeting attendance elected to receive such fees in the form of Common Stock purchased by the Company on the open market. Directors who are also employees of the Company received no compensation from the Company in their capacity as directors. The Company reimburses all of its directorsDirectors for travel and out of pocket expenses in connection with their attendance at meetings of the Board of Directors. The following table contains information concerning the compensation paid to the Company’s Directors during the fiscal year ending June 30, 2005: Section 16 Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, together with rules promulgated by the Securities and Exchange Commission pursuant to the Investment Company Act of 1940, as amended, requires directors, officers and persons who beneficially own more than 10% of a registered class of stock of the Company to file initial reports of ownership (Forms 3) and reports of changes in beneficial ownership (Forms 4 and 5) with the SEC and NASDAQ. Such persons are also required under the rules and regulations promulgated by the SEC to furnish the Company with copies of all Section 16(a) forms they file.
12
| | | | Name of Director
| | Total Compensation from the Company Paid to Directors(1)
| James E. Andrews | | $ | 1,200 | J. W. Whiting Chisman, Jr. | | | 1,000 | Eric L. Fox | | | 1,000 | Marvin S. Friedberg | | | 900 | Roger L. Frost | | | 1,200 | Ernest F. Hardee | | | 1,100 | Henry U. Harris III | | | 600 | Robert I. Low | | | 800 | Peter M. Meredith, Jr. | | | 1,300 | Augustus C. Miller | | | 200 | Juan M. Montero II | | | 800 | R. Scott Morgan | | | 300 | Jordan E. Slone | | | 500 | | | “Interested Person” Directors | | | | J. Alan Lindauer | | | — | T. Richard Litton Jr. | | | 900 |
During the Company’s 2003 fiscal year, each Director of the Company failed to file a Form 4 relating to the receipt by such Director of shares of Common Stock issued by the Company in lieu of directors’ fees. These shares were purchased on the open market and issued to Directors on a periodic basis.
(1) | Paid in the form of Common Stock purchased by the Company on the open market. |
Compensation Committee Report Concerning Compensation of Certain Executive Officers This report describes the Company’s executive officer compensation strategy, the components of the compensation program, and the manner in which the 20032005 compensation determinations were made for the Company’s Chief Executive Officer, J. Alan Lindauer, and the Company’s other executive officers (collectively “Executive Officers”). In addition to the information set forth above under “Executive Compensation,” the Compensation Committee is required to provide shareholders a report explaining the rationale and considerations that led to the fundamental executive compensation decisions affecting the Company’s Executive Officers. In fulfillment of this requirement, the Compensation Committee, at the direction of 14
the Company’s Board of Directors, has prepared the following report for inclusion in this Proxy Statement. None of the members of the Compensation Committee are executive officers or employees of the Company. Compensation Philosophy The compensation of the Company’s Executive Officers is designed to attract, retain, motivate and reward qualified, dedicated executives, and to directly link compensation with (i) the Executive Officer’s previous and anticipated performance, (ii) the contributions and responsibilities of the Executive Officer to the Company and (iii) the Company’s profitability. None of these three factors is given more relative consideration than any other. The principal components of an Executive Officer’s compensation package during fiscal year 20032005 were (i) a base salary at a stated annual rate, together with certain other benefits as may be provided from time to time and (ii) discretionary cash bonuses. See “Bonus Program” below. In addition, stock option awards have been made in the past, and will continue to be made in the future, to the Company’s Executive Officers pursuant to the Company’s 1998 Employee Stock Option Plan. Employment Agreements
The Company has entered into Employment Agreements with certain Executive Officers. The Compensation Committee believes that written employment agreements are necessary to attract and retain a quality management team and are consistent with the Company’s compensation philosophy. To strengthen the Company’s ability to retain quality management, four written employment agreements were entered into between certain Executive Officers effective January 1, 2001. The principal terms of these employment agreements are described under “Executive Officer Employment Agreements” above.
Bonus Program The Company has historically awarded annual cash bonuses to Executive Officers based upon individual performance and financial performance of the Company. Although no bonus awards were made to Executive Officers during fiscal year 2003, the Compensation Committee expects that such bonuses will be awarded in the future. 13
1998 Employee Stock Option Plan The Board and the Compensation Committee strive to compensate key employees of the Company in a manner that aligns closely the interests of such key employees with the interests of the Company’s shareholders. In furtherance of this goal, in 1998 the Board adopted the Waterside Capital Corporation 1998 Employee Stock Option Plan, which was approved by shareholders. During 1999, the Board adopted, and the shareholders approved, an amendment to the Plan. The purpose of the Plan is to support the business goals of the Company and to attract, retain and motivate management officials of high caliber by providing incentives that will, through the award of options to acquire the Company’s Common Stock, associate more closely the interests of Executive Officers and key employees of the Company with the interests of the Company’s shareholders. The Compensation Committee did not grant any stock options to Executive Officers during fiscal year 2003,2005, however, the Committee expects that such stock option grants will be awarded in the future. Limitation on Deductibility of Certain Compensation for Federal Income Tax Purposes Section 162(m) of the Internal Revenue Code (“162(m)”) precludes the Company from taking a deduction for compensation in excess of $1 million for the Chief Executive Officer or certain of its other highest paid officers. Certain performance based compensation, however, is specifically exempt from the deduction limit. The Compensation Committee has concluded that 162(m) will not impact the Company during fiscal year 20042005 because compensation in excess of $1 million will not be paid to any employee of the Company. 15
J. W. Whiting Chisman, Jr. Ernest F. Hardee Peter M. Meredith, Jr. THE PRECEDING “COMPENSATION COMMITTEE REPORT CONCERNING COMPENSATION OF CERTAIN EXECUTIVE OFFICERS” AND THE AUDIT COMMITTEE REPORT APPEARING ELSEWHERE IN THIS PROXY STATEMENT SHALL NOT BE DEEMED TO BE SOLICITING MATERIAL OR TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED, OR INCORPORATED BY REFERENCE IN ANY DOCUMENTS SO FILED. Section 16 Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934, as amended, together with rules promulgated by the Securities and Exchange Commission pursuant to the Investment Company Act, requires directors, officers and persons who beneficially own more than 10% of a registered class of stock of the Company to file initial reports of ownership (Forms 3) and reports of changes in beneficial ownership (Forms 4 and 5) with the SEC and NASDAQ. Such persons are also required under the rules and regulations promulgated by the SEC to furnish the Company with copies of all Section 16(a) forms they file. PROPOSAL 2. RATIFICATION OF APPOINTMENT OF AUDITORS Effective as of May 12, 2003, the Company appointed Witt Mares Eggleston Smith, PLC as the new independent auditor for the Company. Effective as of May 8, 2003, the Company dismissed KPMG LLP as the independent auditor of the Company. This change in the auditor for the Company was approved by theThe Company’s Audit Committee of the Board of Directors of the Company. The Audit Committee decided to solicit audit proposals from three independent public accounting firms, including KPMG LLP prior to the commencement of the audit for the Company’s fiscal year ending June 30, 2003. After receiving these proposalshas selected and considering a variety of factors, including cost, the Audit Committee decided to dismiss KPMG LLP and engage Witt Mares Eggleston Smith, PLC as the Company’s independent auditor.
14
During the Company’s two most recent fiscal years, there were no disagreements between the Company and KPMG LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of KPMG LLP, would have caused KPMG LLP to make reference to the subject matter of the disagreement in connection with its report. None of the reportable events described under Item 304(a)(1)(v) of Regulation S-K, promulgated under the Securities Act of 1933, as amended (“Regulation S-K”), occurred within the Company’s two most recent fiscal years prior to KPMG LLP’s dismissal.
The audit reports of KPMG LLP on the financial statements of the Company as of and for the fiscal years ended June 30, 2002 and 2001 did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles. The Company provided KPMG LLP with a copy of the foregoing disclosure, and KPMG LLP issued a letter to the Company on May 12, 2003 stating its agreement with such statements.
During the Company’s two most recent fiscal years, and prior to its engaging Witt Mares Eggleston Smith, PLC, the Company did not consult with Witt Mares Eggleston Smith, PLC with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s financial statement, or any other matters or reportable events listed on Item 304(a)(2)(i) and (ii) of Regulation S-K.
The Board of Directors of the Company desires that the Company’s appointment ofapproved Witt Mares Eggleston Smith, PLC as the Company’s independent auditor to audit the financial statements of the Company for the fiscal year ending June 30, 2006, and the Audit Committee desires that such appointment be ratified by the Company’s shareholders. Witt Mares Eggleston Smith, PLC audited the Company’s financial statements for the fiscal year ended June 30, 2005. A representative of Witt Mares Eggleston Smith, PLC will be present at the Annual Meeting. Such representative will have an opportunity to make a statement if he or she so desires, and will be available to respond to appropriate questions. Ratification by the shareholders of the appointment of Witt Mares Eggleston Smith, PLC requires the affirmative vote of the majority of the votes cast at the Annual Meeting.
16
Fees Paid to Principal Accountants The following table sets forth the professional fees paid to the Company’s independent auditor by the Company for professional services rendered for the Company’s last two completed fiscal years. | | | | | | | | | | | | | | | 2005
| | % of Total
| | | 2004
| | % of Total
| | Audit fees(1) | | $ | 40,000 | | 77.2 | % | | $ | 4,000 | | 25.3 | % | Audit-related fees(2) | | | 6,000 | | 11.6 | | | | 6,000 | | 38.0 | | Tax fees(3) | | | 5,000 | | 9.7 | | | | 5,000 | | 31.6 | | All other fees (4) | | | 800 | | 1.5 | | | | 800 | | 5.1 | | Total | | $ | 51,800 | | 100 | % | | $ | 15,800 | | 100 | % |
(1) | These fees are paid for professional services rendered for the audit of the Company’s financial statements for fiscal 2005 and 2004. Fees for professional services rendered for the audit of the Company’s financial statements for fiscal 2005 in the amount of approximately $24,000 have paid during fiscal 2006. |
(2) | These are fees paid for assurance and related services that were reasonably related to the performance of the audit or review of Company’s financial statements that are not reported under “Audit fees” above, including consultations regarding internal controls and financial accounting and reporting matters. |
(3) | These are fees paid for professional services rendered for tax compliance, tax planning, and tax advice. |
(4) | These are fees for permissible work performed by Witt Mares Eggleston Smith, PLC that does not fall within the specifications of the above categories. This did not include any services for financial information system design or implementation. |
The Company’s Audit Committee pre-approves all audit, audit-related and non-audit services provided by our independent auditor, Witt Mares Eggleston Smith, PLC. Generally, services are pre-approved by the Audit Committee through its annual review of the engagement letter. Subsequently, as the need for additional services arise, detailed information regarding the specific audit, audit-related, tax and permissible non-audit services are submitted to the Audit Committee for its review and approval prior to the provision of such services. In the event that the Audit Committee cannot meet prior to the provision of such services, the Committee has delegated to its Chair the authority to pre-approve such services. All such pre-approvals are then reported to the Audit Committee at its next regularly scheduled meeting. THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE RATIFICATION OF THE APPOINTMENT OF WITT MARES EGGLESTON SMITH, PLC AS THE COMPANY’S INDEPENDENT AUDITOR. FEES PAID TO PRINCIPAL ACCOUNTANTS
Audit Fees
KPMG LLP, the former independent auditor for the Company, billed the Company an aggregate of $41,400 relating to its (i) completion of the audit of the Company’s financial statements for its fiscal year ended June 30, 2002 and (ii) reviews of the Company’s financial statements included in reports filed by the Company with the Securities and Exchange Commission. Witt Mares Eggleston Smith, PLC billed the Company an aggregate of $36,000 for the audit of the Company’s financial statements for the fiscal year ended June 30, 2003.
Financial Information Systems Design and Implementation Fees
Neither Witt Mares Eggleston Smith, PLC nor KPMG LLP provided any services to the Company, and did not therefore bill the Company for any such services, relating to financial information systems design and implementation.
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All Other Fees
KPMG, LLP billed the Company an aggregate of $6,000 during the fiscal year ended June 30, 2003 for services not related to the financial statements referenced above. These fees consisted of fees for assisting the Company with the preparation of tax returns and other miscellaneous services. Witt Mares Eggleston Smith, PLC did not bill the Company during the fiscal year ended June 30, 2003 for any services other than those services related to the financial statements referenced above.
OTHER MATTERS The Board of Directors does not know of any matters that will be presented for action at the Annual Meeting other than those described above or matters incident to the conduct of the Annual Meeting. If, however, any other matters not presently known to management should come before the Annual Meeting, it is intended that the shares represented by proxies will be voted on such matters in accordance with the discretion of the holders of such proxies. SHAREHOLDER COMMUNICATIONS The Company does not currently have a formal policy regarding shareholder communications with the Board of Directors as it does not receive a significant amount of such communications; however, any shareholder may submit written communications to Gerald T. McDonald, Secretary, Waterside Capital Corporation, 500 East Main Street, Suite 800, Norfolk, Virginia 23510, whereupon such communications will be forwarded to the Board of Directors if addressed to the Board of Directors as a group or to the individual Director or Directors addressed. SHAREHOLDER PROPOSALS The next Annual Meeting will be held on or about October 21, 2004.16, 2006. Any shareholder who wishes to submit a proposal for consideration at that meeting, and who wishes to have such proposal included in the Company’s proxy statement, must comply with SEC Rule 14a-8 and must submit the proposal in writing no later than May 22, 2004.2006. The deadline for shareholders to notify the Company of non-Rule 14a-8 matters that may be raised for consideration at the next Annual Meeting is May 22, 2004.August 5, 2006. All such proposals and notifications should be sent to Gerald T. McDonald, the Secretary of the Company, at the Company’s principal executive offices, 500 East Main Street, Suite 800, Norfolk, Virginia. GENERAL The Company’s 20032005 Annual Report to Shareholders accompanies this Proxy Statement. The 20032005 Annual Report does not form any part of the material for the solicitation of proxies. Upon written request, the Company will provide shareholders with a copy of its Report on Form N-SAR for the year ended June 30, 20032005 (the “Form N-SAR”), as filed with the Securities and Exchange Commission, without charge. Please direct written requests for a copy of the Form N-SAR to: Gerald T. McDonald, Chief Financial Officer, Waterside Capital Corporation, 500 East Main Street, Suite 800, Norfolk, VA 23510. PLEASE MARK, SIGN, DATE AND RETURN THE PROXY PROMPTLY | By Order of the Board of Directors | | /s/ Gerald T. McDonald | Gerald T. McDonald, Secretary | September 19, 2005 |
September 19, 2003
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| | | x PLEASE MARK VOTES
AS IN THIS EXAMPLE
| | REVOCABLE PROXY
WATERSIDE CAPITAL CORPORATION
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| | | | For | | | | | | With-REVOCABLE PROXY
holdWATERSIDE CAPITAL CORPORATION
| | | For All Except | PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE 2005 ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON OCTOBER 21, 200317, 2005 AT 11:00 a.m. A.M. EASTERN TIME | | 1. To elect 16 directors to hold office for a term of one year and until their respective successors are elected and qualified;
| | | | | | ¨ | | ¨ | | ¨ | The undersigned, having received the Annual Report to Shareholders and the accompanying Notice of Annual Meeting of Shareholders and Proxy Statement dated September 12, 2003,19, 2005, hereby appoints Ernest F. Hardee and Peter M. Meredith, Jr. (each with the power to act alone), as proxies, with full power of substitution, and hereby authorizes them to represent and vote, as directed below, all the shares of the Common Stock of Waterside Capital Corporation held of record by the undersigned on August 29, 2003,31, 2005, at the 2005 Annual Meeting of Shareholders to be held on October 21, 2003,17, 2005, and any adjournment thereof. | | 1. To elect 15 directors to hold office for a term of one year and until their respective successors are elected and qualified; FOR: ¨ WITHHOLD: ¨ FOR ALL EXCEPT: ¨ NOMINEES: James E. Andrews;Andrews, J.W. Whiting Chisman, Jr., Eric L. Fox, Marvin S. Friedberg, Roger L. Frost, Ernest F. Hardee, Henry U. Harris, III, J. Alan Lindauer, T. Richard Litton, Jr., Robert L.I. Low, Peter M. Meredith, Jr., Charles H. Merriman III, Augustus C. Miller, Juan M. Montero, II, R. Scott Morgan, Sr., Richard G. Ornstein, and Jordan E. Sloan. | | INSTRUCTION: To withhold authority to vote for any individual nominee, mark “For All Except” and write that nominee’s name in the space provided below. | | | | | | Please be sure to sign and date this Proxy in the box below.
| | | | | For | | Against | | Abstain | | | 2. To ratify the appointment of Witt Mares Eggleston Smith, PLC as the Company’s independent auditorsauditor for 2004. | | ¨ | | ¨ | | ¨ | | the fiscal year ending June 30, 2006. | | | | | | | | | | | FOR: ¨ WITHHOLD: ¨ FOR ALL EXCEPT: ¨ | | | | | | | | | | | 3. To act upon such other matters as may properly come | | | Shareholder sign above | | | | Date | | | | before the meeting or any adjournment thereof. | | | _____________________________ Please be sure to sign and date Date
this Proxy in the box below.
| | THIS PROXY IS REVOCABLE AT ANY TIME PRIOR TO | | | | | | | | | | | ITS EXERCISE. THIS PROXY, WHEN PROPERLY | | | Co-holder (if any) | | | | Date | | | | EXECUTED, WILL BE VOTED AS DIRECTED. WHEN NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED FOR 1 and 2.AND 2 ABOVE. | | Detach above card, sign, date and mail in postage paid envelope provided. WATERSIDE CAPITAL CORPORATION NOTE: Please sign your name(s) exactly as they appear hereon. If signer is a corporation, please sign the full corporate name by duly authorized officer. If any attorney, guardian, administrator, executor, or trustee, please give full title as such. If a partnership, sign in partnership name by authorized person. PLEASE COMPLETE, DATE, SIGN AND RETURN THIS PROXY PROMPTLY IN THE ACCOMPANYING ENVELOPE. IF YOUR ADDRESS HAS CHANGED, PLEASE CORRECT THE ADDRESS IN THE SPACE PROVIDED BELOW AND RETURN THIS PORTION WITH THE PROXY IN THE ENVELOPE PROVIDED. | | | | | | Shareholder sign above Co-holder (if any) sign above
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é Detach above card, sign, date and mail in postage-paid envelope provided. é
WATERSIDE CAPITAL CORPORATION
NOTE: Please sign your name(s) exactly as they appear hereon. If signer is a corporation, please sign the full corporate name by duly authorized officer. If any attorney, guardian, administrator, executor, or trustee, please give full title as such. If a partnership, sign in partnership name by authorized person.
PLEASE COMPLETE, DATE, SIGN AND RETURN THIS PROXY PROMPTLY
IN THE ACCOMPANYING ENVELOPE.
IF YOUR ADDRESS HAS CHANGED, PLEASE CORRECT THE ADDRESS IN THE SPACE PROVIDED BELOW AND RETURN THIS PORTION WITH THE PROXY IN THE ENVELOPE PROVIDED.
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