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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1997 Commission File Number 33-94322
WINFIELD CAPITAL CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
New York 13-2704241
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
237 Mamaroneck Avenue, White Plains, New York 10605
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (914) 949-2600
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, par value $.01 Boston Stock Exchange
Redeemable Warrants Boston Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
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. [X] The aggregate market value of the voting
stock held by non-affiliates of the registrant as of June 24, 1997 was
approximately $4,645,313.
The number of outstanding shares of the registrant's common stock as of
June 24, 1997 was 5,023,361 shares.
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PART I
ITEM 1. BUSINESS.
Winfield Capital Corp. (the "registrant" or the "Company") was
incorporated as a New York corporation in 1972. It is a small business
investment company ("SBIC") that was licensed by the Small Business
Administration (the "SBA") in 1972 under the Small Business Investment Act of
1958, as amended (the "Small Business Investment Act"). The Company is a
non-diversified investment company that has elected to be regulated as a
business development company ("Business Development Company"), a type of
closed-end investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Company intends to qualify as a "regulated
investment company" for federal income tax purposes. The Company's offices are
located at 237 Mamaroneck Avenue, White Plains, New York 10605. Its telephone
number is (914) 949-2600.
As an SBIC, the Company uses funds borrowed from the SBA, together with
its own capital, to provide loans to, and, to a lesser extent, to make equity
investments in, independently owned and operated business concerns that (i) do
not have a net worth in excess of $18 million and do not have average net income
after federal income taxes for the preceding two years of more than $6 million,
or (ii) meet size standards set by the SBA that are measured by either annual
receipts or number of employees, depending on the industry in which such
concerns are primarily engaged ("Eligible Concerns"). The types and dollar
amounts of the loans and other investments the Company may make are limited by
the 1940 Act, the Small Business Investment Act and the regulations of the SBA
(the "SBA Regulations"). The SBA is authorized to examine the operations of the
Company, and the Company's ability to obtain funds from the SBA is also governed
by the Small Business Investment Act and the SBA Regulations.
The Company has no independent investment advisor. The Company's loan
and other investment decisions are made by its officers, subject to the
Company's investment policies and objectives and oversight by its Board of
Directors. Historically, the Company has relied on the efforts of its officers
to identify new financing opportunities. Following its public offering late in
1995, the Company expanded its marketing efforts and sought referrals from
venture capitalists, investment bankers, attorneys, accountants and commercial
bankers. Prior to its public offering, the Company's investments in portfolio
companies were generally structured as straight loans, or as loans with warrants
to purchase equity securities of the portfolio companies. After its public
offering, the Company has sought to make more investments in portfolio companies
with equity features than was the case heretofore. In connection with its loans
to portfolio companies with equity features, the Company has sought and will
continue to seek security interests in the assets of the borrower. To the extent
it deems necessary, the Company also seeks to obtain personal guaranties from
the principals of its borrowers and security interests in certain of the assets
of such principals.
CHARACTERISTICS OF THE COMPANY'S INVESTMENTS
The Company invests in all kinds and classes of securities of portfolio
companies, including, but not limited to, notes and bonds; straight,
subordinated, convertible and income debentures; preferred stock; common stock;
and options and warrants to purchase any of the foregoing. The Company does not
have a policy that limits the amount that may be invested in any kind or class
of security, except that it intends to invest approximately one-third of its
assets in straight loans or debt securities and two-thirds of its assets in
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loans or debt securities with equity features, such as conversion rights and
warrants, or in direct equity investments (common stock and preferred stock).
When the Company's investments are structured as loans, they are
evidenced by promissory notes and often are accompanied by warrants to acquire
equity interests in the borrower for nominal consideration. The loans are
usually collateralized by assets of the borrower, which security interests
frequently are senior to any other financing the borrower may have in place.
When appropriate, a personal guaranty of a borrower's major stockholder or
stockholders is sought, which may also be collateralized by such stockholders'
personal assets. The Company's loans typically have a fixed rate of interest at
the maximum rate allowed by the SBA (see "SBA Regulation" below), although lower
rates may be negotiated depending on the creditworthiness of the borrowers and
other relevant factors. Typically, such loans require periodic payments of
principal and interest which fully amortize the loan at maturity, and mature in
five years. In addition, the Company intends to pursue bridge loan opportunities
as and to the extent permitted by the SBA Regulations. The Company's current
management believes that the performance of its investment portfolio could be
enhanced by increasing the Company's equity investments, relative to its loan
portfolio. Accordingly, the Company's management now seeks more financing
opportunities with equity participation and more investments with equity
features than were made by the Company heretofore. There can be no assurance
that the Company will find such opportunities on terms favorable to the Company.
INVESTMENT OBJECTIVES AND STRATEGIES
The Company seeks both current income and long-term growth in the value
of its assets. The Company's investments are made, and will continue to be made,
with the intention of having any loan repaid within five years and any equity
investment liquidated within 5 to 10 years. Situations may arise, however, where
the Company may hold an equity interest for a longer period.
Prior to May 2, 1995, when there was a change in management of the
Company (see "Change in Management" below), the Company's investments were made
primarily in very small local retail and service businesses. Under its current
management, the Company focuses on investments in privately held Eligible
Concerns in growing industries, including communications, transportation,
consumer products and information processing. There can be no assurance that the
Company will be able to locate investments in such industries on terms favorable
to it. The Company concentrates its investments in the Northeastern United
States, but will consider investments in other parts of the country if they are
otherwise consistent with the Company's loan and other investment selection
criteria.
For the most part, the Company's existing portfolio companies are
expansion stage businesses, although some are start-up and development stage
companies, including some with negative net worth. The average original loan
amount of the Company's currently outstanding loans to portfolio companies is
approximately $135,000. To date, the largest investment made by the Company has
been $2,000,000. Under the SBA Regulations, the Company may not invest more than
20% of its "Private Capital" in any single company without SBA approval. Under
the Small Business Investment Act and the SBA Regulations, "Private Capital" is
defined as the total of paid-in capital, other than capital obtained from
federal sources, such as the SBA, and paid-in surplus. Pursuant to current SBA
Regulations, the Company is able to invest approximately $2,200,000, or 20% of
its Private Capital, in a single company. In most instances, the Company
participates in loans with other investors. Through such participation, the
Company has been able to become involved in transactions larger than would
otherwise be possible under the investment limit of 20% of its own Private
Capital.
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SELECTION OF LOAN AND OTHER INVESTMENT OPPORTUNITIES
Given its objective to emphasize equity investments, the Company uses
the following criteria in selecting investment opportunities:
Potentially Profitable Operations. The Company attempts to identify
companies that are profitable or that it believes are potentially profitable.
Development Stage Companies. The Company attempts to identify and
invest in development stage companies, that is, companies with a product or
service that is beyond the testing stage. The Company generally will avoid seed
and start-up companies.
Experienced Management Team. The Company seeks portfolio companies that
have experienced management with a substantial ownership interest and a
demonstrated ability, or the potential, to accomplish the objectives set forth
in such companies' business plan.
Liquidation Value of Assets. The Company is not an "asset-based"
lender, however, the value of assets securing its loans is an important
consideration in its credit decisions. Emphasis is placed on balance sheet
assets such as inventory, plant, property and equipment.
Growth. In addition to generating sufficient cash flow to service
prospective loans, the Company requires that prospective portfolio companies
have what management believes to be a good chance of achieving substantial
annual growth.
Exit Strategy. Another investment consideration is whether there is an
opportunity to liquidate the investment in a potential portfolio company. Such
opportunity generally would allow the Company to realize a gain on its equity
interests and include public offerings, sales of the portfolio company or
repurchases by the portfolio company of the Company's equity interests.
CERTAIN NON-COMPLIANCE BY PORTFOLIO COMPANIES
Although the Company's agreements with its portfolio companies require
them to furnish the Company with periodic and/or annual financial statements and
to include financial and other covenants by its borrowers in its loan
agreements, many of the portfolio companies fail to supply the financial
statements or to otherwise comply with the covenants required of them. The
Company deals with these failures on a case-by-case basis, and its actions are
influenced by the payment records of such companies.
The aggregate face amount of the Company's loans and the cost of other
portfolio investments was $4,644,133 as of March 31, 1997 with loans and notes
receivable comprising 69.9% (64% which were performing in accordance with their
terms and 36% which were non-performing) and equity interests and assets
acquired in liquidation of defaulted loans comprising 30.1%.
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WRITE-OFFS
During the past three fiscal years, the Company has written off loans
and investments and disposed of, at a loss, assets acquired in liquidation, in
the aggregate amount of $209,254 as described in the following table:
Year Ended March 31,
1995 1996 1997
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Amount written off $60,938 $79,366 $68,950
Amount written off as a percentage of
aggregate loans and investments and assets acquired
in liquidation as of the beginning of the year 1.4% 2.1% 1.6%
SBA FUNDING
The Small Business Investment Act and the regulations thereunder
provide for the purchase by the SBA of subordinated debentures issued by SBICs
and the guaranty by the SBA of debentures issued by SBICs to third parties. An
SBIC can issue such debentures in a principal amount up to either 200% or 300%
of its Private Capital, depending upon various factors.
Under the current SBA Regulations, the Company is considered to have,
as of March 31,1997, Private Capital of approximately $11,000,000, which would
enable it to sell debentures to, or with a guaranty by, the SBA up to a maximum
principal amount of approximately $33,000,000 (300% of its Private Capital). The
Company's ability to sell such debentures is subject to the availability of SBA
program funds and other funding limitations and compliance with the SBA
Regulations. See "SBA Regulation" below.
The SBA offers eligible SBICs the opportunity to sell "participating
securities" (preferred stock or debentures having interest payable only to the
extent of earnings) to the SBA or to entities that receive SBA guaranties in the
amount up to 200% of the SBIC's Private Capital. Although the Company has the
minimum amount of Private Capital necessary to be eligible for the SBA's
participating securities program (that is, $10,000,000), the issuance of the
Debentures in the Company's public offering may disqualify the Company from
participating in the program under the provisions of the SBA Regulations and the
1940 Act. In addition, the Company believes that, to date, only partnerships
have been allowed to issue participating securities and that corporations may
not be allowed to issue participating securities.
During the past five years, because of the failures and business
reverses of the Company's portfolio companies for a variety of reasons,
including what the Company's management believes to have been generally
unfavorable business conditions in the Northeastern United States where
substantially all of the Company's portfolio companies are located, and the
substantial devaluation of real estate held as collateral for loans, the Company
has suffered significant portfolio losses which created a substantial
accumulated deficit and jeopardized the Company's ability to continue to operate
as an SBIC. See "Past SBA Problems".
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SBA REGULATION
SBICs, such as the Company, are licensed by the SBA as part of a
program designed to stimulate the flow of private debt and/or equity capital to
"Eligible Concerns" and "Smaller Concerns." Under current SBA Regulations and
the Small Business Investment Act, an independently owned and operated business
concern that (i) does not have a net worth in excess of $18 million and does not
have average net income after federal income taxes for the preceding two years
of more than $6 million, or (ii) meets size standards set by the SBA that are
measured by either annual receipts or number of employees, depending on the
industry in which such concern is primarily engaged, is eligible to receive
financial assistance from an SBIC (hence, it is referred to in this Annual
Report as an "Eligible Concern"). The SBA Regulations also define a "Smaller
Concern," which is a concern with a net worth of $6 million or less and average
annual net profits after taxes of $2 million or less, or depending on the
industry in which the concern operates, meets criteria based on the number of
its employees or its annual receipts. Commencing with its fiscal year ended
March 31, 1996, the Company was required by the SBA Regulations to earmark at
least 10% of its financing to Smaller Concerns and in each subsequent fiscal
year to earmark at least 20% of its financing to Smaller Concerns.
SBA Regulations place certain limitations on the terms of loans by
SBICs. The maximum maturity of these loans may not exceed 20 years and, subject
to certain exceptions, the minimum maturity is five years. A borrower from an
SBIC cannot be required during the first five years to repay, on a cumulative
basis, more principal than an amount calculated on a straight-line, five-year
amortization schedule. On straight loans (without equity features), an SBIC can
charge interest equal to 7% above the higher of (i) the interest rate then being
charged on ten year SBA Debentures, or (ii) the weighted average cost of the
SBIC's borrowings from the SBA and qualified third party lenders such as banks.
On loans with equity features, an SBIC may charge interest equal to 6% above the
higher of items (i) or (ii). Notwithstanding the above, if the rate that the SBA
charges on the debentures it purchases from SBICs drops below 8%, an SBIC may
charge up to 15% interest, in the case of a straight loan, or up to 14%
interest, in the case of a loan with an equity feature.
SBICs may invest directly in the equity of its portfolio companies.
However, they may not become a general partner of an unincorporated entity or
otherwise become jointly or severally liable for the general obligations of an
unincorporated entity. An SBIC may acquire options or warrants in its portfolio
companies. Such options and warrants may also have redemption provisions,
subject to certain restrictions. In general, however, SBICs may not control a
portfolio company. "Control" is defined as a 50% interest in the outstanding
voting securities of a portfolio company if it is held by fewer than 50
shareholders, or if there are 50 or more shareholders, a 20% to 25% interest
(depending on the holdings of other shareholders of the portfolio company).
With certain limited exceptions, SBICs may not invest overseas, in real
estate or in passive businesses, that is, businesses which are not regular and
continuous.
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PAST SBA PROBLEMS
In July 1994, the SBA informed the Company that it was not in
compliance with the SBA's minimum requirement for unimpaired Private Capital
because the Company's realized and unrealized losses on its portfolio securities
as of March 31, 1994 exceeded 50% of its Private Capital. (Private Capital is
unimpaired when the combination of (i) adjusted unrealized gain (loss) on
securities held, (ii) undistributed net realized earnings and (iii) non-cash
gains of an SBIC equals or exceeds zero. If these items aggregate less than
zero, based on a formula set forth in the SBA Regulations, the SBIC's Private
Capital begins to become impaired.) Although the SBA permits a certain amount of
impaired Private Capital, the Company had exceeded permissible levels of
impaired Private Capital. The SBA further informed the Company that the SBA
would require the Company to liquidate unless the capital impairment problem was
corrected. The SBA also identified three other violations of the SBA
Regulations, including the purchase of participation loan receivables from an
affiliate of the Company, Maple Investors, Inc. ("Maple") without SBA
authorization, as a result of which the Company exceeded the single loan limit
imposed by the SBA Regulations. The Company responded to the SBA by proposing a
change in the control of the Company, to Paul A. Perlin and David Greenberg, and
a capital infusion, through a private placement that raised approximately
$3,000,000 in Private Capital (the "Private Placement"), as well as requiring
Maple to repurchase those participation loan receivables from the Company.
Effective April 5, 1995, the SBA approved the change of control application,
which included the sale of Common Stock in the Private Placement. On May 2,
1995, Messrs. Perlin and Greenberg purchased all of the then outstanding shares
of the Company from the holders thereof and were elected to the Board of
Directors of the Company (along with R. Scot Perlin), Paul A. Perlin became the
Company's Chief Executive Officer, and the Company sold 2,581,753 shares (which
does not include 10,000 shares subsequently sold to Bruce A. Kaufman) in the
Private Placement. In April 1995, Maple repurchased the remaining participation
loan receivables from the Company as required by the SBA. The Company believes
that it is no longer in violation of the SBA Regulations.
REGULATION AS A BUSINESS DEVELOPMENT COMPANY
The Company is a closed-end, non-diversified investment company that
has elected to be regulated as a Business Development Company under the 1940 Act
and, as such, is subject to regulation under that Act. Among other things, the
1940 Act contains prohibitions and restrictions relating to transactions between
the Company and its affiliates, principal underwriters and affiliates of those
affiliates or underwriters and requires that a majority of the Company's
directors be persons other than "interested persons," as defined in the 1940
Act. In addition, the 1940 Act prohibits the Company from changing the nature of
its business so as to cease to be, or to withdraw its election as, a Business
Development Company unless so authorized by the vote of the holders of a
majority of its outstanding voting securities.
A Business Development Company is permitted, under specified
conditions, to issue multiple classes of indebtedness and one class of stock
senior to the shares of common stock currently outstanding (collectively,
"Senior Securities," as defined in the 1940 Act) if the asset coverage, as
defined in the 1940 Act, of any Senior Security is at least 200% immediately
after each such issuance and certain other conditions are met. On the other
hand, because the Company is an SBIC, the only asset coverage requirement
applicable to it would give the holders of its Senior Securities constituting
indebtedness, including the Debentures, the right to elect a majority of the
Board of Directors, if on the last business day of each of 12 consecutive
calendar months, the Company failed to maintain at least 100% asset coverage.
Also, while Senior Securities constituting preferred stock are outstanding
(other than preferred stock issued
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to or guaranteed by the SBA), provision must be made to prohibit any
distributions to shareholders or the repurchase of such securities or shares
unless the applicable asset coverage ratios are met at the time of the
distribution or repurchase. The Company may also borrow amounts up to 5% of the
value of its total assets for temporary purposes.
Under the 1940 Act, a Business Development Company may not acquire any
asset, other than assets of the type listed in Section 55(a) of the 1940 Act
("Qualifying Assets") unless, when the acquisition is made, such Qualifying
Assets represent at least 70% of its total assets. The principal categories of
Qualifying Assets relevant to the business of the Company are the following:
(1) Securities purchased in transactions not involving any public
offering from the issuer of such securities, which issuer is an
eligible portfolio company. An "eligible portfolio company" is defined,
in pertinent part, in the 1940 Act as any issuer which:
(a) is organized under the laws of, and has its
principal place of business in, the United States:
(b) is not an investment company other than another
SBIC that is wholly-owned by the Company; and
(c) does not have any class of securities with
respect to which margin credit may be extended under federal
law.
(2) Securities of any eligible portfolio company which is controlled by
the Business Development Company.
(3) Securities received in exchange for or distributed on or with
respect to securities described in item (1) or (2) above, or pursuant
to the exercise of options, warrants or rights relating to such
securities.
(4) Cash, cash items, government securities, or high quality debt
securities maturing in one year or less from the time of investment.
In addition, a Business Development Company must have been organized
(and have its principal place of business) in the United States for the purpose
of making investments in the types of securities described in item (1) or (2)
above and, in order to count the securities as Qualifying Assets for the purpose
of the 70% test, the Business Development Company must either control the issuer
of the securities or make available to the issuer of the securities significant
managerial assistance. Making available significant managerial assistance means,
among other things, any arrangement whereby a Business Development Company,
through its directors, officers or employees, offers to provide, and, if
accepted, does so provide, significant guidance and counsel concerning the
management, operations or business objectives and policies of a portfolio
company; or in the case of an SBIC (such as the Company), making loans to a
portfolio company.
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FUNDAMENTAL AND OTHER INVESTMENT POLICIES
The Company's investment objectives are to achieve a high level of
current income from interest and long-term growth through equity interests in
its portfolio companies.
Fundamental Policies
In making investments and managing its portfolio, the Company will
adhere to the following fundamental policies, which may not be changed without
the approval of (i) the holders of 50% or more of the Company's outstanding
voting securities, or (ii) the holders of 67% or more of the Company's
outstanding voting securities present at a meeting of securityholders at which
holders of 50% or more of such securities are present in person or by proxy:
1. The Company will conduct its business so as to retain its status as
an SBIC and as a Business Development Company, and to qualify as a "regulated
investment company" (as defined under the Code). In order to retain its status
as an SBIC, the Company must limit its investments to Eligible Concerns and meet
the minimum financing obligations applicable to Smaller Concerns (see "THE
COMPANY - SBA Regulation"). In order to retain its status as a Business
Development Company, the Company may not acquire assets (other than
non-investment assets necessary and appropriate to its operations as a Business
Development Company) if, after giving effect to such acquisition, the value of
its Qualifying Assets is less than 70% of the value of its total assets. See
"Regulation as a Business Development Company." In order to qualify as a
"regulated investment company," the Company will be required, among other
things, to diversify its holdings as required under the Internal Revenue Code of
1986, as amended. While the Company did not qualify as a "regulated investment
company" prior to the fiscal year ended March 31, 1997, the Company believes it
will qualify as a "regulated investment company" for the fiscal year ended March
31, 1997.
2. The Company will not borrow money except through the issuance of the
Debentures, other debentures ranking on an equal basis with the Debentures, the
SBA Debentures and through one or more bank lines of credit.
3. The Company may issue preferred stock with such terms as the Board
of Directors may determine, subject to the requirements of the 1940 Act and the
Small Business Investment Act.
4. The Company will not (i) act as an underwriter of securities (except
to the extent it may be deemed to be an "underwriter" as defined in the
Securities Act of 1933, as amended (the "Securities Act") of securities
purchased by it in private transactions), (ii) purchase or sell real estate or
interests in real estate or real estate investment trusts (except that the
Company may acquire real estate which collateralizes its loans or guaranties of
its loans upon defaults of such loans and may dispose of such real estate as and
when market conditions permit), (iii) sell securities short, (iv) purchase
securities on margin (except to the extent that the registrant may be deemed to
have done so as a result of its acquisition of securities in connection with
loans made to portfolio companies which are funded with borrowed money), or (v)
purchase or sell commodities or commodity contracts, including futures contracts
(except where necessary in working out distressed loans or investments).
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5. The Company may write or buy put or call options in connection with
loans to, and other investments in, portfolio companies, or rights to require
the issuer of such securities to repurchase such loans and other investments
under certain circumstances.
6. The Company has no policy with respect to concentration of
investments in a particular company, industry or groups of industries, except
that it will not lend money to, or invest in, any company if such loan or
investment exceeds 20% of the Company's Private Capital, without SBA approval.
7. The Company may make straight loans and loans with equity features
to the extent permitted under the Small Business Investment Act and the 1940
Act.
Other Investment Policies
The Company's investment policies described below are not fundamental
policies, and may be changed, subject to the Small Business Investment Act and
the SBA Regulations, by the Company's Board of Directors without shareholder
approval:
1. Except for subsidiaries organized by the Company to hold assets
acquired in foreclosures of defaulted loans, the Company will not acquire (i)
50% or more of the outstanding voting securities of any issuer held by fewer
than 50 shareholders, (ii) 25% or more of the outstanding voting securities of
any issuer having 50 or more shareholders, or (iii) 20% or more of the
outstanding voting securities of any issuer having 50 or more shareholders if,
as a result of such acquisition, the Company would hold a number of voting
securities equal to or greater than the largest other holding of such
securities.
2. The Company will not invest in companies for the purpose of
controlling management of such companies.
3. The Company will not invest in finance companies, foreign companies,
passive businesses or real estate companies, except as permitted by the SBA.
4. The Company has no policy with respect to portfolio turnover.
Moreover, because borrowers have certain prepayment rights pursuant to SBA
Regulations, the Company cannot control or predict the frequency of portfolio
turnover.
5. Pending the investment of its funds in Eligible Concerns (including
Smaller Concerns) or as otherwise permitted by the SBA, the Company may invest
its funds in direct obligations of, or obligations guaranteed as to principal
and interest by, the United States which mature in 15 months or less, repurchase
agreements with federally insured institutions with respect to such obligations
which mature in seven days or less, or certificates of deposit issued by a
qualified federally insured institution which mature in one year or less, or
will be deposited in a qualified federally insured institution in accounts which
may be subject to withdrawal restrictions not to exceed one year.
COMPETITION
Many entities, including banks, lending companies (including other
SBICs), venture capital funds and other sources of capital, compete for loan
originations and investments similar to those made by the
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Company. The Company's competition is not limited to entities which operate in
the same geographical area as the Company, as many of the Company's competitors
operate throughout the nation. Furthermore, competition for loan origination has
increased as the financial strength of the banking community has improved over
the last few years. Many of the Company's competitors have far greater financial
and personnel resources than the Company. In addition, many other SBICs use
professional investment advisors to seek and evaluate potential investments. The
Company does not have an independent investment advisor and it does not intend
to retain one.
CHANGE IN MANAGEMENT
On May 2, 1995, Paul A. Perlin and David Greenberg purchased all of the
then outstanding shares of Common Stock from the shareholders of the Company. On
that date, Paul A. Perlin, R. Scot Perlin and David Greenberg were elected
directors of the Company, and Paul A. Perlin was elected the Chief Executive
Officer and Stanley M. Pechman continued in office as President of the Company.
Also, on that date, Paul A. Perlin and Stanley M. Pechman entered into
employment agreements with the Company. After the Company's public offering in
October 1995, it entered into an employment agreement with David Greenberg as
Chief Operating Officer.
FACILITIES; EMPLOYEES
The Company operates from rented quarters, consisting of approximately
1,500 square feet, located in a four story office building under a lease
expiring in December 1997. The lease is cancelable at the Company's option on 90
days prior written notice. Management considers that such quarters will be
adequate for the near term for the conduct of the Company's business. The
Company maintains its investment and business records at its executive offices.
Before May 2, 1995, the Company had only one salaried executive
officer, Stanley M. Pechman. As of May 2, 1995, the Company had three full-time
employees, two of whom, Messrs. Paul A. Perlin and Pechman, are officers who
manage the Company, and one of whom handles clerical matters. After the
completion of the Company's public offering, David Greenberg became the fourth
full-time employee when he was employed as Chief Operating Officer. Bruce A.
Kaufman is the Company's non-salaried Treasurer and Secretary. As of July 1,
1996, R. Scot Perlin was employed as the Company's part-time Chief Financial
Officer. The Company considers its relations with employees to be satisfactory.
LEGAL PROCEEDINGS
From time to time in the ordinary course of business, the Company
initiates legal proceedings against borrowers in default and, where warranted,
their guarantors to seek payment of loan obligations and to take possession of
collateral. In the latter instances, these proceedings are sometimes followed by
court authorized liquidations. All such proceedings require outside counsel with
attendant professional fees and expenses.
The Company has never been named as a defendant in any material
litigation.
ITEM 2. PROPERTIES.
The Company's office is in rented quarters consisting of approximately
1,500 square feet with an annual rental of approximately $32,000. The lease
expires in December 1997. The lease is cancellable at
-11-
the Company's option on 90 days prior written notice. For a description of the
Company's loans and other investments, as of March 31, 1997 and March 31, 1996
see pages F-20 to F-24.
ITEM 3. LEGAL PROCEEDINGS.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The registrant's common stock trades in the NASDAQ SmallCap Market
under the symbol, "WCAP", and its common stock purchase warrants trade in the
NASDAQ SmallCap Market under the symbol, "WCAPW". The registrant's common stock
and warrants are listed on the Boston Stock Exchange under the symbols, "WNF"
and "WNFW", respectively, but there has been no meaningful trading of such
securities on that Exchange since the registrant's initial public offering,
which was made on October 26, 1995. The reported high and low bid quotations for
the registrant's common stock and warrants on the NASDAQ SmallCap Market from
October 26, 1995 to June 24, 1997 were as follows:
COMMON STOCK WARRANTS
HIGH LOW HIGH LOW
---- --- ---- ---
October 26 - December 31, 1995 $ 9.00 $ 5.00 $ 5.25 $ 1.125
January 1 - March 31, 1996 11.25 6.00 6.00 1.75
April 1 - June 30, 1996 7.125 2.25 2.50 .50
July 1 - September 30, 1996 2.625 1.375 1.50 .375
October 1 - Decmber 31, 1996 2.125 1.25 1.25 .50
January 1 - March 31, 1997 2.5625 1.296875 .875 .50
April 1 - June 24, 1997 2.03125 1.09375 .625 .1875
The foregoing quotations reflect inter-dealer prices, without retail
markup, markdown or commission, and do not necessarily represent actual
transactions.
ITEM 6. SELECTED FINANCIAL DATA. See Summary of Financial Information for the
years ended March 31, 1997, 1996, 1995, 1994 and 1993 on the following page:
-12-
WINFIELD CAPITAL CORP.
SUMMARY OF FINANCIAL INFORMATION
Year Ended March 31,
-------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ----------- ----------- -----------
STATEMENT OF OPERATIONS DATA
Total investment income $ 1,436,957 $ 599,537 $ 290,972 $ 403,024 $ 556,079
Total investment expenses 1,731,499 995,985 674,903 765,208 758,021
Net realized gains (losses)
on disposition of investments 57,349 77,550 (26,926) (50,560) 5,304
Unrealized appreciation
(depreciation)
on loans and investments 581,745 (133,195) (120,000) (30,000) (190,357)
Net income (loss) 344,552 (452,093) (530,857) (442,744) (386,995)
Earnings (loss) per share .07 (.13) (.90) (.75) (.65)
Weighted average number of
shares outstanding 5,215,293 3,484,630 591,608 591,608 591,608
OTHER OPERATING DATA
Number of loans and other
investments
outstanding at end of period 44 43 51 55 60
Number of loans and other
investments
originated 7 3 3 6 7
Principal amount of loans and other
investments originated 3,959,335 1,157,090 287,115 290,932 418,077
Investment expenses as a percentage
of average net assets 16.6% 19.3% 216.0% 95.7% 62.4%
BALANCE SHEET DATA
Loans and investment portfolio
including assets acquired in
liquidation 4,908,905 3,977,593 3,724,118 4,295,680 5,005,766
Total assets 20,748,682 15,852,084 4,448,322 4,971,472 5,576,583
SBA debentures 8,900,000 4,500,000 3,750,000 3,750,000 3,750,000
Common stock (including additional
paid-in capital) 10,901,063 10,901,063 1,250,000 1,250,000 1,250,000
Realized retained earnings (deficit) (556,091) (318,898) (1,019,450) (608,593) (195,489)
Total shareholders' equity 10,610,022 10,265,470 47,050 577,907 1,020,651
-13-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Years Ended March 31, 1997, 1996 and 1995
Investment Income
Investment income increased by $837,420 from $599,537 for the year
ended March 31, 1996 to $1,436,957 for the year ended March 31, 1997, an
increase of 139.7%. Interest from loans to small business concerns increased
$330,809 principally due to new loan generation and the collection of
approximately $90,000 of past due interest. Interest from invested idle funds
increased by $358,660 mainly as a result of the interest earned for a full year
on the net proceeds received from the Company's public offering completed in
November, 1995 and interest earned on proceeds from the issuance of $5,000,000
of debentures to the SBA. Commitment and loan processing fee income increased by
$136,485 concomitant with the increased loan activity and other investments
while other income increased 25.9% from $44,184 to $55,650 reflecting a
preferred stock dividend received upon early redemption of the stock.
Investment income increased by $308,565 from $290,972 for the year
ended March 31, 1995 to $599,537 for the year ended March 31, 1996, an increase
of 106.1%. This reflected $330,155 in increased earnings from invested idle
funds as a result of the proceeds received from the private placement which took
place in May, 1995 and the Company's public offering referred to above. There
was a decrease of $53,222 in earnings from the Company's investment portfolio
due to a decrease in outstanding loans receivable. This was partially offset by
an increase in commitment fees and other income totaling $31,632. Investment
income declined in fiscal 1995 to $290,972, a 27.8% decrease from the same
period a year earlier. This decline was mainly due to a decrease in the value of
the Company's loan portfolio, which reflected a 65.7% increase in assets
acquired in liquidation from $325,988 at March 31, 1994 to $540,300 at March 31,
1995. Loans and other investments also declined 13.3% in fiscal 1995 to
$3,724,118 at March 31, 1995, contributing to the decline in investment income
for the period.
Interest Expense
Interest expense increased from $404,248 for the year ended March 31,
1996 to $780,646 for the year ended March 31, 1997 due to both the increased
indebtedness to the SBA and the payment of interest for a full year on the 6.5%
debentures issued in conjunction with the Company's public offering of equity
securities.
Interest expense increased from $396,327 for the year ended March 31,
1995 to $404,248 for the year ended March 31, 1996. Short-term borrowing
decreased from $500,000 at March 31, 1995 to $5,000 at March 31, 1996. The
decrease in short-term borrowing was offset by an increase in indebtedness to
the SBA of $750,000, which reflected the retirement of $600,000 principal amount
of 8% debentures issued to the SBA which were then replaced by the issuance to
the SBA of $1,350,000 principal amount of 6.875% debentures. In addition, the
Company issued $1,089,000 principal amount of 6.5% debentures in conjunction
with the public offering of equity securities. Interest expense remained
essentially unchanged from March 31, 1994 to March 31, 1995.
-14-
Operating Expenses
The Company's operating expenses consist of employee compensation and
benefits, rent, insurance, professional and consulting fees, marketing and
investment solicitation expenses. The Company's operating expenses increased
from $591,737 for the year ended March 31, 1996 to $950,853 for the year ended
March 31, 1997. Payroll and payroll related expenses increased by $173,701 as a
result of a combination of salary increases, the hiring of a new employee and
the full year impact of an employee hired during the previous fiscal year.
Insurance expense increased by $64,598 which included policies covering both
officers and directors liability and health insurance for new employees.
During the year ended March 31, 1997, travel and entertainment related
expenses increased by $19,345 over similar expenses for the preceding year
primarily in connection with due diligence and negotiating new investment
opportunities with small business concerns. Professional fees and general and
administrative expenses increased by $54,431 and $104,308, respectively.
The Company's operating expenses increased from $278,576 for the year
ended March 31, 1995 to $591,737 for the year ended March 31, 1996, primarily as
a result of an increase in salaries of $172,568 and smaller increases in
insurance, professional fees, consulting fees, travel and entertainment.
Operating expenses declined to $278,576 for fiscal 1995, from $396,534 for the
previous year, due principally to lower losses on the sale of assets acquired in
liquidation.
Realized Gains or Losses on Equity Investments
The Company realized gains or losses on its equity investments or
rights to acquire equity investments upon their disposition. The realized gains
for the year ended March 31, 1997 included a gain of $124,960 on the sale of
warrants which was partially offset by losses on loan receivables of $68,950.
The Company realized a $156,916 gain on the sale of warrants it held in
portfolio companies during the year ended March 31, 1996 which was partially
offset by losses on loan receivables of $79,366. Gains of $34,012 were recorded
for the fiscal year ended March 31, 1995 which were offset by losses on loans
receivable of $60,938.
Unrealized Appreciation or Depreciation of Loans and Investments.
As an investment company, the Company evaluates its investment
portfolio periodically to determine the fair value of the portfolio and,
accordingly, does not maintain an allowance for loan losses similar to
commercial banks. Any change in the fair value of loans and other investments is
reflected in unrealized appreciation or depreciation of loans and investments,
but has no impact on net investment income unless or until such loans or
investments mature, are sold or are otherwise liquidated. There was unrealized
appreciation on loans and investments of $581,745 for the year ended March 31,
1997 and unrealized depreciation for the years ended March 31, 1996 and March
31, 1995 of $133,195 and $120,000, respectively.
Liquidity and Capital Resources
At March 31, 1997, the Company had cash, certificates of deposit and
treasury bills totaling $15,423,149, an increase of 33.6% from the year ended
March 31, 1996. The cash and certificates of
-15-
deposit were all invested with banks which meet the Federal Deposit Insurance
Corporation's definition of well capitalized institutions.
During the year ended March 31, 1997, the Company sold to the SBA
$5,000,000 of debentures due June 1, 2006 with an interest rate of 7.71%. The
Company believes that its cash and short term investments at March 31, 1997 will
be adequate to meet both its working capital needs and the long term investments
opportunities it seeks through March 31, 1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Page
----
Reports of Independent Accountants F-1 through F-3
Balance Sheets F-4
Statements of Operations F-5
Statements of Shareholders' Equity F-6
Statements of Cash Flows F-7
Financial Highlights (Per Share Data and Ratios/Supplemental
Data) F-8
Notes to Financial Statements F-9 through F-19
Portfolio of Investments F-20 through F-24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On June 5, 1997, the registrant engaged the firm of Coopers & Lybrand,
L.L.P. ("C&L") to replace the firm of Joel Popkin and Company, P.C. ("JP&C") as
the registrant's independent certified public accountants for the fiscal year
ended March 31, 1997. JP&C's resignation became effective on the same date. The
registrant's decision to change accounting firms was authorized by the
registrant's Audit Committee of the Board of Directors and subsequently by its
Board of Directors after an interview process involving several qualified
accounting firms.
Prior to their engagement, no events or consultations occurred with C&L
which would require disclosure of the type specified in Item 304 (a) (2) of
Regulation S-K.
There were no disagreements or differences of opinion between the
registrant and JP&C, from the inception to the termination of their engagement.
JP&C will continue to provide the registrant with accounting and other services
even after its engagement as auditor ends.
The registrant expects to benefit from C&L's significant experience as
outside independent auditors to numerous investment companies, including small
business investment companies, as well as to publicly traded companies.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated by reference to the registrant's definitive proxy
statement to be filed not later than 120 days after March 31, 1997.
-16-
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference to the registrant's definitive proxy
statement to be filed not later than 120 days after March 31, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference to the registrant's definitive proxy
statement to be filed not later than 120 days after March 31, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference to the registrant's definitive proxy
statement to be filed not later than 120 days after March 31, 1997.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Financial Statements:
See Item 8 of Part II hereof.
(b) Financial Statement Schedules: The schedules specified under
Regulation S-X are either not applicable or are immaterial to
the Company's financial statements for each of the three years
in the period ended March 31, 1997.
(c) Exhibits:
3(A). Certificate of Incorporation, as amended,
incorporated by reference to Exhibit 1(A) to the
registrant's registration statement in SEC File No.
33-94322.
3(B). Certificate of Amendment of Certificate of
Incorporation, incorporated by reference to Exhibit
1(B) to the registrant's registration statement in
SEC File No. 33-94322.
3(C). By-laws, as amended, incorporated by reference to
Exhibit 2 to the registrant's registration statement
in SEC File No. 33-94322.
4(A). Warrant Agreement, including Form of Warrant,
incorporated by reference to Exhibit 3(B) to the
registrant's registration statement in SEC File No.
33-94322.
4(B). Form of Debenture incorporated by reference to
Exhibit 3(C) to the registrant's registration
statement in SEC File No. 33-94322.
4(C). Agency Agreement for the Debentures, incorporated by
reference to Exhibit 3(D) to the registrant's
registration statement in SEC File No. 33-94322.
-17-
10(A). Indemnification Agreement, incorporated by reference
to Exhibit 4 to the registrant's registration
statement in SEC File No. 33-94322.
10(B). Stock Option Plan, incorporated by reference to
Exhibit 5 to the registrant's registration statement
in SEC File No. 33-94322.
10(C). Registrant's License from SBA, incorporated by
reference to Exhibit 6 to the registrant's
registration statement in SEC File No. 33-94322.
10(D). Stock Purchase Agreement dated as of August 25, 1994,
as amended, incorporated by reference to Exhibit 7 to
the registrant's registration statement in SEC File
No. 33-94322.
10(E)(1). Employment Agreement with Paul A. Perlin,
incorporated by reference to Exhibit 8(A) to the
registrant's registration statement in SEC File No.
33-94322.
10(E)(2). Stock Option Agreement with Paul A. Perlin,
incorporated by reference to Exhibit 8(B) to the
registrant's registration statement in SEC File No.
33-94322.
10(F)(1). Employment Agreement with Stanley M. Pechman,
incorporated by reference to Exhibit 9(A) to the
registrant's registration statement in SEC File No.
33-94322.
10(F)(2). Stock Option Agreement with Stanley M. Pechman,
incorporated by reference to Exhibit 9(B) to the
registrant's registration statement in SEC File No.
33-94322.
10(G). Employment Agreement with David Greenberg,
incorporated by reference to Exhibit 9(C) to the
registrant's registration statement in SEC File No.
33-94322.
10(H). Lock-up Agreement with Officers and Directors,
incorporated by reference to Exhibit 9(D) to the
registrant's registration statement in SEC File No.
33-94322.
11. Statement of Computation of Earnings (Loss) Per
Share.
12. Letter of Joel Popkin & Company, P.C. to the
Securities and Exchange Commission dated June 5,
1997, incorporated by reference to Item 7. (c)
Exhibit 1 to the registrant's Current Report on Form
8-K dated June 5, 1997 in SEC File No. 33-94322.
(d) No reports on Form 8-K were filed during the fourth quarter of
the registrant's fiscal year ended March 31, 1997.
-18-
INDEX TO FINANCIAL STATEMENTS
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
PAGE
------------
Reports of Independent Accountants F-1-F-3
Balance Sheets
(As of March 31, 1997 and 1996) F-4
Statements of Operations
(For the years ended March 31, 1997, 1996 and 1995) F-5
Statements of Shareholders' Equity F-6
(For the years ended March 31, 1997, 1996 and 1995)
Statements of Cash Flows
(For the years ended March 31, 1997, 1996 and 1995) F-7
Financial Highlights F-8
Per Share Data
(For the years ended March 31, 1997 and 1996)
Ratios/Supplemental Data
(For the years ended March 31, 1997 and 1996)
Notes to Financial Statements F-9-F-19
Portfolio of Investments F-20-F-24
COOPERS Coopers & Lybrand L.L.P.
& LYBRAND a professional services firm
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Winfield Capital Corp.
(A Small Business Investment Company licensed by
the U.S. Small Business Administration):
We have audited the accompanying balance sheet of Winfield Capital Corp. as of
March 31, 1997, including portfolio investments as of March 31, 1997 and the
related statements of operations, shareholders' equity and cash flows for the
year then ended and the financial highlights for the periods indicated thereon.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and the financial highlights
are free of material misstatement. An audit includes examining on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included verification of investments owned as of March 31, 1997 by
examination and correspondence with custodians. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statements presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the 1997 financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of Winfield Capital Corp. as of March 31, 1997, and the results of its
operations and its cash flows for the year then ended and the financial
highlights for the period indicated thereon, in conformity with generally
accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
--------------------------------------
Coopers & Lybrand L.L.P.
New York, NY
June 20, 1997
F-1
[Letterhead of Joel Popkin & Company, P.C.]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Winfield Capital Corp.
A Small Business Investment Company
licensed by the SBA
White Plains, New York
We have audited the accompanying balance sheets of Winfield Capital
Corp. as of March 31, 1996, including portfolio investments as of March 31, 1996
and the related statements of operations, shareholders' equity and cash flows
for each of the two years in the period ended March 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of Winfield Capital Corp. as of March
31, 1996, and the results of its operations and its cash flows for each of the
two years in the period ended March 31, 1996 in conformity with generally
accepted accounting principles.
F-2
Winfield Capital Corp.
As explained in Note 2, the financial statements include loans and
investment securities valued at $3,977,592 as of March 31, 1996, whose values
have been estimated by the Board of Directors in the absence of readily
ascertainable market values. We have reviewed the procedures used by the Board
of Directors in arriving at their estimate of value of such loans and
investments and have inspected underlying documentation, and in the
circumstances, we believe the procedures are reasonable and the documentation
appropriate. However, because of the inherent uncertainty of valuation, those
estimated values may differ significantly from the values that would have been
used had a ready market for loans and investment securities existed, and the
differences could be material.
/s/ Joel Popkin & Company, P.C.
May 24, 1996
F-3
WINFIELD CAPITAL CORP.
BALANCE SHEETS
MARCH 31
---------------------------
ASSETS: 1997 1996
------------ ------------
Investments, at value:
Loans and notes receivable (cost: $3,244,529 and $3,456,795,
respectively) $ 2,552,030 $ 3,316,405
Equity interests in small business concerns (cost: $286,755 and
$42,806, respectively) 1,549,304 36,500
Assets acquired in liquidation (cost: $1,112,571 and $794,687,
respectively) 807,571 624,687
------------ ------------
Total investments 4,908,905 3,977,592
Cash 3,314,875 3,410,572
Short-term marketable securities 12,108,274 8,131,149
Accrued interest receivable 72,088 76,724
Furniture and equipment (net of accumulated depreciation of $ 61,817
and $58,146, respectively) 11,849 9,321
Other assets (principally deferred debenture costs) 332,691 246,726
------------ ------------
Total assets $ 20,748,682 $ 15,852,084
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Debentures payable to the U.S. Small Business Administration $ 8,900,000 $ 4,500,000
Subordinated debentures payable 942,665 901,828
Notes payable - bank 5,000
Accrued expenses 295,995 155,336
Funds in escrow 24,450
------------ ------------
Total liabilities 10,138,660 5,586,614
------------ ------------
Commitments and contingencies (Note 7)
Shareholders' equity:
Preferred stock - .001 par value; Authorized 1,000,000 shares Issued and
outstanding - none
Common stock - $.01 par value; Authorized - 10,000,000 shares; Issued and
outstanding - 5,023,361 shares at March 31, 1997
and 1996 50,234 50,234
Additional paid-in capital 10,850,829 10,850,829
Accumulated deficit (dated May 2, 1995) (556,091) (318,898)
Unrealized appreciation (depreciation) on investments, net 265,050 (316,695)
------------ ------------
Total shareholders' equity 10,610,022 10,265,470
------------ ------------
Total liabilities and shareholders' equity $ 20,748,682 $ 15,852,084
============ ============
The accompanying notes are an integral part of the financial statements.
F-4
WINFIELD CAPITAL CORP.
STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31
-----------------------------------
1997 1996 1995
----------- --------- ---------
Investment income:
Interest from small business concerns $ 539,455 $ 208,646 $ 261,868
Interest from invested idle funds 694,867 336,207 6,052
Loan processing fees 146,985 10,500 1,110
Other income 55,650 44,184 21,942
----------- --------- ---------
Total investment income 1,436,957 599,537 290,972
----------- --------- ---------
Expenses:
Interest 780,646 404,248 396,327
Payroll and payroll related expenses 474,690 300,989 128,421
General and administrative expenses 259,043 154,735 82,220
Professional fees 153,289 98,858 39,109
Depreciation and amortization 19,933 7,150 3,564
Other operating costs 43,898 30,005 25,262
----------- --------- ---------
Total investment expenses 1,731,499 995,985 674,903
----------- --------- ---------
Investment loss - net (294,542) (396,448) (383,931)
----------- --------- ---------
Realized gain (loss) on investments 57,349 77,550 (26,926)
Change in unrealized appreciation (depreciation) of
investments 581,745 (133,195) (120,000)
----------- --------- ---------
Gain (loss) on investments, net 639,094 (55,645) (146,926)
----------- --------- ---------
Net increase (decrease) in shareholders'
equity resulting from operations $ 344,552 $(452,093) $(530,857)
=========== ========= =========
Per share net increase (decrease) in
shareholders' equity resulting from
operations $ 0.07 $ (0.13) $ (0.90)
=========== ========= =========
The accompanying notes are an integral part of the financial statements.
F-5
WINFIELD CAPITAL CORP.
STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended MARCH 31, 1997, 1996 AND 1995
UNREALIZED
COMMON STOCK ADDITIONAL APPRECIATION
------------------- PAID-IN ACCUMULATED (DEPRECIATION) ON
SHARES AMOUNT CAPITAL (DEFICIT) INVESTMENTS - NET TOTAL
--------- ---------- ------------- ------------ ------------ -------------
Balance - March 31, 1994 591,608 $ 5,916 $ 1,244,084 $ (608,593) $ (63,500) $ 577,907
Net decrease in share-
holders' equity resulting
from operations (410,857) (120,000) (530,857)
--------- ---------- ------------- ------------ ------------ -------------
Balance - March 31, 1995 591,608 5,916 1,244,084 (1,019,450) (183,500) 47,050
Sale of common stock 2,591,753 25,918 2,852,764 2,878,682
Reorganization (1,019,450) 1,019,450
Sale of common stock
and warrants 1,840,000 18,400 7,773,431 7,791,831
Net decrease in share-
holders' equity resulting
from operations (318,898) (133,195) (452,093)
--------- ---------- ------------- ------------ ------------ -------------
Balance - March 31, 1996 5,023,361 50,234 10,850,829 (318,898) (316,695) 10,265,470
Net increase in share-
holders' equity resulting
from operations (237,193) 581,745 344,552
--------- ---------- ------------- ------------ ------------ -------------
Balance - March 31, 1997 5,023,361 $ 50,234 $ 10,850,829 $ (556,091) $ 265,050 $ 10,610,022
========= ========== ============= ============ ============ =============
The accompanying notes are an integral part of the financial statements.
F-6
WINFIELD CAPITAL CORP.
STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH
---------------------------------------
1997 1996 1995
------------ ------------ ---------
Operating activities:
Net increase (decrease) in shareholders' equity
resulting from operations $ 344,552 $ (452,093) $(530,857)
Adjustments to reconcile net increase (decrease)
in shareholder's equity resulting from operations
to net cash used in operating activities:
Realized (gain) loss on investment (57,349) (77,550) 26,926
Loss on assets acquired 5,254
Amortization of discount 40,837 17,015
Change in unrealized (appreciation)
depreciation on investments (581,745) 133,195 120,000
Capitalized interest (15,431)
Depreciation and amortization of fixed assets 3,671 3,161 3,564
Amortization of debenture costs 45,016 11,948
Decrease in accrued interest receivable 4,636 29,450 59,094
Increase in other assets 269 15,313 (27,188)
Increase (decrease) in accrued liabilities 140,659 (14,636) 6,115
------------ ------------ ---------
Net cash used in operating activities (59,454) (349,628) (337,092)
------------ ------------ ---------
Investing activities:
Purchases of short-term marketable securities (14,683,274) (22,277,149)
Proceeds from the maturity of short-term marketable
securities 10,706,149 14,146,000
Assets acquired in liquidation (10,359) (13,923)
Proceeds from sale of equity interests 376,299 156,916 35,257
Investments originated (3,959,335) (1,157,090) (287,115)
Proceeds from collection of loans 3,290,817 746,290 486,013
Acquisition of fixed assets (6,199) (4,217)
Proceeds on sale of assets acquired in liquidation 2,250 199,150
(Decrease) increase in funds held in escrow (24,450) 11,453 1,592
------------ ------------ ---------
Net cash (used in) provided by investing
activities (4,299,993) (8,385,906) 420,974
------------ ------------ ---------
Financing activities:
Sale of common stock 10,743,678
Proceeds from debentures payable to the SBA 5,000,000 1,491,167
Repayment of debentures payable to the SBA
and bank note (605,000) (495,000)
Debenture costs paid (131,250) (35,438)
------------ ------------
Net cash provided by financing activities 4,263,750 11,704,407
------------ ------------ ---------
(Decrease) increase in cash (95,697) 2,968,873 83,882
Cash - beginning of year 3,410,572 441,699 357,817
------------ ------------ ---------
Cash - end of year $ 3,314,875 $ 3,410,572 $ 441,699
============ ============ =========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 589,663 $ 385,047 $ 393,276
============ ============ =========
Supplemental schedule of non-cash investing and financing activities:
Assets acquired in liquidation of loans $ 317,885 $ 246,278 $ 374,644
============ ============ =========
The accompanying notes are an integral part of the financial statements.
F-7
WINFIELD CAPITAL CORP.
FINANCIAL HIGHLIGHTS
YEARS ENDED MARCH 31
--------------------------
1997 1996
----------- -----------
PER SHARE OPERATING PERFORMANCE(1)
Net asset value, beginning of period $ 2.04 $ 0.08(2)
----------- -----------
Investment loss - net (0.06) (0.09)
Net realized and unrealized gain (loss)
on investments 0.13 (0.04)
----------- -----------
Total from investment operations 0.07 (0.13)
----------- -----------
Proceeds from sale of common stock 2.09
-----------
Net asset value, end of period $ 2.11 $ 2.04
=========== ===========
Per share market value, end of period $ 2.00 $ 7.13
=========== ===========
Shares outstanding, end of period 5,023,361 5,023,361
=========== ===========
RATIO/SUPPLEMENTAL DATA
Net assets, end of period $10,610,022 $10,265,470
Ratio of investment expenses to average net assets 16.59% 19.32%
Ratio of investment loss, net to average net assets 2.82% 7.69%
(1) The Company's initial 1933 Act Registration Statement went effective in
October 1995; therefore no per share information has been presented prior
to 1996.
(2) Net asset value at beginning of period is calculated based on shareholders'
equity of $47,050 at March 31, 1995 and 591,608 shares of common stock
outstanding.
The accompanying notes are an integral part of the financial statements.
F-8
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION:
Winfield Capital Corp. (the "registrant" or the "Company") was
incorporated as a New York corporation in 1972. The Company is a small
business investment company ("SBIC") that was licensed by the U.S. Small
Business Administration (the "SBA") in 1972 under the Small Business
Investment Act of 1958, as amended (the "Small Business Investment Act").
The Company is a non-diversified investment company that has elected to
be regulated as a business development company ("Business Development
Company"), a type of closed-end investment company under the Investment
Company Act of 1940, as amended (the "1940 Act"). For the year ended
March 31, 1997, the Company elected to be taxed as a Regulated Investment
Company under Subchapter M of the Internal Revenue Code of 1986, as
amended.
The Company uses funds borrowed from the SBA, together with its own
capital, to provide loans to, and make equity investments in,
independently owned and operated business concerns that in accordance
with SBA Regulations (i) do not have a net worth in excess of $18 million
and do not have average net income after federal income taxes for the
preceding two years of more than $6 million, or (ii) meet size standards
set by the SBA that are measured by either annual receipts or number of
employees, depending on the industry in which such concerns are primarily
engaged ("Eligible Concerns"). The Company invests in all kinds and
classes of securities of portfolio companies, including, but not limited
to, notes and bonds; straight, subordinated, convertible and income
debentures; preferred stock; common stock; and options and warrants to
purchase any of the foregoing. The Company seeks both current income and
long-term growth in the value of its assets. The Company's investments
are made, and will continue to be made, with the intention of having
loans repaid within five years and equity investments liquidated within 5
to 10 years. Situations may arise, however, where the Company may hold an
equity interest for a shorter or longer period.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
VALUATION OF INVESTMENTS
Securities that are traded on a securities exchange or the NASDAQ
National Market System, which are not deemed to be restricted
investments, are valued at the security's last sales price on the last
trading day of the period. Securities traded over-the-counter are valued
at the average closing bid price for the valuation date and the preceding
two trading days. A valuation discount of at least 10% is applied if the
number of securities held is substantial in relation to the average daily
trading volume.
CONTINUED
F-9
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
The Company's investments in restricted securities of public companies
are valued at the bid quotation less a discount rate of 10% to 40%, which
is determined by the Board of Directors of the Company (the "Board of
Directors") based upon applicable factors such as resale restrictions,
contractual agreement, size of position held and trading history of the
investee company.
Loans and other investments for which no public market exists are stated
at "value" as determined in good faith by the Board of Directors.
The carrying values of loans to small business concerns are based on the
Board of Director's evaluation of the financial condition of the
borrowers and/or the underlying collateral. The values assigned are
considered to be amounts which could be realized in the normal course of
business which anticipates the Company holding the loans to maturity and
realizing the face value of the loans. The carrying value of loans
normally corresponds to cost plus amortized original issue discount, if
any, unless adverse factors lead to a determination of value at a lower
amount. In such instances, the Company records an increase in unrealized
depreciation of investments to reduce the carrying value of such loans to
a value, as determined by the Board of Directors.
Investments in nonpublic companies securities (including equity
investments, warrants and convertible instruments) are recorded at value
as determined in good faith by the Board of Directors, after
consideration of all pertinent information, including factors such as
significant equity financing by sophisticated, unrelated new investors,
history of positive cash flows from operations, the market of comparable
publicly traded companies (discounted for illiquidity) and other
pertinent factors. The values assigned to these securities are based upon
available information and do not necessarily represent amounts which
might ultimately be realized, since such amounts depend on future
circumstances and cannot reasonably be determined until the individual
positions are liquidated.
Certain of the Company's loans are delinquent as to the required
principal and/or interest due under the respective loan agreements. Loans
are generally considered to be in default when they become 180 days past
due pursuant to SBA regulations. However on a case by case basis,
management will consider, based on available information, the
appropriateness of the continued accrual of interest and the carrying
value of the loan.
At March 31, 1997, the investment portfolio included investments totaling
$3,678,103, whose values had been estimated by the Board of Directors in
the absence of readily ascertainable market values. Because of the
inherent uncertainty of the valuations, the values may differ
significantly from the values that would have been used had a ready
market for the securities existed, and the differences could be material.
CONTINUED
F-10
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
At March 31, 1997, all investments were in small business concerns
located in the United States of America.
REALIZED AND UNREALIZED GAIN OR LOSS
Realized gains or losses are recorded upon disposition of investments and
calculated as the difference between the proceeds from such dispositions
and the cost basis determined using the specific identification method.
The cost of investments that in the Board of Director's judgment have
become permanently impaired, in whole or in part, are written off and
such amounts are reported as realized losses.
All other changes in the valuation of portfolio investments are included
as changes in the unrealized appreciation or depreciation of investments
in the statement of operations.
DESCRIPTION OF LOAN TERMS
The Company's loans to small business concerns range up to $2,000,000 in
size, have a five-year maturity, and, in many cases, are convertible into
common stock or are accompanied by warrants to purchase common stock of
the borrower at a nominal exercise price, subject in most cases to
certain conditions, including certain "put" rights in favor of the
Company. The Company seeks to maximize the difference, or "spread,"
between the rate at which it borrows funds from the SBA and the rate at
which it lends these funds to small business concerns.
Interest rates are subject to a cap determined by the SBA.
The loans bear interest at rates ranging from 12.00% to 17.00%, per
annum. Interest is payable in monthly, quarterly, or semi-annual
installments with principal payments payable either over the term of the
loan or at maturity. These loans are generally collateralized by the
assets of the borrower, certain of which are subject to prior liens,
and/or guarantees.
The Company also participates in syndicated loans and equity investments.
ASSETS ACQUIRED IN LIQUIDATION
Assets acquired in liquidation ("Liquidations") include those loan
balances for which collateral in real estate and other assets have been
obtained by the Company and which have been or are in the process of
being liquidated. These Liquidations are carried at a value as determined
in good faith by the Board of Directors based upon amounts which the
Company expects to realize upon disposition of the collateral, on a
discounted basis, after reasonable selling expenses. The Company
capitalizes expenditures related to Liquidations subsequent to
foreclosure on the collateral, and accrued interest receivable as of the
date of such foreclosure, if the Board of Directors expects such amounts
to be recovered by the Company.
CONTINUED
F-11
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
DEFERRED DEBENTURE COSTS
SBA debenture costs are amortized over ten years which represents the
terms of the SBA debentures.
REVENUE RECOGNITION
Interest income is recognized as it is earned on short-term marketable
securities and debt investments. Dividend income from equity investments
is recognized as of the ex-dividend date.
DEFERRED INCOME
Loan origination fees paid to the Company are deferred and amortized over
the terms of the respective loans. Upon prepayment of loans, loan
processing fees are recognized in full.
FURNITURE AND EQUIPMENT
Furniture and equipment are carried at cost. The Company depreciates
furniture and equipment over the estimated useful life of 10 years using
the straight-line method except for computer equipment which is
depreciated under an accelerated method over five years.
INCOME TAXES
Prior to May 2, 1995 the Company had been treated as an S Corporation for
Federal and State income tax purposes. During that time, the Company's
profits and losses were reported and taxed directly to the Company's
shareholders. Effective with the sale of securities on May 2, 1995, the
Company became a C Corporation and its income was subject to taxes at the
corporate level. During this period, the Company was subject to state
income taxes on interest.
Effective April 1, 1996, the Company has elected to be taxed as a
regulated investment company ("RIC") under Subchapter M of the Internal
Revenue Code (the "Code"). If the Company, as a RIC, satisfies certain
requirements relating to the source of its income, the diversification of
its assets and the distribution of its net income, the Company is taxed
as a pass-through entity which acts as a partial conduit of income to its
shareholders.
In order to maintain its RIC status, the Company must in general: a)
derive at least 90% of its gross income from dividends, interest and
gains from the sale or disposition of securities b) derive less than 30%
of its gross income from the sale or disposition of securities held for
less than three months, c) meet investment diversification requirements
defined by the Code and d) distribute to shareholders 90% of its net
income (other than long-term capital gains).
The aggregate gross unrealized appreciation of investments for Federal
income tax purposes was $1,293,550 and the aggregate gross unrealized
depreciation of investments was $1,028,500 resulting in a net unrealized
appreciation of $265,050.
CONTINUED
F-12
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
STOCK OPTIONS
The Company uses the intrinsic value based method, as permitted by
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation", to account for the granting of stock
options to employees. This method generally does not result in
compensation costs.
PER SHARE DATA
Net increase (decrease) in shareholders' equity per share has been
computed in accordance with Accounting Principles Board Opinion No. 15
("APB No. 15") and is based on the net increase (decrease) in
shareholders' equity for the period divided by the weighted average
number of shares of common stock and common stock equivalents outstanding
(using the treasury method). APB No. 15 requires that the weighted
average number of shares outstanding exclude the number of common shares
issuable upon the exercise of outstanding options if such inclusion would
be anti-dilutive.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of income and expense
during the reporting period. Actual results could differ from those
estimates.
RECLASSIFICATION
Certain amounts for 1996 and 1995 have been reclassified to conform with
the 1997 presentation.
NEWLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") 128,
"Earnings Per Share". SFAS 128, which simplifies existing computational
guidelines, supersedes APB No. 15, "Earnings Per Share," and specifies
the computation, presentation, and disclosure requirements for earnings
per share ("EPS") for entities with publicly-held common stock or
potential common stock. SFAS 128 is effective for financial statements
issued for periods ending after December 15, 1997, including interim
periods. Earlier adoption is not permitted, and all prior period EPS is
required to be restated to conform with SFAS 128. The Company is
currently evaluating SFAS 128 and believes that the adoption of SFAS 128
will not have a significant impact on the disclosure in the financial
statements of the Company.
CONTINUED
F-13
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. FAIR VALUE OF FINANCIAL INSTRUMENTS:
CASH AND SHORT-TERM MARKETABLE SECURITIES
The carrying amount reported in the balance sheet for cash and short-term
marketable securities approximates fair value.
DEBENTURES PAYABLE TO THE U.S. SMALL BUSINESS ADMINISTRATION
The carrying amount of the Company's debentures payable to the SBA
approximates fair value.
4. DEBENTURES PAYABLE TO THE U.S. SMALL BUSINESS ADMINISTRATION:
Debentures payable to the SBA at March 31, 1997, with interest payable
semi-annually, consist of the following:
INTEREST RATE
AMOUNT DUE DATE (PER ANNUM)
------------ ----------- ---------------
$ 600,000 9/1/97 10.350%
300,000 6/1/99 8.950%
450,000 9/1/99 8.800%
300,000 6/1/00 9.300%
900,000 9/1/01 8.330%
750,000 9/1/05 6.875%
600,000 9/1/05 6.875%
5,000,000 6/1/06 7.710%
-----------
$ 8,900,000
===========
Under the terms of the debentures, the Company may not repurchase or
retire any of its capital stock, make any distributions to its
shareholders other than dividends out of retained earnings pursuant to
SBA regulations or increase officers' salaries without the prior written
approval of the SBA.
5. SUBORDINATED DEBENTURES:
In October, 1995 in conjunction with its public offering of common stock,
the Company issued 6.5% subordinated debentures due 2000 with warrants
attached. The debentures are unsecured, have no sinking fund provision
and are not issued under a trust agreement. The debentures are carried,
net of unamortized discount, as follows:
CONTINUED
F-14
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
1997 1996
---------- ----------
Face value of debentures $1,089,000 $1,089,000
Less, unamortized discount 146,335 187,172
---------- ----------
$ 942,665 $ 901,828
========== ==========
The debentures have been discounted to yield an effective interest rate
of 8.0%. The warrants issued in connection with the unit offering were
valued at $.25.
6. TRANSACTIONS WITH AFFILIATES:
Robert E. Fischer, a member of a Lowenthal, Landau, Fischer & Bring, P.C.
("LLF&B"), which served as counsel for the Company in certain matters,
was formerly the Secretary and a director and shareholder of the Company.
Edward J. Landau, a member of LLF&B, was formerly a shareholder of the
Company. Martin R. Bring, a member of LLF&B, was formerly the Treasurer
of the Company. For the year ended March 31, 1995, LLF&B received $65,144
for its services provided to the Company.
Mr. Stanley M. Pechman, the Company's President, and Maple Investors,
Inc., a corporation whose shares are held in trust for members of Stanley
M. Pechman's family, and Mr. Pechman, individually, have on occasion
participated with the Company in portfolio investments. At March 31,
1997, 1996 and 1995, Mr. Pechman and Maple Investors, Inc. were
participants in loans of approximately $93,000, $102,000, and $130,000,
respectively.
7. COMMITMENTS AND CONTINGENT LIABILITIES:
The Company has operating leases on real and personal property expiring
through November 30, 1998 with aggregate minimum rental commitments as
follows:
MARCH 31,
-------------------
REAL PERSONAL
PROPERTY PROPERTY
-------- --------
Year ending
1998 $ 22,047 $ 6,132
1999 3,577
-------- -------
$ 22,047 $ 9,709
======== =======
CONTINUED
F-15
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
Rent expense was $38,274, $38,521 and $40,525 for the years ended March
31, 1997, 1996 and 1995, respectively.
8. SHAREHOLDERS' EQUITY:
COMMON STOCK
On May 2, 1995, the Company's Certificate of Incorporation was amended
increasing the authorized number of common shares from 1,000,000 shares
to 10,000,000 shares and reducing the par value per share from ten cents
to one cent per share. In connection with the foregoing amendment, the
outstanding shares of the company were subject to a 10 for 1 stock split.
On June 26, 1995, the Company's Board of Directors approved a 5 for 7
reverse stock split. The stock splits resulted in the previously
outstanding 82,825 common shares being converted to 591,608 common shares
which has been retroactively reflected in the financial statements. In
addition, upon the Company's reorganization, the Company charged against
the additional paid-in capital an amount equal to the accumulated
deficit. In the opinion of management, there was no indication of
impairment of its assets at that date which would have required their
writedown in conjunction with the reorganization.
On May 2, 1995 and June 29, 1995, the Company completed the sale of
2,591,753 shares of common stock for $3,011,600 less costs of
approximately $132,918.
In an initial public offering on October 26, 1995, the Company sold
1,840,000 shares of common stock and 816,750 warrants for $9.2 million
less costs of approximately $1.6 million. The warrants entitle the holder
to purchase one share of common stock at $6.00 per share. The warrants
expire on October 25, 1997. No warrants have been exercised.
PREFERRED STOCK
The Company is authorized to issue up to 1,000,000 shares of preferred
stock, $.001 par value per share.
STOCK OPTION PLAN
In October 1995, the Company adopted the 1995 stock option plan (the
"Plan") by which 800,000 shares of common stock are reserved pursuant to
the Plan, of which 100,000 are available for non-employee directors under
automatic options ("Formula Options") and 700,000 shares are available
for key employees ("Eligible Employees"). Under the Plan, options
intended to qualify as "incentive stock options" under Section 422 of the
Code ("Qualified Options"), options not intended to qualify, stock
appreciation rights ("SARS") and shares of Restricted Common Stock may be
granted or issued.
CONTINUED
F-16
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
On each March 31, each nonemployee director who has served as a director
of the Company for twelve consecutive months will automatically receive a
Formula Option to purchase 2,000 shares, at the fair market value of the
Common Stock. (Directors in office on March 31, 1996 received a Formula
Option for 2,000 shares, whether or not they have served twelve
consecutive months.) Each Formula Option will be exercisable immediately
and will have a five year duration, whether or not the optionee
terminates his or her service as a director for any reason other than
cause. Nonemployee directors will not be eligible for any other option,
SARs or restricted stock under the Plan.
Qualified Options granted to Eligible Employees under the Plan will be
exercisable at a price equal to the fair market value of the shares at
the time the Qualified Option is granted, or, if no such market value is
determinable, at the current net asset value of such shares, except with
respect to options granted to any employee who owns 10% or more of the
outstanding stock of the Company (a "10% stockholder"), the exercise
price may not be less than 110% of the current fair market value of the
common stock. If the aggregate fair market value (determined at the time
the Qualified Option is granted) of the shares exercisable for the first
time by any grantee during any calendar year exceeds $100,000, such
excess shares may not be treated as a Qualified Option. No Qualified
Option may be exercised more than 10 years after the date on which it is
granted, except that such period may not exceed five years in the case of
an option granted to a 10% stockholder.
Options not intended to qualify as "incentive stock options" under the
Code may be granted to Eligible Employees under the Plan and shall have
such exercise prices and such other terms and conditions as the Committee
may determine in its discretion, subject to the requirements of the 1940
Act.
The Plan is administered by the Board of Directors. The Board of
Directors will determine the employees who are eligible to participate in
the Plan and the number of shares, if any, on which options are to be
granted, the SARs, if any, to be granted with respect to such options and
the shares of restricted Common Stock, if any, to be issued, to Eligible
Employees.
Options granted under the Plan will not be transferable, other than by
the laws of descent and distribution, and during the grantee's life may
be exercised only by such grantee. All rights to exercise options will
terminate upon termination for cause of the holder's employment or
directorship.
The Plan also provides that shares of restricted Common Stock may be
granted to eligible employees on such terms and in such amounts as the
Committee determines. Such shares of Stock will be issued under a written
agreement which will contain restrictions on transfers thereof as may be
required by law and as the Committee may determine in its discretion.
CONTINUED
F-17
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
The Plan will terminate when there have been granted shares of Common
Stock and options on the total number of shares authorized by the Plan or
by action of the Board of Directors, but in no event later than June 12,
2005. The authorized number of shares may be increased, and the Plan's
date of termination may be extended, only by shareholder action.
Stock option transactions are as follows:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------------ -----------
Granted in fiscal 1996 438,572 $1.23
Outstanding and Exercisable at
March 31, 1996 438,572 $1.23
Granted in fiscal 1997 20,000 $1.53
Outstanding and Exercisable at
March 31, 1997 458,572 $1.24
The Company applied the intrinsic value based method permitted by SFAS
123 in accounting for its stock-based compensation plans and awards.
Accordingly, no compensation expense has been recognized since the
options were granted with exercise prices equal to the market value of
the common stock on the date of grant. As of March 31, 1997 no options
have been exercised or cancelled.
Had the Company measured compensation expense under the fair value based
method for the stock options granted in 1997 and 1996, the Company's net
income and net income per share would have been reduced to the pro forma
amounts indicated below:
1997 1996
---------- ------------
Net income - as reported $ 344,552 $ (452,093)
Net income - pro forma $ 332,435 $ (706,999)
Net income per share - as reported .07 (.13)
Net income per share - pro forma .06 (.20)
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants - expected volatility of 40%; risk-free
interest rate of approximately 6.6%; and expected lives ranging from 3 to
6 years.
CONTINUED
F-18
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
9. CONCENTRATION OF CREDIT RISK:
At March 31, 1997, the Company's cash and certificates of deposit were
all invested with banks which meet the Federal Deposit Insurance
Corporation's definition of well capitalized institutions.
10. SUBSEQUENT EVENT:
In May 1997, the Company made a loan to HPA Monon Corporation in the
amount of $2,000,000 with a 12% interest rate, and in addition the
Company received 625,000 shares of convertible preferred stock.
In June 1997, the Company made a $200,000 equity investment consisting of
shares of common stock in Cool Zone, Inc.
F-19
WINFIELD CAPITAL CORP.
PORTFOLIO OF INVESTMENTS
MARCH 31, 1997
LOANS AND NOTES RECEIVABLES
LOAN
MATURITY INTEREST
COMPANY NAME INDUSTRY DATE RATE (%) COST VALUE
- ---------------------------------------- ------------------- ------------- ---------- -------------- --------------
LOANS
Bob's Auto Body Shop Auto Repairs 01-Mar-98 15.50 $ 48,452 $ 48,452
Buona Pasta, Ltd. Food Service 31-Mar-98 12.00 69,000 69,000
Carpenito's Restaurant, Inc. Restaurant 01-Feb-01 12.00 151,800 151,800
D&S Diner Rte 7 Cobleskill Diner Corp. Restaurant 16-Oct-00 16.25 92,571 92,571
Diversified Development, LLC (d) Land Development On Demand 14.00 500,000 500,000
1155 Deli, Inc. Food Service 10-Jul-99 16.68 79,534 79,534
Fishmarket Inn, Inc. (c) Restaurant 01-May-93 15.75 140,389 55,389
Francis A. Lee, Inc. Construction 01-Sep-97 15.00 68,482 68,482
Global Network Communications, Inc. Communication 01-Jun-99 13.50 103,520 68,520
H. Lockings Corp. (d) Food Service 19-Jul-95 16.25 48,122 48,122
Improved Drinking Water & Pool Co. Swimming Pools 31-Dec-99 12.00 22,806 12,806
Jerusalem Refrigeration Corp. Refrigeration 01-May-00 15.50 58,050 58,050
Keystone Terminal Operating Corp. (d) Gasoline Dist. 21-Apr-94 16.63 34,924 19,924
La Torinese USA, Inc. (c) Specialty Baking 08-Mar-01 14.00 600,000 300,000
NAI Technologies, Inc. Computer Systems 15-Jan-01 12.00 400,000 400,000
No-Name Deli/Grocery, Inc. (c) Food Service 28-Jul-93 16.50 124,554 74,554
Phone Management Enterprises, Communication 15-Aug-95 None 70,959 50,959
Inc.(a)(d)
Saints & Sinners, Inc.(a) Food Service 17-Oct-91 15.50 22,491 2,491
Savo Contracting Corp. (a) Construction 02-May-93 15.75 70,842 5,842
Schiattin Realty Corp. (a) Construction 15-Oct-92 16.00 133,699 58,699
Suburban Enterprises, Inc. (b) Construction 01-Sep-98 13.50 24,706 7,209
Volz Collision Inc. (Mahopac) Auto Repair 01-Apr-00 17.00 115,444 115,444
NOTES RECEIVABLE
Barrier Motor Fuels, Inc. Auto Repair 01-Aug-99 15.00 124,580 124,580
Gisante Realty Corp. (d) Real Estate 08-Mar-96 11.00 12,962 12,962
957 South Elmora, Inc. Real Estate 01-Dec-04 7.50 126,642 126,640
-------------- --------------
Total Loans and Notes Receivable $ 3,244,529 $ 2,552,030
============== ==============
(a) non-income producing
(b) foreclosed upon during the year
(c) foreclosed upon subsequent to year end
(d) payable on demand
See accompanying notes to the financial statements.
F-20
WINFIELD CAPITAL CORP.
PORTFOLIO OF INVESTMENTS
MARCH 31, 1996
LOANS AND NOTES RECEIVABLE
LOAN
MATURITY INTEREST
COMPANY NAME INDUSTRY DATE RATE (%) COST VALUE
- --------------------------------------- ------------------ -------------- --------- -------------- --------------
LOANS
Bob's Auto Body Shop Auto Repairs 01-Feb-93 15.50 $ 73,431 $ 73,431
Buona Pasta Ltd. Food Service 01-Mar-95 14.50 75,000 75,000
Carpenito's Restaurant, Inc. Restaurant 27-Feb-94 16.75 148,439 148,439
1902 Jericho, Inc. (Charbru) Restaurant 28-Sep-99 17.00 45,301 43,801
D&S Rte 7 Cobleskill Diner Corp. Restaurant 16-Oct-00 16.25 104,669 104,669
D&S Rte 7 Cobleskill Diner Corp. Restaurant 15-Nov-93 15.00 8,000 8,000
1155 Deli, Inc. Food Service 10-Jul-99 16.68 101,804 101,804
Fishmarket Inn, Inc. Restaurant 01-May-93 15.75 131,985 69,485
Francis A. Lee, Inc. Construction 01-Sep-97 15.00 81,067 81,067
Global Network Communications, Inc. Communication 01-Jun-99 13.50 123,809 103,809
Improved Drinking Water & Pool Co. Swimming Pool 31-Dec-99 12.00 22,806 22,806
Jerusalem Refrigeration Corp. Refrigeration 01-Mar-95 15.75 71,254 71,254
Jerusalem Refrigeration Corp. Refrigeration 01-Jun-96 15.50 2,035 2,035
Keystone Terminal Operating Corp. Gasoline Dist. 21-Apr-94 16.63 69,259 54,259
La Torinese USA, Inc. Specialty Bakery 08-Mar-01 14.00 600,000 600,000
H. Lockings Corp. Food Service 19-Jul-95 16.25 55,476 55,476
NAI Technologies, Inc. Computer Systems 15-Jan-01 12.00 400,000 550,000
No-Name Deli/Grocery, Inc. Food Service 28-Jul-93 16.50 119,594 99,594
Paolo Enterprises, Inc. #1 Construction 01-May-94 17.00 131,572 131,572
Paolo Enterprises, Inc. #2 Construction 01-Apr-97 10.00 80,000 80,000
Phone Management Enterprises, Inc. Communications 15-Aug-95 14.00 75,671 55,671
Saints & Sinners, Inc. Food Service 17-Oct-91 15.50 22,491 22,491
Savo Contracting Corp. Construction 02-May-93 15.75 70,842 35,842
Schiattin Realty Corp. Construction 15-Oct-92 16.00 135,789 100,789
957 South Elmora (K&A) Food Service 26-Mar-92 14.75 46,583
Suburban Enterprises, Inc. Construction 01-Sep-98 13.50 24,706 24,706
Tel-A-Booth Communication, Ltd. Communication 01-Sep-94 16.00 9,807
Volz Collision, Inc. (Mahopac) Auto Repair 01-Aug-94 17.00 175,500 175,500
Volz Collision, Inc. (Mahopac) Auto Repair 01-Aug-94 15.25 70,933 70,933
NOTES RECEIVABLE
Charles Bistro (F&T) Real Estate 08-Mar-08 8.00 106,600 106,600
Gisante Realty Corp. Real Estate 08-Mar-96 11.00 30,000 30,000
957 South Elmora, Inc. Real Estate 01-Dec-04 7.50 138,237 138,237
Hall Diner Restaurant 01-Oct-97 10.00 104,135 79,135
-------------- --------------
Total Loans and Notes Receivable $ 3,456,795 $ 3,316,405
============== ==============
See accompanying notes to the financial statements.
F-21
WINFIELD CAPITAL CORP.
PORTFOLIO OF INVESTMENTS
MARCH 31, 1997
EQUITY INTERESTS
COST OR
NUMBERS OF SHARES/ CONTRIBUTED
COMPANY NAME INDUSTRY OWNERSHIP PERCENTAGE VALUE VALUE
- ------------------------------- ----------------- ------------------------------------- ------------ -------------
Academic Industries, Inc. Movie Production 1,000 Shares, Preferred Stock - $ 7,000 $ 1,000
Series A
Alliance National, Inc. Office Rental 65,000 Shares, 1.46%; Unregistered 58,500
Common Stock
Complete Wellness Holistic Therapy 33,333 Shares, 2.36%; Warrant to 48,333
Centers, Inc. Purchase Common Stock, (Restricted)
Desserts & Cafes, Inc. Specialty Baking 11%; Warrant to Purchase Common 9,000
Stock
Diversified Development, Land Development 49.9%; Warrant to Purchase Common
LLC. Stock
Dowling, LLC. Construction 9.5% or 5 units @1.9%; Preferred 250,000 250,000
Return Units
Improved Drinking Water Swimming Pool Preferred Stock 12.75% preferred 25,000
& Pool Co. return, convertible into 20% Common
Stock
Independence Brewing Beverages 949,941, 29.6% and 66.3% assuming 4,755 509,971
Company warrant exercise; Common Stock and
Warrants, (Restricted)
La Torinese USA, Inc. Specialty Baking 2.64%; Warrant to Purchase Common
Stock
NAI Technologies, Inc. Computer Systems 1.94%; Convertible Note into 672,500
200,000 Shares of Common Stock,
Warrants to Purchase 100,000
Shares of Common Stock
------------ -------------
Total Equity Interests $ 286,755 $ 1,549,304
============ =============
See accompanying notes to the financial statements.
F-22
WINFIELD CAPITAL CORP.
PORTFOLIO OF INVESTMENTS
MARCH 31, 1996
EQUITY INTERESTS
COST OR
NUMBERS OF SHARES/ CONTRIBUTED
COMPANY NAME INDUSTRY OWNERSHIP PERCENTAGE VALUE VALUE
- ----------------------------- ----------------- ------------------------------------- ------------ ------------
Academic Industries, Inc. Movie Production 1,000 Shares, Preferred Stock - $ 7,000 $ 3,500
Series A
Artec Distributing, Inc. Distribution 100 Shares, Common Stock 10,806
Desserts & Cafes, Inc. Specialty Baking 11%; Warrant to purchase common 30,500
stock
Improved Drinking Water & Swimming Pool Preferred Stock 12.75% Preferred 25,000 2,500
Pool Co. Return; Convertible into 20% Common
Stock
------------ ------------
Total Equity Interests $ 42,806 $ 36,500
============ ============
See accompanying notes to the financial statements.
F-23
WINFIELD CAPITAL CORP.
PORTFOLIO OF INVESTMENTS
MARCH 31, 1997 AND 1996
ASSETS ACQUIRED IN LIQUIDATION
MARCH 31, 1997
-----------------------------------
COMPANY NAME COST VALUE
- ----------------------------------------- --------------- --------------
A.D.L Contracting Corp. $ 98,440 $ 18,440
Bashert Enterprises, Inc. 208,197 208,197
Hall Diner 104,907 44,907
The Partition Corp. 131,317 131,317
Ne James/Malaky #1 160,827 100,827
Ne James/Malaky #3 33,843 33,843
Maypat Realty Corp. 162,063 77,063
Paolo Enterprises, Inc. #1 132,977 112,977
Paolo Enterprises, Inc. #2 80,000 80,000
--------------- --------------
Total Assets Acquired in Liquidation $ 1,112,571 $ 807,571
=============== ==============
MARCH 31, 1996
-----------------------------------
COMPANY NAME COST VALUE
- ----------------------------------------- --------------- --------------
A.D.L Contracting Corp. $ 98,440 $ 33,440
Bashert Enterprises, Inc. 208,197 208,197
The Partition Corp. 131,317 131,317
Ne James/Malaky #1 160,827 115,827
Ne James/Malaky #3 33,843 33,843
Maypat Realty Corp. 162,063 102,063
--------------- --------------
Total Assets Acquired in Liquidation $ 794,687 $ 624,687
=============== ==============
See accompanying notes to the financial statements.
F-24
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.
WINFIELD CAPITAL CORP.
Dated: June 27, 1997 By: s/Paul A. Perlin
-----------------------
Paul A. Perlin,
Chairman of the Board
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.
Dated: June 27, 1997 By: s/Paul A. Perlin
------------------------------------------
Paul A. Perlin, Chairman of the Board
(Chief Executive Officer) and Director
Dated: June 27, 1997 By: s/R. Scot Perlin
------------------------------------------
R. Scot Perlin, (Chief Financial Officer &
Chief Accounting Officer) and Director
Dated: June 27, 1997 By: s/Bruce A. Kaufman
------------------------------------------
Bruce A. Kaufman, Treasurer
Dated: June 27, 1997 By: s/David Greenberg
------------------------------------------
David Greenberg, Chief Operating Officer
and Director
Dated: June 27, 1997 By: s/Joel I. Barad
------------------------------------------
Joel I. Barad, Director
Dated: June 27, 1997 By:
------------------------------------------
Barry J. Gordon, Director
Dated: June 27, 1997 By:
------------------------------------------
Allen L. Weingarten, Director
Dated: June 27, 1997 By:
------------------------------------------
Scott A. Ziegler, Director
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