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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, 2005 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 (IRS 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: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, par value $.01 per share
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of May 18, 2005 was approximately $779,068. The number of
outstanding shares of the Registrant's common stock as of May 18, 2005 was
5,346,084 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement to be filed not
later than 120 days after March 31, 2005, are incorporated into Part III of this
Report.
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RISKS
Pursuant to Section 64(b) of the Investment Company Act of 1940, we are
required to advise you annually that Winfield Capital Corp. (the "Company") is
engaged in a high risk business. Loans to and other investments in small
business concerns are extremely speculative. Most of such concerns are privately
held. Even if a public market for the securities of such concerns exists, the
loans and other securities purchased by the Company are often restricted from
sale or other transfer for specified and significant periods of time. Thus, such
loans and other investments have little, if any, liquidity, and the Company and
you, as its shareholders, must bear significantly larger risks, including
possible losses on such investments, than otherwise would be the case with
traditional investment companies.
According to the U.S. Small Business Administration (the "SBA")
Regulations, the Company is required to be in compliance with the capital
impairment rules, as defined by regulation 107.1830 of the SBA Regulations. The
Company was notified by the SBA on April 30, 2003 that the Company was no longer
in compliance with the SBA's capital impairment requirements and that the SBA
had accelerated the maturity date of the Company's debentures. The aggregate
principal, interest and fees due under the debentures totaled approximately
$25.6 million as of April 30, 2003, including interest and fees due through the
next semi-annual payment date. As a result of subsequent repayments by the
Company, the aggregate principal, interest and fees due under the debentures
totaled approximately $5.0 million as of March 31, 2005. The SBA has transferred
Winfield Capital's account to liquidation status where any new investments and
material expenses are subject to prior SBA approval. Based on discussions and
meetings that the Company has had with the SBA to date, the SBA will not afford
the Company the flexibility of a self-managed liquidation to repay its
indebtedness. As a result, the Company anticipates that it will be required to
repay all or substantially all of the principal and interest owing to the SBA on
a schedule acceptable to the SBA.
On April 6, 2005, subsequent to the balance sheet date, the Company entered
into a Forbearance Agreement with the SBA whereby the maturity date of the
Company's remaining principal indebtedness to the SBA was extended until June
30, 2005, subject to a cure period of fifteen days. In connection with the
Forbearance Agreement, the Company entered into a Stipulated Settlement and a
Consent and Judgment whereby the SBA may pursue any remedies it deems
appropriate under the law or the instruments evidencing the Company's
indebtedness, including, without limitation, initiating proceedings for the
appointment of the SBA or its designee as receiver to the extent that the
Company defaults under its obligations pursuant to the Forbearance Agreement. If
the SBA were to require the Company to immediately pay back the entire
indebtedness including accrued interest, certain private security investments
may need to be disposed of in a forced sale that may result in proceeds less
than their carrying value at March 31, 2005. As such, this impairment could have
a material adverse effect on the Company's financial position, results of
operations and cash flows that raises substantial doubt about the Company's
ability to continue as a going concern. The Company continues to explore various
strategic alternatives, including a third party equity infusion, although there
can be no assurance that it will be successful in its ability to consummate or
implement these or any other strategic alternatives.
In addition, inasmuch as the Company's capital structure includes a large
amount of debt securities, all of which are debentures issued to the SBA at
fixed interest rates, unless and until the Company is able to invest all or
substantially all of the proceeds from such debt securities at annualized
interest or at other rates of return that substantially exceed annualized rates
of interest the Company is required to pay the SBA under these debentures, the
Company's operating results will be adversely affected which, in turn, may
depress the market value of the Company's shares of common stock.
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 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 ("BDC"), a
type of closed-end investment company registered under the Investment Company
Act of 1940, as amended (the "1940 Act"). The Company has elected to be taxed as
a regulated investment company ("RIC") as defined under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"). The Company's offices
are located at 237 Mamaroneck Avenue, White Plains, New York 10605 and its
telephone number is (914) 949-2600. The Company can also be reached via its Web
site at http://www.winfieldcapital.com.
As a SBIC, the Company uses funds borrowed from the SBA, together with its
own capital, to provide loans to, and to make equity investments in,
unaffiliated 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
two years preceding any date of determination 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. As a BDC, the Company is
required to make available significant managerial assistance to its portfolio
companies.
The Company has no independent investment adviser. The Company's loan and
other investment decisions are made by its officers, in accordance with the
Company's established investment policies and objectives, subject to oversight
by its Board of Directors. Historically, the Company has relied on its officers
to identify new financing opportunities. Following its initial public offering
("IPO") late in 1995, the Company expanded its marketing efforts and sought
transaction referrals from venture capitalists, investment bankers, attorneys,
accountants and commercial bankers. The Company has sought to enter into either
straight loan or equity transactions with portfolio companies or debt
transactions having equity components ("debt securities"). In connection with
the latter, the Company has sought and will continue to seek security interests
in and liens on 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.
Selected Recent Developments
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According to the SBA Regulations, the Company is required to be in
compliance with the capital impairment rules, as defined by regulation 107.1830
of the SBA Regulations. The Company was notified by the SBA on April 30, 2003
that the Company was no longer in compliance with the SBA's capital impairment
requirements and that the SBA had accelerated the maturity date of the Company's
debentures. The aggregate principal, interest and fees due under the debentures
totaled approximately $25.6 million as of April 30, 2003, including interest and
fees due through the next semi-annual payment date. As a result of subsequent
repayments by the Company, the aggregate principal, interest and fees due under
the debentures totaled approximately $5.0 million as of March 31, 2005. The SBA
has transferred Winfield Capital's account to liquidation status where any new
investments and material expenses are subject to prior SBA approval. Based on
discussions and meetings that the Company has had with the SBA to date, the SBA
will not afford the Company the flexibility of a self-managed liquidation to
repay its indebtedness. As a result, the Company anticipates that it will be
required to repay all or substantially all of the principal and interest owing
to the SBA on a schedule acceptable to the SBA.
On April 6, 2005, subsequent to the balance sheet date, the Company entered
into a Forbearance Agreement with the SBA whereby the maturity date of the
Company's remaining principal indebtedness to the SBA was extended until June
30, 2005, subject to a cure period of fifteen days. In connection with the
Forbearance Agreement, the Company entered into a Stipulated Settlement and a
Consent and Judgment whereby the SBA may pursue any remedies it deems
appropriate under the law or the instruments evidencing the Company's
indebtedness, including, without limitation, initiating proceedings for the
appointment of the SBA or its designee as receiver to the extent that the
Company defaults under its obligations pursuant to the Forbearance Agreement. If
the SBA were to require the Company to immediately pay back the entire
indebtedness including accrued interest, certain private
security investments may need to be disposed of in a forced sale that may result
in proceeds less than their carrying value at March 31, 2005. As such, this
impairment could have a material adverse effect on the Company's financial
position, results of operations and cash flows that raises substantial doubt
about the Company's ability to continue as a going concern. The Company
continues to explore various strategic alternatives, including a third party
equity infusion, although there can be no assurance that it will be successful
in its ability to consummate or implement these or any other strategic
alternatives.
Characteristics of the Company's Investments
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The Company invests in all kinds and classes of securities issued by
portfolio companies, including, but not limited to, notes and bonds; straight,
senior, subordinated, convertible and interest-paying debentures; preferred
stock; common stock; and options and warrants to purchase the foregoing. The
Company does not have a policy that limits the amount that it may invest in any
kind or class of security, except that it intends to primarily invest its assets
in straight loans or debt securities.
When the Company's investments are structured as loans, they typically are
evidenced by promissory notes or equivalent instruments with a specified
maturity or due upon demand, 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 secured debt 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 subject to 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 (although there may be
exceptions), such loans require periodic payments of principal and interest that
fully amortize the loan at maturity, and mature in five years or less. In
addition, the Company intends to pursue "bridge loan" opportunities (e.g.,
typically with maturity dates not more than one year) as and to the extent
permitted by the SBA Regulations. Management believes that, although there can
be no assurance, 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 intends to continue seeking more financing
opportunities with equity participation and more investments with equity
components than previously were sought by the Company. There can be no assurance
that the Company will find such opportunities on terms favorable to the Company,
if at all.
Investments that the Company holds in its portfolio companies may be
"restricted securities," as that term is defined under Rule 144 of the
Securities Act of 1933, as amended (the "1933 Act"). These securities may not be
sold freely in the absence of registration under the 1933 Act. As a result, its
ability to sell or otherwise transfer the securities it holds in its portfolio
will be limited. The capital stock it receives from portfolio companies is
expected to be acquired primarily in private transactions negotiated directly
with the portfolio company or an affiliate. The Company's management will
continue to be principally responsible for conducting negotiations with respect
to its investments in portfolio companies. The Company may acquire securities of
public companies in connection with mergers of its portfolio companies with such
public companies. The Company may invest a portion of its other assets in the
publicly traded securities of public companies. Such investments, and other
investments that are not "qualifying assets," may not exceed 30% of the value of
the Company's total assets at the time of any such investment.
Investment Objectives and Strategies
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The Company seeks both current income and long-term growth in the value of
its assets. The Company's investments are made, and are intended to 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 or shorter
period of time.
Prior to May 2, 1995, when there was a change in management of the Company,
the Company's investments were made primarily in very small local retail and
service businesses. Today, the Company focuses on investments in privately held
"Eligible Concerns" in industries that management considers growing industries,
including, but not limited to technology and other "new economy" businesses,
computer hardware/software, and consumer products manufacturers and
distributors. There can be no assurance that the Company will continue to be
able to locate investments in such businesses on favorable terms. If the Company
is unable to identify such investments, it would seek to reevaluate its overall
investment strategies. Although the Company is headquartered and incorporated in
the Northeast, it considers investments throughout the country provided they are
otherwise consistent with the Company's loan and other investment selection
criteria. Generally, the Company's existing
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portfolio companies are expansion stage businesses, although some are start-up
and development stage companies, including some with negative net worth and net
operating losses. Under applicable SBA Regulations, the Company may not invest
more than 20% of its "Private Capital" in any single company without prior 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. In most
instances, the Company participates in loans and other investments with other
investors. Accordingly, 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.
Selection of Loan and Other Investment Opportunities
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Given the Company's 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 will become profitable in
the future.
Development Stage Companies. The Company attempts to identify and
invest in development stage companies, (i.e., companies with a product or
service that is beyond the testing stage). The Company generally seeks to
avoid so-called "seed capital" and start-up companies.
Experienced Management Team. The Company seeks to invest in 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. Although the Company is not an
"asset-based" lender, the value of assets securing its loans is an
important consideration in its loan decisions. Emphasis is placed on
balance sheet assets such as inventory, plant, property and equipment.
Growth. The Company requires that prospective borrowers have
sufficient cash flow to service their debt along with having in
management's determination 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 in
the future. Such opportunity generally would allow the Company to realize a
gain on its equity interests that have appreciated in value, if at all,
through public offerings, sales of the portfolio company, mergers with
other companies or repurchases by the portfolio company of the Company's
equity interests. In this connection, the Company often seeks to obtain
registration rights ("demand" and "piggyback") as a condition to its equity
investments.
The foregoing criteria are general guidelines rather than fixed
requirements and the Company may consider such other criteria as investment
opportunities arise.
Certain Non-Compliance by Portfolio Companies
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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,
certain of its portfolio companies may 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 the exercise by the Company of
appropriate remedies are often influenced by the payment records of such
companies.
The aggregate face amount of the Company's outstanding loans and the value
of other portfolio investments was $14,991,167 as of March 31, 2005 with loans
and notes receivable comprising approximately 27.1% (50.2% of which were
performing in accordance with their terms and 49.8% were non-performing) and
equity interests approximately 72.9%.
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There was unrealized appreciation on loans and investments of $4,215,326
for the year ended March 31, 2005 (principally related to the sale of shares in
five publicly held portfolio companies and three loan write-offs which resulted
in the reversal of unrealized depreciation together with the increased fair
value of investments in two privately held portfolio companies, partially offset
by the sale of shares in one publicly held portfolio company which resulted in
the reversal of unrealized appreciation). There was unrealized appreciation on
loans and investments of $1,262,680 for the year ended March 31, 2004
(principally reflecting the increased market price of investments in four
publicly traded portfolio companies and the increased fair value of an
investment in one privately held portfolio company, partially offset by the
decreased fair value of investments in two privately held portfolio companies).
Write-Offs
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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 $5,955,565 as described in the following table:
Year Ended March 31,
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2003 2004 2005
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Amount written-off .................................. $182,001 $12,921 $5,760,643
Amount written-off as a percentage of loans and
investments and assets acquired in liquidation
as of the beginning of the year................... 1.29% 0.07% 31.5%
SBA Funding
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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. A SBIC can
issue such debentures in a principal amount up to either 200% or 300% of its
Private Capital, depending upon various factors.
The SBA offers eligible SBICs the opportunity to sell "participating
securities" (i.e., either preferred stock or debentures having interest payable
only to the extent of earnings) to the SBA or to entities that receive SBA
guaranties in an 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 (i.e., $10,000,000), the issuance of
any future Company debentures 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.
SBA Regulation
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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 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 meets size standards prescribed by the SBA relating
either to annual receipts or number of employees, depending on the industry in
which such business primarily operates, is eligible to receive financial
assistance from a SBIC (hereinafter referred to as an "Eligible Concern"). The
SBA Regulations also define a "Smaller Concern" as 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 business 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 made by
SBICs. The maximum maturity of these loans may not exceed 20 years. A borrower
from a 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 components) a
SBIC can charge an interest rate of up to 19% and on loans with equity
components an annualized interest rate of up to 14%. Notwithstanding the above
restrictions, a SBIC can charge a borrower more by first computing a base rate
using either the SBA debenture rate currently in effect, plus an applicable
charge permitted by the SBA, or a base rate using the weighted average cost of
the SBIC's borrowings from the SBA
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and qualified third party lenders such as banks. On loans with equity
components, a SBIC may charge interest equal to 6% above the base rate used and,
in the case of a straight loan, 11% above the base rate used.
SBICs may invest directly in the equity of their portfolio companies.
However, they may not become a general partner of a non-incorporated entity or
otherwise become jointly or severally liable for the general obligations of a
non-incorporated entity. A SBIC may acquire options or warrants in its portfolio
companies. Such options and warrants may also have redemption provisions,
subject to certain restrictions. As a result of a recent change in the SBA
Regulations, SBICs are now permitted to control a portfolio company. "Control"
for this purpose is defined as the ownership (or control) of 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 that are not regular and
continuous.
Regulation as a Business Development Company
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The Company is a closed-end, non-diversified investment company that has
elected to be regulated as a BDC 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 BDC unless so authorized by the
vote of the holders of a majority of its outstanding voting securities.
A BDC is permitted, under specified conditions, to issue multiple classes
of indebtedness and one class of stock having rights as to voting, liquidation
and dividends which are senior to the Company's common stock (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 a SBIC, the only asset coverage requirement
applicable to it that 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 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 from banks evidenced by notes not to be publicly distributed
or for temporary purposes if the borrowing does not exceed 5% of the value of
its total assets. A loan is presumed to be for temporary purposes if it is
repaid within sixty days and is not extended or renewed.
Under the 1940 Act, a BDC 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 by a member of a national
securities exchange, broker or dealer.
(2) Securities of any eligible portfolio company that is controlled
by the BDC.
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(3) Securities received in exchange for or distributed on or with
respect to securities described in items (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 BDC 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 items (1) or (2) above and, in order to count
the securities as Qualifying Assets for the purpose of the 70% test, the BDC
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 BDC, 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 a SBIC (such as the Company), making loans to a
portfolio company.
Fundamental and Other Investment Policies
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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
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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 the holders of 50% or more of the Company's outstanding voting
securities, or the holders of 67% or more of the Company's outstanding voting
securities present at a meeting of security holders 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
a SBIC and as a BDC, and to qualify as a RIC as defined under the Code. In
order to retain its status as a SBIC, the Company must limit its
investments to Eligible Concerns and meet the minimum financing obligations
applicable to Smaller Concerns (see "SBA Regulation").
2. The Company will not borrow money except through the issuance of
its subordinated debentures, other debentures ranking on an equal basis
with its subordinated 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 1933 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).
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 loan money to, or invest in, any company if such
loan or investment exceeds 20% of the Company's Private Capital, without
SBA approval.
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7. The Company may make straight loans and loans with equity
components to the extent permitted under the Small Business Investment Act
and the 1940 Act.
Other Investment Policies
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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.
In order to retain its status as a BDC, the Company may not acquire assets
(other than non-investment assets necessary and appropriate to its operations as
a BDC) 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
BDC". In order to qualify as a RIC, the Company is required, among other things,
to diversify its holdings as required under the Code. As a result of the sale of
certain portfolio investments in order to repay its indebtedness to the SBA, the
Company's remaining portfolio of investments has become less diversified and
therefore, the Company did not qualify as a RIC for the fiscal year ended March
31, 2005. Accordingly, the Company will be taxed as a regular "C" corporation
for Federal income tax purposes for the fiscal year ended March 31, 2005.
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 Company. The Company's
competition is not limited to entities that operate in the same geographical
area as the Company, as many of the Company's competitors operate throughout the
United States. Furthermore, competition for loan origination has increased as
the financial resources of the banking community have grown 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 nor does it intend to
retain one.
Forward-Looking Statements
- --------------------------
This report and accompanying notes to the financial statements may contain
forward-looking statements. For this purpose, any statements contained in this
report and accompanying notes to the financial statements that are not
7
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, words such as "may," "will," "expect," "could,"
"would," "should," "believe," "anticipate," "estimate," "continue," "provided,"
or comparable terminology are intended to identify forward-looking statements.
These statements by their nature involve substantial risks and uncertainties,
and actual results may differ materially depending on a variety of factors.
Personnel
- ---------
As of May 23, 2005, the Company had two full-time employees (Messrs. Paul
A. Perlin, Chief Executive Officer and R. Scot Perlin, Chief Financial Officer).
In addition to its salaried employees, the Company has from time to time engaged
the services of independent consultants as and when needed. The Company
considers its relations with employees to be satisfactory.
Item 2. Properties
The Company operates its executive offices where it maintains its
investment and business records from rented quarters, consisting of
approximately 2,000 square feet, located in a four-story office building under a
lease expiring on February 29, 2008. 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.
Item 3. 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 4. Submission of Matters to a Vote of Security Holders
Not applicable.
8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
On April 15, 2003, the Registrant's common stock began trading on the OTCBB
under the symbol WCAP. From September 26, 2002 until April 15, 2003, the
Registrant's common stock was listed on the Nasdaq SmallCap Market. Previously,
the Registrant's common stock was listed on the Nasdaq National Market. The
reported high and low bid quotations for the Registrant's common stock as
reported by Nasdaq from April 1, 2003 to April 14, 2003 and as reported on the
OTCBB from April 15, 2003 until May 18, 2005 were as follows:
Common Stock
------------
High Low
---- ---
April 1 - June 30, 2003 ......................... $ 0.51 $ 0.15
July 1 - September 30, 2003 ....................... 0.30 0.15
October 1 - December 31, 2003...................... 0.35 0.18
January 1 - March 31, 2004 ........................ 0.45 0.17
April 1 - June 30, 2004 ........................... 1.65 0.41
July 1 - September 30, 2004 ....................... 0.65 0.22
October 1 - December 31, 2004 ..................... 0.60 0.21
January 1 - March 31, 2005......................... 0.32 0.18
April 1 - May 18, 2005 ............................ $ 0.22 $ 0.13
- --------------------------------------------------------------------------------
The foregoing quotations reflect inter-dealer prices, without retail
markup, markdown or commission, and do not necessarily represent actual
transactions.
As of August 8, 2004, the last record date, the Company estimated that its
shares of common stock were held by approximately 3,719 beneficial holders.
Item 6. Selected Financial Data
See Summary of Financial Information for the years ended March 31, 2005,
2004, 2003, 2002 and 2001 on the following page:
9
WINFIELD CAPITAL CORP.
SUMMARY OF FINANCIAL INFORMATION
Years Ended March 31,
---------------------------------------------------------------------------------
2005 2004 2003 2002 2001
---------------------------------------------------------------------------------
Statement of Operations Data
Total investment income ................... $ 784,321 $ 1,550,947 $ 729,897 $ 1,057,404 $ 1,185,799
Total investment expenses ................. $ 2,161,085 $ 2,868,163 $ 4,086,185 $ 3,641,686 $ 3,232,652
Net realized (losses) gains on
disposition of investments .......... $ (3,809,397) $ 1,191,185 $ 16,407 $ (3,289,935) $ 1,282,344
Unrealized appreciation (depreciation)
on loans and investments ............ $ 4,215,326 $ 1,262,680 $ (2,654,690) $ (8,492,858) $(69,828,667)
Net (loss) income ......................... $ (970,835) $ 1,136,649 $ (5,994,571) $(14,367,075) $(70,593,176)
(Loss) earnings per share - Basic ......... $ (0.18) $ 0.21 $ (1.12) $ (2.69) $ (13.20)
Weighted average number of shares
outstanding ......................... 5,346,084 5,346,084 5,346,084 5,346,084 5,346,084
Other Operating Data
Number of loans and other investments
outstanding at end of period ........ 17 41 44 37 50
Number of loans and other investments
originated .......................... 1 6 7 4 7
Principal amount of loans and other
investments originated .............. $ 54,949 $ 154,905 $ 7,618,912 $ 367,676 $ 9,637,953
Investment expenses as a percentage of
average net assets .................. 100.8% 139.3% 94.0% 22.3% 6.9%
Balance Sheet Data
Loans and investment portfolio
including assets acquired in
liquidation ......................... $ 6,291,375 $ 18,301,052 $ 18,591,630 $ 14,129,234 $ 30,256,226
Total assets .............................. $ 6,725,530 $ 23,918,679 $ 26,656,254 $ 32,498,086 $ 49,031,295
SBA debentures ............................ $ 4,991,550 $ 19,536,660 $ 24,650,000 $ 24,650,000 $ 25,550,000
Common stock (including additional paid
in-capital) ......................... $ 18,445,415 $ 18,445,415 $ 19,762,631 $ 23,036,159 $ 24,806,818
(Accumulated deficit) retained earnings ... $ (8,088,714) $ (2,902,553) $ (4,093,738) $ (4,027,385) $ 1,352,362
Total shareholders' equity ................ $ 1,656,909 $ 2,627,744 $ 1,491,095 $ 7,485,666 $ 23,128,930
10
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations
Years Ended March 31, 2005, 2004, and 2003
------------------------------------------
Critical Accounting Policies
- ----------------------------
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles ("GAAP") requires the application of accounting
policies that often involve a significant degree of judgment. Management, on an
on-going basis, reviews estimates and assumptions. If management determines, as
a result of its consideration of facts and circumstances, that modifications of
its assumptions and estimates are appropriate, results of operations and
financial position as reported in the financial statements may change
significantly. The following sections discuss accounting policies applied in
preparing the Company's financial statements that management believes are most
dependent on the application of estimates and assumptions.
Valuation of Investments
Securities that are traded on a securities exchange or the Nasdaq National
Market, which are not 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 closing price on the valuation date. A
valuation discount is applied if the number of securities held is substantial in
relation to the average daily trading volume.
The Company's investments in restricted securities of public companies are
valued at the closing price on the valuation date less a discount rate of 10% to
30%, 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
portfolio company. In some cases, a discount of greater than 30% may be used
based upon applicable factors including, but not limited to (by way of example):
1) whether the portfolio company will be financially solvent at the time such
restricted securities become freely tradable, 2) whether the Company has
knowledge of material non-public information about the portfolio company which
it is not at liberty to disclose in connection with its sale of the securities
of such portfolio company and 3) the risk that the portfolio company's
securities might be delisted from an exchange or automated trading market with
published trading reports.
Loans and assets acquired in liquidation for which no public market exists
are stated at "fair 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 Directors' 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
less 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 fair value, as determined by the Board of Directors.
Investments in non-public companies securities (including equity
investments, warrants and convertible instruments) are recorded at fair 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 cash flows from operations,
the market for 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.
11
Option Contracts - Derivatives
The Company adopted Statement of Financial Accounting Standards No. 133 as
amended by Statements No. 137 and No. 138, Accounting for Derivative Instruments
and Hedging Activities, (referred to hereafter as "SFAS 133"), on January 1,
2001. At that time, the Company did not have any derivatives. SFAS 133 requires
that an entity recognize all derivative instruments in the balance sheet and
measure those financial instruments at fair value. All changes in the fair
market value of financial instruments are included as changes in the unrealized
appreciation or depreciation of investments in the Statement of Operations.
Income Taxes
Effective April 1, 1996, the Company has elected to be taxed as a RIC under
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 that acts as a
partial conduit of income to its shareholders.
In order to maintain its RIC status, the Company must in general: 1.)
derive at least 90% of its gross income from dividends, interest and gains from
the sale or disposition of securities, 2.) meet investment diversification
requirements defined by the Code, and 3.) distribute to shareholders 90% of its
net income (other than long-term capital gains). As a result of the sale of
certain portfolio investments in order to repay its indebtedness to the SBA, the
Company's remaining portfolio of investments has become less diversified and
therefore, the Company did not qualify as a RIC for the fiscal year ended March
31, 2005. Accordingly, the Company will be taxed as a regular "C" corporation
for Federal income tax purposes for the fiscal year ended March 31, 2005.
The Company may periodically make reclassifications among certain of its
capital accounts as a result of timing and characterization of certain income
and capital gains distributions determined annually in accordance with Federal
tax regulation. The reclassifications may result in a reduction of capital. All
reclassifications have been reflected on the statements of changes in
shareholders' equity.
Investment Income
- -----------------
Investment income decreased by $766,626, or a decrease of 49.4%, to
$784,321 for the year ended March 31, 2005 from $1,550,947 for the year ended
March 31, 2004. This reflected principally a decrease in interest from small
business concerns of $737,207 as a result of the Company's sale of a loan
investment and the prepayment of another loan investment. Interest from
temporarily invested funds decreased by $20,117 as a result of a decrease in
invested idle funds as well as a decrease in interest rates. Other income
decreased by $9,302.
Investment income increased by $821,050, or an increase of 112.5%, to
$1,550,947 for the year ended March 31, 2004 from $729,897 for the year ended
March 31, 2003. This reflected principally an increase in interest from small
business concerns of $1,031,061 as a result of the Company's increased
investments in loans in the last two quarters of fiscal 2003. Interest from
temporarily invested funds decreased by $209,209 as a result of a decrease in
invested idle funds as well as a decrease in interest rates. Other income
decreased by $802.
Interest Expense
- ----------------
Interest expense decreased by $603,815, or a decrease of 36.3%, to
$1,061,594 (net of an interest expense increase of $96,392 due to a cumulative
recalculation of the Company's past repayments of debentures by the SBA) for the
year ended March 31, 2005 from $1,665,409 for the year ended March 31, 2004.
This decrease resulted from repayments of $14,545,110 of debentures to the SBA.
Interest expense decreased $213,074, or a decrease of 11.3% from $1,878,483 for
the year ended March 31, 2003 to $1,665,409 for the year ended March 31, 2004,
also as a result of repayments of $5,113,340 of debentures to the SBA.
Operating Expenses
- ------------------
The Company's operating expenses decreased by $103,263, or a decrease of
8.6%, to $1,099,491 for the year ended March 31, 2005 from $1,202,754 for the
year ended March 31, 2004. Payroll and payroll-related expenses decreased by
$51,430 due to the termination of a clerical employee, insurance expense
decreased by $53,087, directors fees decreased by $46,500, shareholder relations
and other financial expenses decreased by $10,170 and accounting
12
fees decreased by $21,899 while legal expense increased by $82,855 due to
negotiations with the SBA in connection with the Company's capital impairment.
There were other miscellaneous decreases that totaled $3,032.
The Company's operating expenses decreased by $1,004,948 to $1,202,754 for
the year ended March 31, 2004 from $2,207,702 for the year ended March 31, 2003.
Amortization expense decreased by $574,428 primarily due to the acceleration of
the maturity of the SBA debentures that resulted in fully expensing the related
debenture fees in the year ended March 31, 2003. Payroll and payroll-related
expenses decreased by $217,536 due to the resignation of an executive officer
effective December 31, 2002 and the termination of a secretary effective
December 31, 2003. Professional fees decreased by $66,756, shareholder relations
and other financial expenses decreased by $48,623, insurance expense decreased
by $37,009 and directors fees decreased by $23,725. There were other
miscellaneous decreases that totaled $36,871.
Realized Gains or Losses on Equity Investments
- ----------------------------------------------
The Company realizes gains or losses on its investments or rights to
acquire investments upon the disposition or write-offs thereof. The realized
capital loss for the year ended March 31, 2005 of $3,809,397 reflected loan and
equity write-offs of $5,760,643 together with long-term capital losses on the
sale of equity securities of $1,910,470, partially offset by long-term capital
gains on the sale of equity securities of $3,409,186 and a gain of $452,530 on
the disposition of a loan.
The realized capital gain for the year ended March 31, 2004 of $1,191,185
reflected long-term capital gains on the sale of four equity securities of
$1,437,675 and a gain of $107,396 on the disposition of two loans, partially
offset by a long-term capital loss of $340,965 on the sale of one equity
security and a write-off on an asset acquired in liquidation of $24,707,
partially offset by two recoveries totaling $11,786. The realized capital gain
for the year ended March 31, 2003 of $16,407 reflected a long-term capital gain
on an equity security of $208,287, a short-term capital gain on an equity
security of $50,680, partially offset by a write-off of $182,001 on a debt
security, long-term net capital losses on assets acquired in liquidation of
$45,168 and short-term losses on the repositioning of temporarily invested funds
of $15,391.
Unrealized Appreciation or Depreciation of Loans and Investments
- ----------------------------------------------------------------
As an investment company, the Company is required to evaluate 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.
There was unrealized appreciation on loans and investments of $4,215,326 for the
year ended March 31, 2005 (principally related to the sale of shares in five
publicly held portfolio companies and three loan write-offs which resulted in
the reversal of unrealized depreciation together with the increased fair value
of investments in two privately held portfolio companies, partially offset by
the sale of shares in one publicly held portfolio company which resulted in the
reversal of unrealized appreciation).
There was unrealized appreciation on loans and investments of $1,262,680
for the year ended March 31, 2004 (principally reflecting the increased market
price of investments in four publicly traded portfolio companies and the
increased fair value of an investment in one privately held portfolio company,
partially offset by the decreased fair value of investments in two privately
held portfolio companies) compared with an unrealized depreciation on loans and
investments of $2,654,690 (or, $2,692,012, excluding an unrealized appreciation
on short-term marketable securities) for the year ended March 31, 2003
(principally reflecting the decreased market price of investments in nine
publicly traded portfolio companies, partially offset by the increased market
price of one publicly traded portfolio company and the decreased fair value of
investments in five privately held portfolio companies, partially offset by the
increased fair value of investments in five privately held portfolio companies).
Option Contracts - Derivatives
- ------------------------------
Pursuant to a letter received from the SBA in October 2000 granting
permission to use hedging activities to protect its security positions, the
Company, beginning in January 2001, utilized put and call option contracts to
minimize market risks of its investments in publicly held companies. The Company
adopted SFAS 133 on January 1, 2001. SFAS 133 requires that an entity recognize
all derivative instruments in the balance sheet and measure those financial
instruments at fair value. All changes in the fair market value of financial
instruments are included as changes in the unrealized appreciation or
depreciation of investments in the Statement of Operations. As of March 31, 2005
and March 31, 2004, the Company had no option contracts outstanding as part of
its portfolio.
13
Liquidity and Capital Resources
- -------------------------------
At March 31, 2005, the Company held cash and cash equivalents totaling
$323,177.
According to the SBA Regulations, the Company is required to be in
compliance with the capital impairment rules, as defined by regulation 107.1830
of the SBA Regulations. The Company was notified by the SBA on April 30, 2003
that the Company was no longer in compliance with the SBA's capital impairment
requirements and that the SBA had accelerated the maturity date of the Company's
debentures. The aggregate principal, interest and fees due under the debentures
totaled approximately $25.6 million as of April 30, 2003, including interest and
fees due through the next semi-annual payment date. As a result of subsequent
repayments by the Company, the aggregate principal, interest and fees due under
the debentures totaled approximately $5.0 million as of March 31, 2005. The SBA
has transferred Winfield Capital's account to liquidation status where any new
investments and material expenses are subject to prior SBA approval. Based on
discussions and meetings that the Company has had with the SBA to date, the SBA
will not afford the Company the flexibility of a self-managed liquidation to
repay its indebtedness. As a result, the Company anticipates that it will be
required to repay all or substantially all of the principal and interest owing
to the SBA on a schedule acceptable to the SBA.
On April 6, 2005, subsequent to the balance sheet date, the Company entered
into a Forbearance Agreement with the SBA whereby the maturity date of the
Company's remaining principal indebtedness to the SBA was extended until June
30, 2005, subject to a cure period of fifteen days. In connection with the
Forbearance Agreement, the Company entered into a Stipulated Settlement and a
Consent and Judgment whereby the SBA may pursue any remedies it deems
appropriate under the law or the instruments evidencing the Company's
indebtedness, including, without limitation, initiating proceedings for the
appointment of the SBA or its designee as receiver to the extent that the
Company defaults under its obligations pursuant to the Forbearance Agreement. If
the SBA were to require the Company to immediately pay back the entire
indebtedness including accrued interest, certain private security investments
may need to be disposed of in a forced sale that may result in proceeds less
than their carrying value at March 31, 2005. As such, this impairment could have
a material adverse effect on the Company's financial position, results of
operations and cash flows that raises substantial doubt about the Company's
ability to continue as a going concern. The Company continues to explore various
strategic alternatives, including a third party equity infusion, although there
can be no assurance that it will be successful in its ability to consummate or
implement these or any other strategic alternatives.
Debentures Payable to the U.S. Small Business Administration
- ------------------------------------------------------------
Debentures payable to the SBA at March 31, 2005, with interest payable
semi-annually, consisted of the following:
Amount Original Due Date Interest Rate (per annum)
----------- ----------------- ------------------------
$ 750,000 9/1/2005 6.875%
600,000 9/1/2005 6.875%
3,641,550 3/1/2011 6.353%
-----------
$ 4,991,550
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.
Commitments and Contingencies
The Company has an operating lease on its office facility that expires on
February 29, 2008. The following are the future minimum rental commitments on
the lease:
Payments Due By Period
Less Than More than
Total 1 Year 1-3 Years 4-5 Years 5 Years
---------- ---------- ---------- --------- ---------
Operating lease $ 147,285 $ 47,421 $ 99,864 $ - $ -
========== ========== ========== ========= =========
14
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company's earnings and cash flows are subject to fluctuations due to
changes in interest rates primarily from its investment of available cash
balances in bank money market funds with portfolios of investment grade
corporate and U.S. government securities, in individual bank certificates of
deposit and U.S. treasuries. Under its current policies, the Company does not
use interest rate derivative instruments to manage exposure to interest rate
changes.
A portion of the Company's investment portfolio consists of fixed-rate debt
securities. Since these debt securities usually have relatively high fixed rates
of interest, minor changes in market yields of publicly traded debt securities
have little or no effect on the values of debt securities in the Company's
portfolio and no effect on interest income. On the other hand, significant
changes in the market yields of publicly traded debt securities may have a
material effect on the values of debt securities in the Company's portfolio. The
Company's investments in debt securities are generally held to maturity and
their fair values are determined on the basis of the terms of the debt security
and the financial condition of the issuer. As of March 31, 2005, the Company had
no publicly traded debt securities in its portfolio.
A portion of the Company's investment portfolio consists of debt and equity
securities of private companies. The Company anticipates little or no effect on
the value of these investments from modest changes in public market equity
valuations. Should significant changes in market valuations of comparable
publicly owned companies occur, there may a be corresponding effect on
valuations of private companies, which would affect the value, amount and timing
of proceeds eventually realized from these investments. A portion of the
Company's investment portfolio also consists of restricted common stocks and
warrants to purchase common stocks of publicly owned companies. The fair values
of these restricted securities are influenced by the nature of applicable resale
restrictions, the underlying earnings and financial condition of the issuer and
the market valuations of comparable publicly owned companies. A portion of the
Company's investment portfolio also consists of unrestricted, freely marketable
common stocks of publicly owned companies. These freely marketable securities
are directly exposed to equity price fluctuations, in that a change in an
issuer's public market equity price would result in an identical change in the
fair value of the Company's investment in such security. The Company may
utilize, if they are available, put and call option contracts to attempt to
minimize the market risk of its investments in publicly owned companies. As of
March 31, 2005, the Company had no option contracts outstanding as part of its
portfolio.
Item 8. Financial Statements and Supplementary Data
Page
----
Report of Independent Registered Public Accounting Firm - Current ......... F-1
Report of Independent Registered Public Accounting Firm - Predecessor...... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Changes in Shareholders' Equity ............................. F-5
Statements of Cash Flows .................................................. F-6
Financial Highlights (Per Share Data and Ratios/Supplemental Data)......... F-7
Notes to Financial Statements ............................................. F-8 through F-17
Schedules of Portfolio of Investments ..................................... F-18 through F-23
Item 9. Changes in and Disagreements with Auditors on Accounting and Financial
Disclosure
On October 18, 2003, a Form 8-K was filed by the Company in connection with
a change in the Company's certifying auditors. PricewaterhouseCoopers LLP
resigned as the independent auditors of the Company on October 8, 2003. On
October 14, 2003, with approval of the Company's Board of Directors, the Company
engaged the accounting firm of Lazar Levine & Felix LLP as its independent
auditors beginning with the fiscal year ending March 31, 2004 and to review the
Company's interim financial statements beginning with the fiscal quarter ended
September 30, 2003.
15
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
------------------------------------------------
As of the end of the period covered by this Annual Report on Form 10-K, we
evaluated, under the supervision of our chief executive officer and chief
financial officer, the effectiveness of the design and operation of our
"disclosure controls and procedures" (as defined in the Securities Exchange Act
of 1934, Rules 13a-15(e) and 15d-15(e)). Based on that evaluation, our
management, including our chief executive officer and chief financial officer,
has concluded that as of the date of the evaluation our disclosure controls and
procedures are effective to ensure that all material information required to be
filed in this report has been made known to them.
(b) Changes in Internal Controls over Financial Reporting
-----------------------------------------------------
There have been no changes in our internal controls over financial
reporting that occurred during the fourth quarter of the fiscal year ended March
31, 2005 that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
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, 2005.
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, 2005.
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, 2005.
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, 2005.
Item 14. Principal Accountant Fees and Services
Incorporated by reference to the Registrant's definitive proxy statement to
be filed not later than 120 days after March 31, 2005.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Financial Statements:
See item 8 of Part II hereof.
16
(b) No reports on Form 8-K were filed during the fourth quarter of the
Registrant's fiscal year ended March 31, 2005. The Registrant filed a
report on Form 8-K on April 8, 2005, incorporated by reference to
Exhibit 99.1 of the Registrant's Form 10-K for the fiscal year ended
March 31, 2005 in SEC File No. 33-94322.
(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(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.
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(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(I). Employment Agreement with Paul A. Perlin, dated April 4,
2001 as of November 1, 2000, incorporated by reference to
Exhibit 10(I) to the Registrant's Form 10-K for the fiscal
year ended March 31, 2001 in SEC File No. 33-94322.
10(J). Employment Agreement with David Greenberg, dated April 4,
2001 as of November 1, 2000, incorporated by reference to
Exhibit 10(J) to the Registrant's Form 10-K for the fiscal
year ended March 31, 2001 in SEC File No. 33-94322.
10(K). Employment Agreement with Paul A. Perlin, dated November 15,
2002 as of November 1, 2002, incorporated by reference to
Exhibit 10(K) to the Registrant's Form 10-K for the fiscal
year ended March 31, 2003 in SEC File No. 33-94322.
10(L). Forbearance Agreement with the SBA, dated April 6, 2005,
incorporated by reference to Exhibit 10(L) to the
Registrant's Form 10-K for the fiscal year ended March 31,
2005 in SEC File No. 33-94322.
11. Statement of Computation of Earnings (Loss) Per Share,
incorporated herein by reference to the Notes to the
Financial Statements included in this report.
31.1 Certification of Paul A. Perlin, Chief Executive Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of R. Scot Perlin, Chief Financial Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
17
32.1 Certification of Paul A. Perlin, Chief Executive Officer,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of R. Scot Perlin, Chief Financial Officer,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(d) Financial Statement Schedules: The schedules specified under
Regulation S-X are either included in this Form 10-K, not applicable
or are immaterial to the Company's financial statements for each of
the three years in the period ended March 31, 2005.
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: May 23, 2005 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: May 23, 2005 By: /s/ PAUL A. PERLIN
-----------------------------
Paul A. Perlin
Chairman of the Board &
Chief Executive Officer
(Principal Executive Officer)
& Director
Dated: May 23, 2005 By: /s/ R. SCOT PERLIN
-----------------------------
R. Scot Perlin
Chief Financial Officer
(Principal Financial &
Accounting Officer)
& Director
Dated: May 23, 2005 By: /s/ JOEL I. BARAD
-----------------------------
Joel I. Barad
Director
Dated: May 23, 2005 By: /s/ BARRY J. GORDON
-----------------------------
Barry J. Gordon
Director
Dated: May 23, 2005 By: /s/ DAVID GREENBERG
-----------------------------
David Greenberg
Director
Dated: May 23, 2005 By: /s/ ALLEN L. WEINGARTEN
-----------------------------
Allen L. Weingarten
Director
18
WINFIELD CAPITAL CORP.
MARCH 31, 2005 AND 2004
CONTENTS
Page
----
Report of Independent Registered Public Accounting Firm - Current F-1
Report of Independent Registered Public Accounting Firm - Predecessor F-2
Balance Sheets F-3
(At March 31, 2005 and 2004)
Statements of Operations
(For each of the three years in the period ended March 31, 2005) F-4
Statements of Changes in Shareholders' Equity F-5
(For each of the three years in the period ended March 31, 2005)
Statements of Cash Flows F-6
(For each of the three years in the period ended March 31, 2005)
Financial Highlights F-7
Per Share Operating Performance
(For the years ended March 31, 2005 and 2004)
Ratios/Supplemental Data
(For the years ended March 31, 2005 and 2004)
Notes to Financial Statements F-8 - F-17
Schedules of Portfolio of Investments F-18 - F-23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Shareholders
of Winfield Capital Corp.
(A Small Business Investment Company licensed
by the U.S. Small Business Administration ("SBA"))
White Plains, NY
We have audited the accompanying balance sheets of Winfield Capital Corp. as of
March 31, 2005 and March 31, 2004 and the related statements of operations,
changes in shareholders' equity and cash flows for each of the two years then
ended. Our audits also included the financial statement schedules listed in the
accompanying index of this Form 10-K. These financial statements and schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedules based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements and schedules are free of material misstatement. The
Company is not required to have, nor were we engaged to perform an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements and schedules. 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Winfield Capital Corp. at March
31, 2005 and March 31, 2004 and the results of their operations and their cash
flows for each of the two years then ended, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the related financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and its debentures payable to the SBA are currently due as a result of an
impairment under SBA regulations. These matters raise substantial doubt about
the Company's ability to continue as a going concern. Management's plan in
regard to these matters is also described in Note 2. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ LAZAR LEVINE & FELIX LLP
- ----------------------------
Lazar Levine & Felix LLP
New York, NY
May 13, 2005
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
of Winfield Capital Corp.
(A Small Business Investment Company licensed by
the U.S. Small Business Administration ("SBA")):
In our opinion, the statements of income, shareholders' equity and cash flows
for the year ended March 31, 2003 of Winfield Capital Corp. present fairly, in
all material respects, the results of operations and cash flows of Winfield
Capital Corp. in conformity with accounting principles generally accepted in the
United States of America. 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 of these
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and its debentures payable to the SBA are currently due as a result of an
impairment under SBA regulations. These matters raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ PRICEWATERHOUSECOOPERS LLP
- ------------------------------
PricewaterhouseCoopers LLP
New York, NY
June 13, 2003
F-2
WINFIELD CAPITAL CORP.
BALANCE SHEETS
Years Ended March 31,
---------------------
2005 2004
------------ ------------
ASSETS
Investments, at value:
Loans and notes receivable (cost:
$4,069,672 and $10,569,529, respectively) $2,069,672 $8,483,825
Equity interests in small business
concerns (cost: $10,921,495 and $20,646,641, respectively) 4,221,703 9,817,227
------------ ------------
Total investments 6,291,375 18,301,052
Cash and cash equivalents 323,177 5,473,063
Accrued interest receivable 62,054 62,070
Furniture and equipment (net of accumulated
depreciation of $52,163 and $47,316, respectively) 6,241 11,088
Other assets 42,683 71,406
------------ ------------
Total assets $6,725,530 $23,918,679
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Debentures payable to the U.S. Small
Business Administration $4,991,550 $19,536,660
Deferred income - 101,922
Accrued expenses 77,071 1,652,353
------------ ------------
Total liabilities 5,068,621 21,290,935
------------ ------------
Commitments and contingencies
Shareholders' equity:
Preferred stock - $.001 par value; authorized -
1,000,000 shares; issued and outstanding - none
Common stock - $.01 par value; authorized -
30,000,000 shares at March 31, 2005 and 2004;
issued and outstanding - 5,346,084 shares
at March 31, 2005 and 2004 53,461 53,461
Additional paid-in capital 18,391,954 18,391,954
Accumulated deficit (8,088,714) (2,902,553)
Unrealized depreciation on investments, net (8,699,792) (12,915,118)
------------ ------------
Total shareholders' equity 1,656,909 2,627,744
------------ ------------
Total liabilities and shareholders' equity $6,725,530 $23,918,679
============ ============
The accompanying notes are an integral part of the financial statements.
F-3
WINFIELD CAPITAL CORP.
STATEMENTS OF OPERATIONS
Years Ended March 31,
---------------------
2005 2004 2003
------------ ------------ ------------
Investment income:
Interest from small business concerns $ 753,701 $ 1,490,908 $ 459,847
Interest from invested idle funds 30,620 50,737 259,946
Other income - 9,302 10,104
------------ ------------ ------------
Total investment income 784,321 1,550,947 729,897
------------ ------------ ------------
Expenses:
Interest 1,061,594 1,665,409 1,878,483
Payroll and payroll-related expenses 557,884 609,314 826,850
General and administrative expenses 255,157 370,068 474,219
Professional fees 234,889 173,933 240,689
Depreciation and amortization 4,847 5,436 580,113
Other operating costs 46,714 44,003 85,831
------------ ------------ ------------
Total investment expenses 2,161,085 2,868,163 4,086,185
------------ ------------ ------------
Investment loss - net (1,376,764) (1,317,216) (3,356,288)
------------ ------------ ------------
Realized (losses) gains on investments, net (3,809,397) 1,191,185 16,407
Change in unrealized appreciation
(depreciation) of investments 4,215,326 1,262,680 (2,654,690)
------------ ------------ ------------
Gain (loss) on investments, net 405,929 2,453,865 (2,638,283)
------------ ------------ ------------
Net (decrease) increase in shareholders'
equity resulting from operations $ (970,835) $ 1,136,649 $ (5,994,571)
============ ============ ============
Per share net (decrease) increase
in shareholders' equity resulting from operations:
Basic $ (0.18) $ 0.21 $ (1.12)
============ ============ ============
Diluted $ (0.18) $ 0.21 $ (1.12)
============ ============ ============
The accompanying notes are an integral part of the financial statements.
F-4
WINFIELD CAPITAL CORP.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Accumulated Deficit)
Retained Earnings
-----------------------------
Net Net Unrealized
Additional Undistributed Undistributed Appreciation
Common Stock Paid-In Investment Realized (Depreciation) on
Shares Amount Capital Income/(Loss) Gain/(Loss) Investments - net Total
------------ ------------ ------------ ------------ ------------ ----------------- ------------
Balance - April 1, 2002 5,346,084 $ 53,461 $ 22,982,698 $ 104,746 $ (4,132,131) $(11,523,108) $ 7,485,666
Net (decrease) increase
in shareholders' equity
resulting from
operations (3,356,288) 16,407 (2,654,690) (5,994,571)
Reclassification
as described in
Note 3 (3,273,528) 3,251,542 21,986
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance - March 31, 2003 5,346,084 53,461 19,709,170 - (4,093,738) (14,177,798) 1,491,095
Net (decrease) increase
in shareholders' equity
resulting from
operations (1,317,216) 1,191,185 1,262,680 1,136,649
Reclassification
as described in
Note 3 (1,317,216) 1,317,216
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance - March 31, 2004 5,346,084 53,461 18,391,954 - (2,902,553) (12,915,118) 2,627,744
Net (decrease) increase
in shareholders' equity
resulting from
operations (5,186,161) 4,215,326 (970,835)
Reclassification
as described in
Note 3
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance - March 31, 2005 5,346,084 $ 53,461 $ 18,391,954 $ - $ (8,088,714) $ (8,699,792) $ 1,656,909
============ ============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of the financial statements.
F-5
WINFIELD CAPITAL CORP.
STATEMENTS OF CASH FLOWS
Years Ended March 31,
--------------------------------------------
2005 2004 2003
------------ ------------ ------------
Operating activities
Net (decrease) increase in shareholders' equity resulting from operations $ (970,835) $ 1,136,649 $ (5,994,571)
Adjustments to reconcile net (decrease) increase in shareholders' equity
resulting from operations to net cash used in operating activities:
Realized losses (gains) on investments, net 3,809,397 (1,191,185) (16,407)
Change in unrealized (appreciation) depreciation of investments (4,215,326) (1,255,461) 2,692,012
Change in unrealized (appreciation) of
short-term marketable securities - (7,219) (37,322)
Depreciation and amortization of fixed assets 4,847 5,436 5,685
Accretion of interest to face value of notes (224,834) (385,651) (115,147)
Amortization of debenture costs - - 574,428
Decrease in accrued interest receivable 16 23,206 74,529
Decrease (increase) in other assets 28,723 44,264 (49,519)
(Decrease) in deferred income - (27,180) -
(Decrease) increase in accrued expenses (1,575,282) 1,266,296 23,637
------------ ------------ ------------
Net cash used in operating activities (3,143,294) (390,845) (2,842,675)
------------ ------------ ------------
Investing activities:
Purchases of short-term marketable securities - - (6,487,954)
Proceeds from the maturity of short-term marketable securities - 3,430,000 15,808,742
Proceeds from sale of equity interests and return of capital 12,345,107 2,823,397 920,337
Investments originated (54,949) (154,905) (7,618,912)
Proceeds from collection of loans 248,360 485,828 199,679
Acquisition of fixed assets - (3,278) -
------------ ------------ ------------
Net cash provided by investing activities 12,538,518 6,581,042 2,821,892
------------ ------------ ------------
Financing activities:
Repayment of debentures payable to SBA (14,545,110) (5,113,340) -
------------ ------------ ------------
Net cash used in financing activities (14,545,110) (5,113,340) -
------------ ------------ ------------
(Decrease) increase in cash and cash equivalents (5,149,886) 1,076,857 (20,783)
Cash and cash equivalents - beginning of year 5,473,063 4,396,206 4,416,989
------------ ------------ ------------
Cash and cash equivalents - end of year $ 323,177 $ 5,473,063 $ 4,396,206
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 2,636,840 $ 330,392 $ 1,878,483
============ ============ ============
Supplemental schedule of non-cash investing and financing activities:
Conversion of loans and notes receivable into equity interests $ - $ - $ 3,125
============ ============ ============
The accompanying notes are an integral part of the financial statements.
F-6
WINFIELD CAPITAL CORP.
FINANCIAL HIGHLIGHTS
Years Ended March 31,
---------------------
2005 2004
----------- -----------
Per Share Operating Performance
Shareholders' equity, beginning of period $ .49 $ .28
----------- -----------
Investment loss - net (0.26) (0.25)
Net realized and unrealized gain
on investments 0.08 0.46
----------- -----------
Total from investment operations (0.18) 0.21
----------- -----------
Dividends paid - -
----------- -----------
Shareholders' equity, end of year $ .31 $ .49
=========== ===========
Per share market value, end of year $ .22 $ .42
=========== ===========
Shares outstanding, end of year 5,346,084 5,346,084
=========== ===========
Ratios/Supplemental Data
Shareholders' equity, end of period $ 1,656,909 $ 2,627,744
Ratio of investment expenses to average
shareholders' equity 100.87% 139.27%
Ratio of investment loss - net to average
shareholders' equity 64.26% 63.96%
F-7
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2005, 2004 AND 2003
1. Organization
Winfield Capital Corp. (the "Registrant" or the "Company") was
incorporated 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"). Beginning April 1, 1996, the Company elected to be taxed
as a regulated investment company (RIC") under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code").
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, senior, subordinated, convertible and interest-paying
debentures; preferred stock; common stock; and options and warrants to
purchase the foregoing. The Company's investments are 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. Basis of Presentation
According to the SBA Regulations, the Company is required to be in
compliance with the capital impairment rules, as defined by regulation
107.1830 of the SBA Regulations. The Company was notified by the SBA on
April 30, 2003 that the Company was no longer in compliance with the SBA's
capital impairment requirements and that the SBA had accelerated the
maturity date of the Company's debentures. The aggregate principal,
interest and fees due under the debentures totaled approximately $25.6
million as of April 30, 2003, including interest and fees due through the
next semi-annual payment date. As a result of subsequent repayments by the
Company, the aggregate principal, interest and fees due under the
debentures totaled approximately $5.0 million as of March 31, 2005. The SBA
has transferred Winfield Capital's account to liquidation status where any
new investments and material expenses are subject to prior SBA approval.
Based on discussions and meetings that the Company has had with the SBA to
date, the SBA will not afford the Company the flexibility of a self-managed
liquidation to repay its indebtedness. As a result, the Company anticipates
that it will be required to repay all or substantially all of the principal
and interest owing to the SBA on a schedule acceptable to the SBA.
On April 6, 2005, subsequent to the balance sheet date, the Company
entered into a Forbearance Agreement with the SBA whereby the maturity date
of the Company's remaining principal indebtedness to the SBA was extended
until June 30, 2005, subject to a cure period of fifteen days. In
connection with the Forbearance Agreement, the Company entered into a
Stipulated Settlement and a Consent and Judgment whereby the SBA may pursue
any remedies it deems appropriate under the law or the instruments
evidencing the Company's indebtedness, including, without limitation,
initiating proceedings for the appointment of the SBA or its designee as
receiver to the extent the Company defaults under its obligations pursuant
to the Forbearance Agreement. If the SBA were to require the Company to
immediately pay back the entire indebtedness including accrued interest,
certain private security investments may need to be disposed of in a forced
sale that may result in proceeds less than their carrying value at March
31, 2005. As such, this impairment could have a material adverse effect on
the Company's financial position, results of operations and cash flows that
raises substantial doubt about the Company's ability to continue as a going
concern. The Company continues to explore various strategic alternatives,
including a third party equity infusion, although there can be no assurance
that it will be successful in its ability to consummate or implement these
or any other strategic alternatives.
F-8
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 2005, 2004 AND 2003
3. Summary of Significant Accounting Policies
Valuation of Investments
Securities that are traded on a securities exchange or the Nasdaq
National Market, which are not 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 closing price for the
valuation date.
The Company's investments in restricted securities of public companies
are valued at the closing price on the valuation date less a discount rate
of 10% to 30%, 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 and trading history of the portfolio
company. In some cases, a discount of greater than 30% may be used based
upon applicable factors including, but not limited to: 1) whether the
portfolio company will be financially solvent at the time such restricted
securities become freely tradable, 2) whether the Company has knowledge of
material non-public information about the portfolio company which it is not
at liberty to disclose in connection with its sale of the securities of
such portfolio company and 3) the risk that the portfolio company's
securities might be delisted from an exchange or automated trading market
with published trading reports. Investments in restricted securities, which
have been subjected to a discount as determined by the Board of Directors
amounted to $298,345 and $423,514 as of March 31, 2005 and 2004,
respectively.
Loans and assets acquired in liquidation for which no public market
exists are stated at "fair 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 Directors' 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 less 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 non-public companies (including equity investments,
warrants and convertible instruments) are recorded at fair 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 cash flows
from operations, the market for 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.
F-9
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 2005, 2004 AND 2003
At March 31, 2005 and 2004, the investment portfolio included
investments totaling $5,993,030 and $12,223,604, respectively, whose fair
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.
At March 31, 2005 and 2004, 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
Directors' judgment have become permanently impaired, in whole or in part,
are written off, and such amounts are reported as realized losses. For the
fiscal years ended March 31, 2005, 2004 and 2003, net realized losses from
write-offs after recoveries totaled $5,760,643, $12,921 and $182,001,
respectively. 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.
At March 31, 2005 and 2004, the aggregate gross unrealized
depreciation of investments was $9,830,786 and $16,799,648, respectively,
and the aggregate gross unrealized appreciation of investments was
$1,130,994, and $3,884,530, respectively, resulting in a net unrealized
depreciation of $8,699,792 and $12,915,118, respectively.
Description of Loan Terms
The Company's loans to small business concerns range up to
approximately $5,400,000 in size, typically have a maturity of five years
or less, 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.
The loans bear interest at rates ranging from 6.0% to 19.0%, 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 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 Company also participates in syndicated loans.
Option Contracts - Derivatives
The Company adopted Statement of Financial Accounting Standards No.
133 as amended by Statements No. 137 and No. 138, Accounting for Derivative
Instruments and Hedging Activities, (referred to hereafter as "SFAS 133"),
on January 1, 2001. At that time, the Company did not have any derivatives.
SFAS 133 requires that an entity recognize all derivative instruments in
the balance sheet and measure those financial instruments at fair value.
All changes in the fair market value of financial instruments are included
as changes in the unrealized appreciation or depreciation of investments in
the statements of operations.
F-10
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 2005, 2004 AND 2003
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 that 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.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash and cash equivalents.
The carrying amount reported in the balance sheet for cash and cash
equivalents approximates fair value.
Short-term Marketable Securities
Short-term marketable securities are carried at fair value. Interest
income earned on short-term marketable securities for the fiscal years
ended March 31, 2005, 2004 and 2003, was $0, $14,589 and $238,484,
respectively.
Deferred Debenture Costs
SBA debenture costs were amortized over ten years, which represented
the terms of the SBA debentures. There is no remaining balance of debt
issuance costs as it was accelerated at March 31, 2003 due to the SBA's
acceleration of the indebtedness. See Note 2.
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, any
unamortized portion of the loan origination fees is recognized.
Furniture and Equipment
Furniture and equipment are carried at cost. The Company depreciates
furniture and office equipment over an estimated useful life of 10 years
using the straight-line method except for computer equipment that is
depreciated under an accelerated method over five years.
Income Taxes
Effective April 1, 1996, the Company has elected to be taxed as a RIC
under 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 that acts as a partial conduit of income to its shareholders.
In order to maintain its RIC status, the Company must in general: 1)
derive at least 90% of its gross income from dividends, interest and gains
from the sale or disposition of securities, 2) meet investment
diversification requirements defined by the Code and 3) distribute to
shareholders 90% of its net income (other than long-term capital gains). As
a result of the sale of certain portfolio investments in order to repay its
indebtedness to the SBA, the Company's remaining portfolio of investments
has become less diversified and therefore, the Company did not qualify as a
RIC for
F-11
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 2005, 2004 AND 2003
the fiscal year ended March 31, 2005. Accordingly, the Company will be
taxed as a regular "C" corporation for Federal income tax purposes for the
fiscal year ended March 31, 2005.
The Company may periodically make reclassifications among certain of
its capital accounts as a result of timing and characterization of certain
income and capital gains distributions determined annually in accordance
with Federal tax regulation. The reclassifications may result in a
reduction of capital. All reclassifications have been reflected on the
statements of changes in shareholders' equity.
Stock Options
The Company accounts for stock-based compensation relating to its
stock option plan using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations ("APB No. 25"). Under APB No. 25,
compensation cost is measured as the excess, if any, of the quoted market
price of the Company's shares at the date of grant over the exercise price
of the option granted. No compensation cost has been recognized in
connection with the Company's stock option plans. The Company provides
additional pro forma disclosures as required under Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based
Compensation" (see Note 7).
Had the Company measured compensation expense under SFAS No. 123,
there would be no material impact to the net decrease in shareholders'
equity resulting from operations or the per share net increase (decrease)
in shareholders' equity resulting from operations for the years ended March
31, 2005, 2004 and 2003. The following table illustrates the effect on net
income (loss) and earnings (loss) per share if the Company had applied the
fair value recognition provisions of SFAS No. 123 to stock-based employee
compensation.
Years Ended March 31,
---------------------
2005 2004 2003
--------- ---------- -----------
Net (decrease) increase in shareholders' equity, as reported $(970,835) $1,136,649 $(5,994,571)
Deduct: Total stock-based employee compensation as
Determined under the fair value based method for all
awards, net of related tax effects - - -
--------- ---------- -----------
Pro forma net (decrease) increase in shareholders' equity $(970,835) $1,136,649 $(5,994,571)
========= ========== ===========
Basis - as reported $ (0.18) $ 0.21 $ (1.12)
========= ========== ===========
Basis - pro forma $ (0.18) $ 0.21 $ (1.12)
========= ========== ===========
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 for expected volatility, risk-free interest rate and expected
lives.
Per Share Data
Under SFAS No. 128 "Earnings Per Share", net increase (decrease) in
shareholders' equity per share is computed by dividing net increase
(decrease) in shareholders' equity resulting from operations by the
weighted average number of common shares outstanding during the period.
Diluted earnings per share reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock.
Risks and Uncertainties
The Company is engaged in a high-risk business. Loans and other
investments to small business concerns are extremely speculative. Most of
such small business concerns are privately held. Even if a public market
for the
F-12
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 2005, 2004 AND 2003
securities of such concerns exists, the loans and other securities
purchased by the Company are often restricted against sale or other
transfer for specified periods of time. Thus, such loans and other
investments have little, if any, liquidity, and the Company must bear
significantly larger risks, including possible losses on such investments,
than would be the case with traditional investment companies. The market
value of public securities may fluctuate significantly in response to
factors that are beyond the Company's control.
In addition, see Note 2 with regard to certain uncertainties.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements
and the reported amounts of income and expense during the reporting period.
The most significant estimates relate to the valuation of investments.
Actual results could differ from those estimates.
Recent Accounting Pronouncements Affecting The Company
During April 2003, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards (`SFAS") 149, "Amendment
of Statement 133 on Derivative Instruments and Hedging Activities." SFAS
149 amends and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities under SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities." The statement requires that contracts with comparable
characteristics be accounted for similarly and clarifies when a derivative
contains a financing component that warrants special reporting in the
statement of cash flows. SFAS 149 is effective for contracts entered into
or modified after June 30, 2003, except in certain circumstances, and for
hedging relationships designated after June 30, 2003. This new standard
does not currently have any impact on the Company's operating results and
financial position.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based
Payment." This statement is a revision to SFAS No. 123, supersedes APB No.
25, "Accounting for Stock Issued to Employees," and amends SFAS No. 95,
"Statement of Cash Flows." This statement will require the Company to
expense the cost of employee services received in exchange for an award of
equity instruments. This statement also provides guidance on valuing and
expensing these awards, as well as disclosure requirements, and is
effective for the first interim reporting period that begins after June 15,
2006.
SFAS No. 123R permits public companies to choose between the following
two adoption methods:
1. A "modified prospective" method in which compensation cost is
recognized beginning with the effective date (a) based on the
requirements of SFAS No. 123R for all share-based payments granted
after the effective date and (b) based on the requirements of SFAS No.
123 for all awards granted to employees prior to the effective date of
SFAS No. 123R that remain unvested on the effective date, or
2. A "modified retrospective" method which includes the requirements of
the modified prospective method described above, but also permits
entities to restate based on the amounts previously recognized under
SFAS No. 123 for purposes of pro forma disclosures for either (a) all
prior periods presented or (b) all prior periods of the year of
adoption.
As permitted by SFAS No. 123, the Company currently accounts for
share-based payments to employees using the APB No. 25 intrinsic value
method and recognizes no compensation cost for employee stock options. The
impact of the adoption of SFAS No. 123R cannot be predicted at this time
because it will depend on levels of share-based payments granted in the
future. However, valuation of employee stock options under SFAS No. 123R is
similar to SFAS No. 123, with minor exceptions. For information about what
the Company's reported results
F-13
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 2005, 2004 AND 2003
of operations and earnings per share would have been had it adopted SFAS
No. 123, see discussion under the heading "Stock Options" in this note. The
adoption of SFAS No. 123R's fair value method would have no effect on the
Company's operating results and financial position since no options were
granted in the fiscal year ended March 31, 2005.
In December 2004, the FASB issued SFAS No. 153, "Exchanges for
Non-monetary Assets," an Amendment of APB No. 29, "Accounting for
Non-monetary Transactions." SFAS No. 153 requires exchanges of productive
assets to be accounted for at fair value, rather that at carryover basis,
unless (1) neither the asset received nor the asset surrendered has a fair
value that is determinable within reasonable limits or (2) the transactions
lack commercial substance. SFAS No. 153 is effective for non-monetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. The
Company does not expect the adoption of this standard to have a material
effect on its financial position, results of operations or cash flows.
4. Fair Value of Financial Statements:
Debentures payable to the U.S. Small Business Administration
The carrying amount of the Company's debentures payable to the SBA
approximates fair value.
Option Contracts
Beginning in January 2001, the Company utilized put and call option
contracts to minimize market risks of its investments in publicly held
companies. As of March 31, 2005, the Company had no option contracts
outstanding as part of its portfolio.
5. Debentures Payable to the U.S. Small Business Administration:
Debentures payable to the SBA at March 31, 2005, with interest payable
semi-annually, consisted of the following:
Original Interest Rate
Amount Due Date (per annum)
------ -------- -----------
$ 750,000 9/1/2005 6.875%
600,000 9/1/2005 6.875%
3,641,550 3/1/2011 6.353%
-----------
$ 4,991,550
===========
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.
According to the SBA Regulations, the Company is required to be in
compliance with the capital impairment rules, as defined by regulation
107.1830 of the SBA Regulations. The Company was notified by the SBA on
April 30, 2003 that the Company was no longer in compliance with the SBA's
capital impairment requirements and that the SBA had accelerated the
maturity date of the Company's debentures. The aggregate principal,
interest and fees due under the debentures totaled approximately $25.6
million as of April 30, 2003, including interest and fees due through the
next semi-annual payment date. As a result of subsequent repayments by the
Company, the aggregate principal, interest and fees due under the
debentures totaled approximately $5.0 million as of March 31, 2005. The SBA
has transferred Winfield Capital's account to liquidation status where any
new investments and material expenses are subject to prior SBA approval.
Based on discussions and meetings that the Company has had with the SBA to
date, the SBA will not afford the Company the flexibility of a self-managed
liquidation to repay its
F-14
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 2005, 2004 AND 2003
indebtedness. As a result, the Company anticipates that it will be required
to repay all or substantially all of the principal and interest owing to
the SBA on a schedule acceptable to the SBA.
On April 6, 2005, subsequent to the balance sheet date, the Company
entered into a Forbearance Agreement with the SBA whereby the maturity date
of the Company's remaining principal indebtedness to the SBA was extended
until June 30, 2005, subject to a cure period of fifteen days. In
connection with the Forbearance Agreement, the Company entered into a
Stipulated Settlement and a Consent and Judgment whereby the SBA may pursue
any remedies it deems appropriate under the law or the instruments
evidencing the Company's indebtedness, including, without limitation,
initiating proceedings for the appointment of the SBA or its designee as
receiver to the extent the Company defaults under its obligations pursuant
to the Forbearance Agreement. If the SBA were to require the Company to
immediately pay back the entire indebtedness including accrued interest,
certain private security investments may need to be disposed of in a forced
sale that may result in proceeds less than their carrying value at March
31, 2005. As such, this impairment could have a material adverse effect on
the Company's financial position, results of operations and cash flows that
raises substantial doubt about the Company's ability to continue as a going
concern. The Company continues to explore various strategic alternatives,
including a third party equity infusion, although there can be no assurance
that it will be successful in its ability to consummate or implement these
or any other strategic alternatives.
6. Commitments and Contingencies:
The Company has an operating lease on its office facility that expires
on February 29, 2008. Rent expense was $46,647, $46,647, and $46,150 for
the years ended March 31, 2005, 2004 and 2003, respectively. The following
are the minimum rental commitments for the next three fiscal years:
Fiscal Year Ending March 31,
------------------ ---------
2006 $ 47,421
2007 51,220
2008 48,644
---------
$ 147,285
=========
7. Stock Option Plan:
In October 1995, which was subsequently amended by the shareholder
vote in September 1997, the Company adopted the 1995 stock option plan (the
"Plan") under which 1,250,000 shares of common stock were reserved for
issuance pursuant to options granted under the Plan. Under the Plan,
options intended to qualify as "incentive stock options" under Section 422
of the code ("Qualified Options"), options not intended to qualify as
qualified options, stock appreciation rights ("SARs") and shares of
Restricted Common Stock may be granted or issued.
Qualified Options granted to Eligible Employees (as defined in 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 for options granted to any employee who owns 10% or more of the
outstanding stock of the Company ("10% shareholder"), for which 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.
In the case of an option granted to a 10% shareholder, such period may not
exceed five years.
Options not intended to qualify as qualified options may be granted to
Eligible Employees under the Plan and shall have such exercise prices and
such other terms and conditions as the Compensation Committee of the
Company (the "Committee") may determine in its discretion, subject to the
requirements of the 1940 Act.
F-15
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 2005, 2004 AND 2003
The Plan is administered by the Board of Directors. The Board of
Directors determines who is 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 parties.
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 expire
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 Common 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.
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 activity for the past three years has been as follows:
2005 2004 2003
---- ---- ----
Average Average Average
Options Outstanding Exercise Price Options Outstanding Exercise Price Options Outstanding Exercise Price
------------------- -------------- ------------------- -------------- ------------------- --------------
Balance, 866,563 $ 1.14 874,563 $ 1.19 874,563 $ 1.19
beginning of
fiscal year
Granted - - -
Exercised
Expired (42,457) 1.11 (8,000) 5.00 -
-------- -------- --------
Balance, end of
fiscal year 824,106 1.15 866,563 1.15 874,563 1.19
======== ======== ========
Options
exercisable at
end of fiscal year 736,106 $ 1.14 778,563 $ 1.14 778,563 $ 1.14
======== ======== ========
The following table summarizes information about the stock options
outstanding as of March 31, 2005:
Options Outstanding Options
------------------------------------------------ -------
Weighted-average
Exercise price Number outstanding remaining contractual life Vested and exercisable
-------------- ------------------ -------------------------- ----------------------
$ 1.11 421,820 2.99 361,820
$ 1.16 366,286 0.13 366,286
$ 1.50 4,000 2.14 4,000
$ 1.53 20,000 1.92 4,000
$ 1.68 12,000 1.70 -
-------- --------
824,106 736,106
======== ========
F-16
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED MARCH 31, 2005, 2004 AND 2003
8. Concentration of Credit and Market Risk:
Financial instruments that potentially subject the Company to
concentrations of credit risk consisted of cash and cash equivalents of
$323,177 and $5,473,063 at March 31, 2005 and 2004, respectively. Cash is
invested with banks in amounts, which, at times, exceed insurable limits.
As of March 31, 2005, 99% of the Company's total investment value was held
in five equity securities and one note: Accent Optical Technologies, Inc.,
Bigfoot Interactive, Inc., Comdial Corporation, Conversion Services
International, Inc. (a/k/a/ Evoke Software Corporation), myGeek.com, Inc.
and Petroleum Place, Inc.
As of March 31, 2004, 93% of the Company's total investment value was
held in three equity securities and three notes: Accent Optical
Technologies, Inc., J.L. French Automotive Castings, Inc., Comdial
Corporation, Open Solutions, Inc., Petroleum Place, Inc. and Engenia
Software, Inc.
9. (Loss) Earnings Per Common Share:
Years Ended March 31,
---------------------
2005 2004 2003
---------- ---------- -----------
Net (loss) earnings available for common stock
equivalent shares deemed to have a dilutive effect $(970,835) $1,136,649 $(5,994,571)
========== ========== ===========
Per share net (decrease) increase
in shareholders' equity resulting from operations
Basic $(0.18) $0.21 $(1.12)
====== ===== ======
Diluted $(0.18) $0.21 $(1.12)
====== ===== ======
Shares used in computation:
Basic
Weighted average common shares 5,346,084 5,346,084 5,346,084
========== ========== ===========
Diluted
Weighted average common shares 5,346,084 5,346,084 5,346,084
---------- ---------- -----------
Common stock equivalents -A- -A- -A-
---------- ---------- -----------
5,346,084 5,346,084 5,346,084
========== ========== ===========
(A) For the years ended March 31, 2005, 2004 and 2003, the effect of exercising
the outstanding stock options would have been anti-dilutive and, therefore,
the use of common stock equivalent shares was not considered.
10. Nasdaq Stock Market, Inc. ("Nasdaq") Letters and Delisting:
On January 22, 2003, the Company received a determination of the staff
(the "Staff Determination") of the Nasdaq Listing Qualifications Department
(the "Staff") indicating that the Company failed to comply with the minimum
bid price of its common stock requirement for continued listing set forth
in Marketplace Rule 4450(a)(5) and that its securities were, therefore,
subject to delisting from the Nasdaq SmallCap Market effective January 31,
2003. The Company was granted a hearing on March 6, 2003 before a Nasdaq
Listing Qualification Panel (the "Panel") to review the Staff
Determination. This hearing stayed the delisting of the Company's common
stock pending the Panel's decision.
On April 11, 2003, effective April 15, 2003, the Company received
notice from Nasdaq that the Company's securities were delisted from the
Nasdaq SmallCap Market. The Company's securities are quoted on the OTC
Bulletin Board effective April 15, 2003 with the assigned symbol "WCAP".
F-17
WINFIELD CAPITAL CORP.
PORTFOLIO OF INVESTMENTS
MARCH 31, 2005
Loans and Notes Receivable
Loan
Maturity Interest Fair % of Net
Company Name Industry Date Rate (%) Cost Value Assets
- ---------------- ----------- -------- -------- ----------- ----------- --------
Loans
H. Lockings Corp. (a)(b) Food Service 19-Jul-95 16.25 $ 25,976 $ 25,976 1.6%
HPA Monon Corp. (a)(c) Trailer Manufacturer 15-Mar-02 12.00 2,000,000 - 0.0%
Comdial Corporation Communication 27-Mar-06 12.00 1,991,171 1,991,171 120.2%
Notes Receivable
John Papakonstantis Restaurant 17-Jul-17 10.00 52,525 52,525 3.1%
----------- ----------- -------
Total Loans and Notes Receivable $ 4,069,672 $ 2,069,672 124.9%
=========== =========== =======
- ----------
(a) Non-income producing or past due as to required principal and/or interest
(b) Foreclosed upon
(c) Declared Chapter 7 bankruptcy
F-18
WINFIELD CAPITAL CORP.
PORTFOLIO OF INVESTMENTS (CONTINUED)
MARCH 31, 2004
Loans and Notes Receivable
Loan
Maturity Interest Fair % of Net
Company Name Industry Date Rate (%) Cost Value Assets
- ---------------- ----------- -------- -------- ----------- ----------- --------
Loans
D&S Diner Rte 7 Restaurant 16-Oct-00 16.25 $ 24,049 $ - 0.0%
Cobleskill Diner
Corp. (a) (b)
H. Lockings Corp.
(a) (b) Food Service 19-Jul-95 16.25 25,976 25,976 1.0%
Horizon Medical Medical
Products, Inc. Devices 16-Jul-05 8.00 246,250 246,250 9.4%
HPA Monon Corp. Trailer
(a) (c) Manufacturer 15-Mar-02 12.00 2,000,000 - 0.0%
Phone Management Communication 18-Sep-01 None 61,655 - 0.0%
Enterprises Inc. (a)
Comdial Corporation Communication 27-Mar-06 12.00 1,973,503 1,973,503 75.1%
J.L. French
Automotive Automotive 31-Dec-07 19.00 5,937,802 5,937,802 226.0%
Castings, Inc.
Engenia Software, Software
Inc. Design 31-Dec-04 8.00 245,658 245,658 9.3%
Notes Receivable
John Papakonstantis Restaurant 17-Jul-17 10.00 54,636 54,636 2.1%
------------ ----------- -----
Total Loans and Notes Receivable $ 10,569,529 $ 8,483,825 322.9%
============ =========== =====
- ----------
(a) Non-income producing or past due as to required principal and/or interest
(b) Foreclosed upon
(c) Declared Chapter 7 bankruptcy
F-19
WINFIELD CAPITAL CORP.
PORTFOLIO OF INVESTMENTS (CONTINUED)
MARCH 31, 2005
Equity Interests
Cost or
Contributed Fair % of Net
Company Name Industry No. of Shares Value Value Assets
- -------------- -------------- --------------- ------------ ----------- ---------
Accent Optical Optoelectronics 585,366 Shares, $ 1,200,000 $ 600,000 36.2%
Technologies, Unregistered
Inc. Series A Preferred
Stock
Bigfoot E-Marketing 177,815 Shares, 518,364 185,369 11.1%
Interactive, Inc. Services Unregistered
Series B Preferred
Stock
127,901 Shares,
Unregistered
Series C Preferred
Stock
Comdial Communication 352,000 Shares, 103,533 89,134 5.4%
Corporation (a) Common Stock
Creative Foods, Specialty Warrant to Purchase - - 0.0%
Inc. (a) (b) Baking Common Stock
etang.com, Inc. Internet 11,306 Shares, 412,504 - 0.0%
Service Unregistered Common
Provider Stock
Conversion Data 1,127,840 Shares, 2,606,927 209,214 12.6%
Services Management Unregistered Common
International, Inc. Software Stock
f/k/a
Evoke Software
Corporation
Homepoint Home 10,875 Shares, 643,305 7,000 0.4%
Corporation Furnishings Unregistered Series B
Management Preferred Stock
Software
- ----------
(a) Publicly traded at March 31, 2005
(b) Delisted at March 31, 2005
F-20
WINFIELD CAPITAL CORP.
PORTFOLIO OF INVESTMENTS (CONTINUED)
MARCH 31, 2005
Equity Interests (Continued)
Cost or
Contributed Fair % of Net
Company Name Industry No. of Shares Value Value Assets
- -------------- -------------- --------------- ------------ ----------- ---------
Independence Brewing 949,941 Shares, $ 4,755 $ - 0.0%
Brewing Co. (b) Common Stock
myGeek.com, Inc. On-Line Personal 287,969 Shares, 1,000,000 500,000 30.2%
Shopper Unregistered Series
A Preferred Stock
NeoPlanet, Inc. Branding 62,448 Shares, 732,115 - 0.0%
Solutions Unregistered Series
B Preferred Stock
Petroleum Place, Energy Internet 25,372 Shares, 1,499,992 2,630,986 158.8%
Inc. Marketplace and Unregistered Series
Portal C Preferred Stock
Streaming Media Rich Media 586,667 Shares, 2,200,000 - 0.0%
Corporation Delivery Unregistered Series
A Preferred Stock
------------ ----------- ------
Total Equity Interests $ 10,921,495 $ 4,221,703 254.7%
============ =========== ======
- ----------
(a) Publicly traded at March 31, 2005
(b) Delisted at March 31, 2005
F-21
WINFIELD CAPITAL CORP.
PORTFOLIO OF INVESTMENTS (CONTINUED)
MARCH 31, 2004
Equity Interests
Cost or
Contributed Fair % of Net
Company Name Industry No. of Shares Value Value Assets
- -------------- -------------- --------------- ------------ ----------- ---------
Accent Optical Optoelectronics 585,366 Shares, $ 1,200,000 $ 600,000 22.8%
Technologies, Unregistered
Inc. Series A Preferred
Stock
Bigfoot E-Marketing 177,815 Shares, 518,364 185,369 7.1%
Interactive, Inc. Services Unregistered
Series B Preferred
Stock
127,901 Shares,
Unregistered
Series C Preferred
Stock
Comdial Communication 352,000 Shares, 103,680 421,144 16.0%
Corporation (a) Common Stock
Commerce One, Enterprise 25,401 Shares, 295,359 40,896 1.6%
Inc. (a) Procurement Common Stock
Software 33,112 Shares, 499,998 53,310 2.0%
Common Stock
Creative Foods, Specialty Warrant to Purchase - 2,370 0.1%
Inc. (a) Baking Common Stock
divine, inc. (b) Collaboration, 12,342 Shares, 500,000 - 0.0%
Interaction & Common Stock
Knowledge 3,918 Shares, 1,274,422 - 0.0%
Solutions Common Stock
Engenia Collaborative 418,680 Shares, 2,600,002 700,002 26.6%
Software, Inc. Services Unregistered Series
Software C Preferred Stock
etang.com, Inc. Internet 11,306 Shares, 412,504 - 0.0%
Service Unregistered Common
Provider Stock
Conversion Data 1,127,840 Shares, 2,606,927 226,927 8.6%
Services Management Unregistered Common
International, Inc. Software Stock
f/k/a
Evoke Software
Corporation
Homepoint Home 10,875 Shares, 682,852 105,000 4.0%
Corporation Furnishings Unregistered Series B
Management Preferred Stock
Software
- ----------
(a) Publicly traded at March 31, 2004
(b) Delisted at March 31, 2004
F-22
WINFIELD CAPITAL CORP.
PORTFOLIO OF INVESTMENTS (CONTINUED)
MARCH 31, 2004
Equity Interests (Continued)
Cost or
Contributed Fair % of Net
Company Name Industry No. of Shares Value Value Assets
- -------------- -------------- --------------- ------------ ----------- ---------
InfoSpace.com, Internet 4,011 Shares, $ 400,129 $ 155,908 5.9%
Inc. (a) Infrastructure Common Stock
Services 501 Shares, 50,000 19,474 0.7%
Common Stock
Independence Brewing 949,941 Shares, 4,755 - 0.0%
Brewing Co. (b) Common Stock
J. L. French Automotive 227,869 Warrants to 2,800 2,800 0.1%
Automotive Purchase Common
Castings, Inc. Stock
MarketFirst E-Marketing 938,881 Shares, 999,908 - 0.0%
Software, Inc. Solutions Unregistered Series
D Preferred Stock
myGeek.com, Inc. On-Line Personal 287,969 Shares, 1,000,000 100,000 3.8%
Shopper Unregistered Series
A Preferred Stock
NeoPlanet, Inc. Branding 62,448 Shares, 750,000 19,689 0.8%
Solutions Unregistered Series
B Preferred Stock
Open Solutions, Electronic 240,582 Shares, 2,044,949 5,309,645 202.1%
Inc. (a) Commerce Banking Common Stock
& Enterprise
Processing
Applications
Petroleum Place, Energy Internet 25,372 Shares, 1,499,992 1,799,992 68.5%
Inc. Marketplace and Unregistered Series
Portal C Preferred Stock
Primedia, Inc. (a) Special Interest 27,667 Shares, 500,000 74,701 2.8%
Magazine Publisher Common Stock
Streaming Media Rich Media 586,667 Shares, 2,200,000 - 0.0%
Corporation Delivery Unregistered Series
A Preferred Stock
U.S. Wireless Internet-based 83,333 Shares, 500,000 - 0.0%
Data, Inc. (a) Wireless Common Stock
Transaction
Processing
----------- ---------- -------
Total Equity Interests $20,646,641 $9,817,227 373.5%
=========== ========== =======
- ----------
(a) Publicly traded at March 31, 2004
(b) Delisted at March 31, 2004
F-23