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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, 2003 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 June 20, 2003 was approximately $843,951.The number of
outstanding shares of the Registrant's common stock as of June 20, 2003 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, 2003, 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 has been notified by the SBA that the Company is no longer in compliance
with the SBA's capital impairment requirements and that the SBA has accelerated
the maturity date of Winfield Capital'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. The SBA has transferred Winfield Capital's account to
liquidation status where any new investments and material expenses are subject
to prior SBA approval. Although it has not done so as of the date of this
filing, and may not do so, the SBA has the right to institute proceedings for
the appointment of the SBA or its designee as receiver. 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 which may result in proceeds less than their carrying value
at March 31, 2003. As such, this impairment could have a material adverse effect
on the Company's financial position, results of operations and cash flows which
raises substantial doubt about the Company's ability to continue as a going
concern. Management has submitted a plan to the SBA providing for the
liquidation of the Company over a three-year period; however, to date, the SBA
has not indicated whether it will approve of the proposed plan. 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") for Federal income tax purposes. 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 advisor. 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
On June 17, 2002, the Company received notice from the Nasdaq Stock
Market, Inc. ("Nasdaq") that for the preceding 30 consecutive trading days, the
Company's common stock had not maintained the minimum Market Value of Publicly
Held Shares of $5,000,000 as required for continued inclusion by Marketplace
Rule 4450(a)(2) on the Nasdaq National Market. On July 23, 2002, the Company
received notice from Nasdaq that for the preceding 10 consecutive trading days,
the Company's common stock had not closed at the minimum $1.00 per share as
required for continued inclusion by Marketplace Rule 4450(a)(5) (the "Minimum
Bid Price Rule") on the Nasdaq National Market. As a result of these notices,
the Company made an application to the Staff of the Nasdaq Listing
Qualifications Department (the "Staff") to transfer the Company's common stock
from the Nasdaq National Market to the Nasdaq SmallCap Market. On September 25,
2002, the Company was notified by the Staff that its application to transfer the
listing was approved provided it met the Minimum Bid Price Rule by January 22,
2003 (the "Grace Period") and trading in the Company's common stock on the
Nasdaq SmallCap Market commenced on September 26, 2002. On January 22, 2003, the
Company received a determination of the Staff indicating that the Company still
failed to comply with the Minimum Bid Price by the end of the Grace Period and
was therefore, subject to delisting. As the delisting determination was based on
a quantitative deficiency, the Company's common stock was deemed eligible for
quotation on the Over the Counter Bulletin Board ("OTCBB"). On April 15, 2003,
the Company's common stock commenced trading on the OTCBB under the symbol WCAP.
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 has been notified by the SBA that the
Company is no longer in compliance with the SBA's capital impairment
requirements and that the
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SBA has 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. The SBA has transferred the Company's account to
liquidation status where any new investments and material expenses are subject
to prior SBA approval. Although it has not done so as of the date of this
filing, and may not do so, the SBA has the right to institute proceedings for
the appointment of the SBA or its designee as receiver. 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 which may result in proceeds less than their carrying value
at March 31, 2003. As such, this impairment could have a material adverse effect
on the Company's financial position, results of operations and cash flows which
raises substantial doubt about the Company's ability to continue as a going
concern. Management has submitted a plan to the SBA providing for the
liquidation of the Company over a three-year period; however, to date, the SBA
has not indicated whether it will approve of the proposed plan. 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
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
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.
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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 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
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
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
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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 $32,762,210 as of March 31, 2003 with loans
and notes receivable comprising approximately 32% (78% of which were performing
in accordance with their terms and 22% were non-performing), equity interests
approximately 68% and assets acquired in liquidation of defaulted loans less
than 1%.
There was unrealized depreciation on loans and investments of $2,654,690
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
investment 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) compared with an unrealized
depreciation of $8,492,858 for the year ended March 31, 2002 (principally
reflecting the decreased market price of investments in six publicly traded
portfolio companies and the decreased fair value of investments in six privately
held portfolio companies) and unrealized appreciation of $69,828,667 for the
year ended March 31, 2001. Management believes that the decline in the
unrealized value of these investments in the fiscal years ended March 31, 2003
and March 31, 2002 reflect the significant volatility in the public equity
markets in general, and the high technology sector in particular, over the past
two fiscal years.
Write-Offs
During the past three fiscal years, the Company has written-off loans and
investments and disposed of, at a loss, assets acquired in liquidation in the
aggregate amount of $6,699,685 as described in the following table:
Year Ended March 31,
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2001 2002 2003
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Amount written-off $4,179,968 $2,337,716 $182,001
Amount written-off as a percentage of aggregate loans and
investments and assets acquired in liquidation as of the
beginning of the year 4.1% 7.7% 1.3%
SBA Funding
The Small Business Investment Act and the regulations thereunder provide
for the purchase by the SBA of subordinated debentures issued by SBICs and the
guaranty by the SBA of debentures issued by SBICs to third parties. 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 Company has, as approved by the SBA as of March 31, 2003, Private
Capital of approximately $27,000,000, which would enable it to sell debentures
to, or with a guaranty by, the SBA up to a maximum principal amount of
approximately $81,000,000 (300% of its Private Capital). The Company's ability
to sell such debentures is subject to the availability of SBA program funds and
other funding limitations and compliance with the SBA Regulations. See "SBA
Regulation" below.
The SBA offers eligible SBICs the opportunity to sell "participating
securities" (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
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
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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 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
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%
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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.
(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
The Company's investment objectives are to achieve a high level of current
income from interest and long-term growth through equity interests in its
portfolio companies.
Fundamental Policies
In making investments and managing its portfolio, the Company will adhere
to the following fundamental policies, which may not be changed without the
approval of 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 "Regulated Investment Company"
(as defined under the Internal Revenue Code of 1986, as amended). 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.
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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.
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
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 Internal Revenue Code of 1986,
as amended. The Company qualified as a RIC for the fiscal year ended March 31,
2003.
7
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
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 June 26, 2003, the Company had three full-time employees (two of
whom are Messrs. Paul A. Perlin, Chief Executive Officer and R. Scot Perlin,
Chief Financial Officer and Secretary, and one of whom handles clerical
matters). 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.
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, 2001 to April 14, 2003 and as reported on the
OTCBB from April 15, 2003 until June 20, 2003 were as follows:
8
Common Stock
------------
High Low
---- ---
April 1 - June 30, 2001 ..................... $2.69 $1.55
July 1 - September 30, 2001 ................. 2.10 0.62
October 1 - December 31, 2001 ............... 1.95 0.77
January 1 - March 31, 2002 .................. 1.71 1.17
April 1 - June 30, 2002 ..................... 1.60 0.78
July 1 - September 30, 2002 ................. 0.90 0.31
October 1 - December 31, 2002 ............... 1.10 0.28
January 1 - March 31, 2003 .................. 0.47 0.30
April 1 - June 20, 2003 ..................... $0.51 $0.15
The foregoing quotations reflect inter-dealer prices, without retail
markup, markdown or commission, and do not necessarily represent actual
transactions.
As of June 20, 2003, the Company estimates that its shares of common stock
are held by approximately 3,650 beneficial holders.
Item 6. Selected Financial Data
See Summary of Financial Information for the years ended March 31, 2003,
2002, 2001, 2000 and 1999 on the following page:
9
WINFIELD CAPITAL CORP.
SUMMARY OF FINANCIAL INFORMATION
Years Ended March 31,
--------------------------------------------------------------------------------
2003 2002 2001 2000 1999
--------------------------------------------------------------------------------
Statement of Operations Data
Total investment income ................ $ 729,897 $ 1,057,404 $ 1,185,799 $ 873,445 $ 839,897
Total investment expenses .............. $ 4,086,185 $ 3,641,686 $ 3,232,652 $ 3,432,819 $ 2,052,031
Net realized gains (losses) on
disposition of investments ...... $ 16,407 $ (3,289,935) $ 1,282,344 $ 30,851,848 $ 740,829
Unrealized (depreciation) appreciation
on loans and investments ........ $ (2,654,690) $ (8,492,858) $(69,828,667) $ 42,284,344 $ 25,323,076
Net (loss) income ...................... $ (5,994,571) $(14,367,075) $(70,593,176) $ 70,576,818 $ 24,851,771
(Loss) earnings per share .............. $ (1.12) $ (2.69) $ (13.20) $ 13.36 $ 4.95
Weighted average number of shares
outstanding ..................... 5,346,084 5,346,084 5,346,084 5,282,131 5,023,361
Other Operating Data
Number of loans and other investments
outstanding at end of period .... 44 37 50 64 52
Number of loans and other investments
originated ...................... 7 4 7 22 13
Principal amount of loans and other
investments originated .......... $ 7,618,912 $ 367,676 $ 9,637,953 $ 18,624,388 $ 9,420,696
Investment expenses as a percentage of
average net assets .............. 94.0% 22.3% 6.9% 4.8% 8.1%
Balance Sheet Data
Loans and investment portfolio
including assets acquired in
liquidation ..................... $ 18,591,630 $ 14,129,234 $ 30,256,226 $102,739,179 $ 45,311,218
Total assets ........................... $ 26,656,254 $ 32,498,086 $ 49,031,295 $126,867,621 $ 50,128,912
SBA debentures ......................... $ 24,650,000 $ 24,650,000 $ 25,550,000 $ 20,850,000 $ 15,300,000
Common stock (including additional paid
in-capital) ..................... $ 19,762,631 $ 23,036,159 $ 24,806,818 $ 26,968,537 $ 9,264,680
(Accumulated deficit) retained earnings $ (4,093,738) $ (4,027,385) $ 1,352,362 $ (44,848) $ (301,434)
Total shareholders' equity ............. $ 1,491,095 $ 7,485,666 $ 23,128,930 $ 93,722,106 $ 33,477,319
10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Years Ended March 31, 2003, 2002, and 2001
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 for 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
Regulated Investment Company ("RIC") under Subchapter M of the Internal Revenue
Code (the "Code"). If the Company, as a RIC, satisfies certain requirements
relating to the source of its income, the diversification of its assets and the
distribution of its net income, the Company is taxed as a pass-through entity
which acts as a partial conduit of income to its shareholders.
In order to maintain its RIC status, the Company must in general: 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).
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 $327,507 or a decrease of 30.9%, from
$1,057,404 for the year ended March 31, 2002 to $729,897 for the year ended
March 31, 2003. This reflected principally a $620,128 decrease in interest from
temporarily invested funds as a result of a decrease in the idle funds that were
being invested along with a decrease in interest rates, which was partially
offset by a $294,737 increase in interest from small business concerns as a
result of the Company's increased level of investment activity.
Investment income decreased by $128,395, or a decrease of 10.8%, from
$1,185,799 for the year ended March 31, 2001 to $1,057,404 for the year ended
March 31, 2002. This reflected principally a $263,447 decrease in interest from
small business concerns due to loans being repaid, which was offset by a
$147,020 increase in interest from temporarily invested funds as a result of the
Company's decreased level of investment activity.
Distribution and Retention of Net Long-Term Capital Gains
The Company elected not to distribute a net long-term capital gain for its
excise tax year ended October 31, 2000 during calendar year 2000. As a result,
the Company accrued $23,404 of Federal excise tax. The Company subsequently
distributed for this period a net long-term capital gain dividend of $1,276,189,
or approximately $0.2387 per share, on December 19, 2001.
Interest Expense
Interest expense remained relatively unchanged from $1,910,394 for the
year ended March 31, 2002 to $1,878,483 for the year ended March 31, 2003.
Interest expense increased by $151,139 from $1,759,255 for the year ended March
31, 2001 to $1,910,394 for the year ended March 31, 2002 due to additional
borrowings of $5,000,000 from the SBA incurred in March 2001.
Operating Expenses
The Company's operating expenses increased from $1,731,292 for the year
ended March 31, 2002 to $2,207,702 for the year ended March 31, 2003 due
primarily to the acceleration of the maturity of the SBA debentures which
resulted in fully expensing the related debenture fees of $496,214 and an
insurance expense increase of $35,421
12
due primarily to the increased Directors and Officers insurance renewal premium.
Partially offsetting these increases were decreases in payroll and
payroll-related expenses of $52,678 due primarily to the resignation of an
executive officer effective December 31, 2002 and other operating costs that
netted to $2,547.
The Company's operating expenses increased from $1,473,397 for the year
ended March 31, 2001 to $1,731,292 for the year ended March 31, 2002 as a result
of increases in payroll and payroll-related expenses of $133,985 due primarily
to increased officer salaries and the implementation of a Company 401(k) Plan in
fiscal year 2002, professional fees of $74,830 due primarily to increased tax
advisory and audit-related fees and general and administrative costs of $79,280
due primarily to a full year of directors' fees (first paid in the last quarter
of fiscal year 2001). Partially offsetting these increases were decreases in
other operating costs that netted to $30,200.
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 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. The realized loss of $3,289,935 for the year ended March 31, 2002
reflected long-term net capital losses on equity securities of $1,039,442 and
write-offs totaling $2,337,716 offset by an equity security recovery of $87,223.
The realized gain for the year ended March 31, 2001 of $1,282,344 reflected
long-term capital gains on equity securities of $5,449,466 and a bad debt
recovery of $12,846 offset by write-offs totaling $4,179,968.
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 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 compared with an
unrealized depreciation on loans and investments of $8,492,858 (or $8,395,076
excluding an unrealized depreciation on short-term marketable securities) for
the year ended March 31, 2002 (principally reflecting the decreased market price
of investments in six publicly traded portfolio companies and the decreased fair
value of investments in six privately held portfolio companies as well as the
aforementioned realized net loss on the sale of equities) and an unrealized
depreciation of $69,828,667 for the year ended March 31, 2001.
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. All option contracts
entered into in the fiscal year ended March 31, 2001 were presented at fair
value based on the market price of exchange-listed options. The unrealized net
appreciation was $842,726 on these option contracts for the fiscal year ended
March 31, 2001. During the fiscal year ended March 31, 2002, all the option
contracts became due. As of March 31, 2003, the Company has no option contracts
outstanding as part of its portfolio.
Liquidity and Capital Resources
At March 31, 2003, the Company held cash and short-term marketable
securities totaling $7,850,432.
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 has been notified by
13
the SBA that the Company is no longer in compliance with the SBA's capital
impairment requirements and that the SBA has accelerated the maturity date of
Winfield Capital'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. The
SBA has transferred Winfield Capital's account to liquidation status where any
new investments and material expenses are subject to prior SBA approval.
Although it has not done so as of the date of this filing, and may not do so,
the SBA has the right to institute proceedings for the appointment of the SBA or
its designee as receiver. 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 which may
result in proceeds less than their carrying value at March 31, 2003. As such,
this impairment could have a material adverse effect on the Company's financial
position, results of operations and cash flows which raises substantial doubt
about the Company's ability to continue as a going concern. Management has
submitted a plan to the SBA providing for the liquidation of the Company over a
three-year period; however, to date, the SBA has not indicated whether it will
approve of the proposed plan. 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.
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, 2003,
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, 2003, the Company had no option contracts outstanding as part of its
portfolio.
Item 8. Financial Statements and Supplementary Data.
Page
----
Report of Independent Accountants ......................... F-1
Balance Sheets ............................................ F-2
Statements of Operations .................................. F-3
Statements of Changes in Shareholders' Equity ............. F-4
14
Statements of Cash Flows .................................. F-5
Financial Highlights (Per Share Data and
Ratios/Supplemental Data) ................................ F-6
Notes to Financial Statements ............................. F-7 through F-19
Portfolio of Investments .................................. F-20 through F-24
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
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, 2003.
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, 2003.
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, 2003.
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, 2003.
Item 14. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
Based on their evaluation of the Company's disclosure controls and
procedures conducted within 90 days of the date of filing this report on Form
10-K, the Company's Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures (as defined in
Rules 13a-14c and 15d-14c) promulgated under the Securities Exchange Act of
1934) are effective to ensure that information required to be disclosed by the
Company in reports that it files or submits under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in Securities Exchange Commission rules and forms.
(b) Changes in Internal Controls
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect those controls subsequent to the
date of their evaluation. There were no deficiencies or material weaknesses, and
therefore, there were no corrective actions taken.
15
Item 15. Principal Accountant Fees and Services
Current Year
Audit Fees
PricewaterhouseCoopers LLP billed the Company $94,500 in the aggregate,
for professional services rendered by them for the audit of the Company's annual
financial statements for the fiscal year ended March 31, 2003, and the reviews
of the interim financial statements included in the Company's Forms 10-Q filed
during the fiscal year ended March 31, 2003.
Tax Fees
PricewaterhouseCoopers LLP billed the Company $20,000 in the aggregate for
tax services rendered by them during the fiscal year ended March 31, 2003.
Prior Year
Audit Fees
PricewaterhouseCoopers LLP billed the Company $79,267 in the aggregate,
for professional services rendered by them for the audit of the Company's annual
financial statements for the fiscal year ended March 31, 2002, and the reviews
of the interim financial statements included in the Company's Forms 10-Q filed
during the fiscal year ended March 31, 2002.
Tax Fees
PricewaterhouseCoopers LLP billed the Company $20,000 in the aggregate for
tax services rendered by them during the fiscal year ended March 31, 2002.
Certain portions of this item are incorporated by reference to the
Registrant's definitive proxy statement to be filed not later than 120 days
after March 31, 2003.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Financial Statements:
See item 8 of Part II hereof.
(b) No reports on Form 8-K were filed during the fourth quarter of the
Registrant's fiscal year ended March 31, 2003. The Registrant filed
a report on Form 8-K on May 8, 2003, incorporated by reference to
Exhibit 99.1 of the Registrant's Form 10-K for the fiscal year ended
March 31, 2003 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.
16
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 .
11. Statement of Computation of (Loss) Earnings Per Share,
incorporated herein by reference to the Notes to the Financial
Statements included in this report.
99.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C.Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
99.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C.Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
(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, 2003.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
WINFIELD CAPITAL CORP.
Dated: June 26, 2003 By: /s/ PAUL A. PERLIN
--------------------------
Paul A. Perlin
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Dated: June 26, 2003 By: /s/ PAUL A. PERLIN
--------------------------
Paul A. Perlin
Chairman of the Board &
Chief Executive Officer
(Principal Executive Officer)
& Director
17
Dated: June 26, 2003 By: /s/ R. SCOT PERLIN
--------------------------
R. Scot Perlin
Chief Financial Officer
(Principal Financial &
Accounting Officer)
& Director
Dated: June 26, 2003 By: /s/ JOEL I. BARAD
--------------------------
Joel I. Barad
Director
Dated: June 26, 2003 By: /s/ BARRY J. GORDON
--------------------------
Barry J. Gordon
Director
Dated: June 26, 2003 By: /s/ DAVID GREENBERG
--------------------------
David Greenberg
Director
Dated: June 26, 2003 By: /s/ BRUCE A. KAUFMAN
--------------------------
Bruce A. Kaufman
Director
Dated: June 26, 2003 By: /s/ ALLEN L. WEINGARTEN
--------------------------
Allen L. Weingarten
Director
Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, Paul A. Perlin, Chief Executive Officer of Winfield Capital Corp. certify
that:
1. I have reviewed this annual report on Form 10-K of Winfield Capital
Corp;
2. Based on my knowledge, this annual report does not contain any
untrue statement of material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report;
3. Based on my knowledge, the financial statements and other financial
information included in this annual report, fairly represent in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant is made
known to us by others within the entity, particularly during
the period in which this annual report is being prepared;
18
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of the date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: June 26, 2003 By: /s/ PAUL A. PERLIN
--------------------------
Paul A. Perlin
Chief Executive Officer
Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, R. Scot Perlin, Chief Financial Officer of Winfield Capital Corp. certify
that:
1. I have reviewed this annual report on Form 10-K of Winfield Capital
Corp;
2. Based on my knowledge, this annual report does not contain any
untrue statement of material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report;
3. Based on my knowledge, the financial statements and other financial
information included in this annual report, fairly represent in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant is made
known to us by others within the entity, particularly during
the period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of the date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to
19
the registrant's auditors and the audit committee of the
registrant's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: June 26, 2003 By: /s/ R. SCOT PERLIN
--------------------------
R. Scot Perlin
Chief Financial Officer
20
Winfield Capital Corp.
Financial Statements
INDEX TO FINANCIAL STATEMENTS
Item 8. Financial Statements and Supplemental Data
Page
---------
Report of Independent Accountants .................................... F-1
Balance Sheets
(At March 31, 2003 and 2002) ...................................... F-2
Statements of Operations
(For each of the three years in the period ended March 31, 2003) .. F-3
Statements of Changes in Shareholders' Equity
(For each of the three years in the period ended March 31, 2003) .. F-4
Statements of Cash Flows
(For each of the three years in the period ended March 31, 2003) .. F-5
Financial Highlights ................................................. F-6
Per Share Operating Performance
(For the years ended March 31, 2003 and 2002)
Ratios/Supplemental Data
(For the years ended March 31, 2003 and 2002)
Notes to Financial Statements ........................................ F-7-F-19
Portfolio of Investments ............................................. F-20-F-24
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Winfield Capital Corp.
(A Small Business Investment Company licensed by
the U.S. Small Business Administration ("SBA")):
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Winfield
Capital Corp. at March 31, 2003 and 2002, and the results of its operations and
its cash flows for each of the three years in the period ended March 31, 2003 in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedules listed
in the accompanying index present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
financial statements. These financial statements and financial statement
schedules are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedules based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which 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
audits provide 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-1
WINFIELD CAPITAL CORP.
BALANCE SHEETS
March 31,
----------------------------
2003 2002
------------ ------------
ASSETS
Investments, at value:
Loans and notes receivable (cost: $10,365,361 and $2,942,591,
respectively) ............................................................. $ 8,371,521 $ 1,176,887
Equity interests in small business concerns (cost: $22,372,142 and
$22,340,624, respectively) ................................................ 10,220,109 12,784,997
Assets acquired in liquidation (cost: $24,707 and $324,586, respectively) .... -- 167,350
------------ ------------
Total investments ................................................... 18,591,630 14,129,234
Cash and cash equivalents ........................................................ 4,396,206 4,416,989
Short-term marketable securities ................................................. 3,454,226 12,753,178
Accrued interest receivable ...................................................... 85,276 341,806
Receivable from escrow account ................................................... -- 197,369
Furniture and equipment (net of accumulated depreciation of $41,880
and $36,195, respectively) ................................................... 13,246 18,931
Other assets (principally deferred debenture costs) .............................. 115,670 640,579
------------ ------------
Total assets ........................................................ $ 26,656,254 $ 32,498,086
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Debentures payable to the U.S. Small Business Administration ..................... $ 24,650,000 $ 24,650,000
Deferred income .................................................................. 129,102 --
Accrued expenses ................................................................. 386,057 362,420
------------ ------------
Total liabilities ................................................... 25,165,159 25,012,420
------------ ------------
Commitments and contingencies (Note 6)
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, 2003 and 2002; issued and outstanding -
5,346,084 shares at March 31, 2003 and 2002 ............................... 53,461 53,461
Additional paid-in capital ................................................... 19,709,170 22,982,698
Accumulated deficit .......................................................... (4,093,738) (4,027,385)
Unrealized depreciation on investments, net .................................. (14,177,798) (11,523,108)
------------ ------------
Total shareholders' equity .......................................... 1,491,095 7,485,666
------------ ------------
Total liabilities and shareholders' equity .......................... $ 26,656,254 $ 32,498,086
============ ============
The accompanying notes are an integral part of the financial statements.
F-2
WINFIELD CAPITAL CORP.
STATEMENTS OF OPERATIONS
Years ended March 31,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
Investment income:
Interest from small business concerns .......... $ 459,847 $ 165,110 $ 428,557
Interest from invested idle funds .............. 259,946 880,074 733,054
Loan processing fees ........................... -- 927 5,484
Other income ................................... 10,104 11,293 18,704
------------ ------------ ------------
Total investment income ................ 729,897 1,057,404 1,185,799
------------ ------------ ------------
Expenses:
Interest ....................................... 1,878,483 1,910,394 1,759,255
Payroll and payroll-related expenses ........... 826,850 879,529 745,544
General and administrative expenses ............ 474,219 448,381 369,101
Professional fees .............................. 240,689 259,880 185,050
Depreciation and amortization .................. 580,113 85,358 69,058
Other operating costs .......................... 85,831 58,144 104,644
------------ ------------ ------------
Total investment expenses .............. 4,086,185 3,641,686 3,232,652
------------ ------------ ------------
Investment loss - net .................. (3,356,288) (2,584,282) (2,046,853)
------------ ------------ ------------
Realized gains (losses) on investments, net ........ 16,407 (3,289,935) 1,282,344
Change in unrealized depreciation of
investments .................................... (2,654,690) (8,492,858) (69,828,667)
------------ ------------ ------------
Loss on investments, net ............... (2,638,283) (11,782,793) (68,546,323)
------------ ------------ ------------
Net decrease in shareholders' equity
resulting from operations ........... $ (5,994,571) $(14,367,075) $(70,593,176)
============ ============ ============
Per share net decrease in shareholders' equity
resulting from operations:
Basic ........................................ $ (1.12) $ (2.69) $ (13.20)
============ ============ ============
Diluted ...................................... $ (1.12) $ (2.69) $ (13.20)
============ ============ ============
The accompanying notes are an integral part of the financial statements.
F-3
WINFIELD CAPITAL CORP.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Accumulated Deficit)
Retained Earnings
----------------------------
Net Net Unrealized
Common Stock Additional Undistributed Undistributed Appreciation
------------------ Paid-in Investment Realized (Depreciation) on
Shares Amount Capital Income/(Loss) Gain/(Loss) Investments - net Total
--------- -------- ------------ ------------- ------------- ----------------- ------------
Balance - April 1, 2000 5,346,684 $ 53,461 $ 26,915,076 $ (44,848) $ -- $ 66,798,417 $ 93,722,106
Net (decrease) increase in
shareholders' equity resulting
from operations (2,046,853) 1,282,344 (69,828,667) (70,593,176)
Reclassification
as described in Note 3 (2,161,719) 2,167,873 (6,154) --
--------- -------- ------------ ----------- ----------- ------------ ------------
Balance - March 31, 2001 5,346,684 53,461 24,753,357 76,172 1,276,190 (3,030,250) 23,128,930
Net (decrease) increase in
shareholders' equity resulting
from operations (2,584,282) (3,289,935) (8,492,858) (14,367,075)
Dividends paid (1,276,189) (1,276,189)
Reclassification
as described in Note 3 (1,770,659) 2,612,856 (842,197) --
--------- -------- ------------ ----------- ----------- ------------ ------------
Balance - March 31, 2002 5,346,684 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 5,346,684 $ 53,461 $ 19,709,170 $ -- $(4,093,738) $(14,177,798) $ 1,491,095
========= ======== ============ =========== =========== ============ ============
The accompanying notes are an integral part of the financial statements.
F-4
WINFIELD CAPITAL CORP.
STATEMENTS OF CASH FLOWS
Years ended March 31,
--------------------------------------------
2003 2002 2001*
------------ ------------ ------------
Operating activities:
Net decrease in shareholders' equity resulting from operations ......... $ (5,994,571) $(14,367,075) $(70,593,176)
Adjustments to reconcile net decrease in shareholders' equity
resulting from operations to net cash used in operating activities:
Realized (gains) losses on investments, net ....................... (16,407) 3,289,935 (1,282,344)
Stock dividends reinvested ........................................ -- -- (18,130)
Change in unrealized depreciation of investments .................. 2,692,012 8,395,076 69,881,908
Change in unrealized (appreciation) depreciation of
short-term marketable securities ................................ (37,322) 97,782 (53,241)
Depreciation and amortization of fixed assets ..................... 5,685 6,862 6,020
Accretion of interest to face value of notes ...................... (115,147) -- --
Amortization of debenture costs ................................... 574,428 78,496 80,997
Accretion of subordinated debentures .............................. -- -- 23,823
Decrease (increase) in receivable from broker ..................... -- 46,599 (46,599)
Decrease (increase) in accrued interest receivable ................ 74,529 (152,927) (60,803)
(Increase) decrease in other assets ............................... (49,519) (9,244) 83,679
(Decrease) increase in income taxes payable ....................... -- (23,404) 23,404
(Decrease) in deferred income ..................................... -- -- (4,612)
Increase (decrease) in accrued expenses ........................... 23,637 33,459 (206,511)
------------ ------------ ------------
Net cash used in operating activities ........................ (2,842,675) (2,604,441) (2,165,585)
------------ ------------ ------------
Investing activities:
Purchases of short-term marketable securities .......................... (6,487,954) (13,735,656) (15,809,113)
Proceeds from the maturity of short-term marketable securities ......... 15,808,742 16,732,951 --
Proceeds from recovery of bad debt ..................................... -- -- 12,846
Proceeds from sale of equity interests and return of capital ........... 920,337 4,524,282 12,085,228
Investments originated ................................................. (7,618,912) (367,676) (9,637,953)
Proceeds from collection of loans ...................................... 199,679 102,105 1,343,242
Net premiums received from option contracts ............................ -- -- 112,323
Acquisition of fixed assets ............................................ -- (11,724) (7,509)
------------ ------------ ------------
Net cash provided by (used in) investing activities .......... 2,821,892 7,244,282 (11,900,936)
------------ ------------ ------------
Financing activities:
Proceeds from debentures payable to the SBA ............................ -- -- 5,000,000
Repayment of debentures payable to the SBA ............................. -- (900,000) (300,000)
Repayment of subordinated debentures ................................... -- -- (1,089,000)
Debenture costs paid ................................................... -- (40,000) (175,000)
Dividends paid ......................................................... -- (1,276,189) --
Payment of Federal income tax - deemed distribution .................... -- -- (10,690,254)
------------ ------------ ------------
Net cash used in financing activities ........................ -- (2,216,189) (7,254,254)
------------ ------------ ------------
(Decrease) increase in cash and cash equivalents ............ (20,783) 2,423,652 (21,320,775)
Cash and cash equivalents - beginning of year .......................... 4,416,989 1,993,337 23,314,112
------------ ------------ ------------
Cash and cash equivalents - end of year ...................... $ 4,396,206 $ 4,416,989 $ 1,993,337
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest ................................................. $ 1,878,483 $ 1,889,523 $ 1,740,843
============ ============ ============
Supplemental schedule of non-cash investing and financing activities:
Conversion of loans and notes receivable into equity interests ......... $ 3,125 $ 18,370 $ 2,714,167
------------ ------------ ------------
Receivable from escrow account ......................................... $ -- $ 197,369 $ --
------------ ------------ ------------
* Certain prior year amounts have been reclassified to conform with the 2003
presentation.
The accompanying notes are an integral part of the financial statements.
F-5
WINFIELD CAPITAL CORP.
FINANCIAL HIGHLIGHTS
Years ended March 31,
--------------------------
2003 2002
----------- -----------
Per Share Operating Performance
Shareholders' equity, beginning of period ........................ $ 1.40 $ 4.33
----------- -----------
Investment loss - net ............................................ (0.63) (0.48)
Net realized and unrealized (loss) gain
on investments ................................................... (0.49) (2.21)
----------- -----------
Total from investment operations ................................. (1.12) (2.69)
----------- -----------
Dividends paid ................................................... -- (0.24)
----------- -----------
Shareholders' equity, end of year ................................ $ .28 $ 1.40
=========== ===========
Per share market value, end of year .............................. $ .36 $ 1.37
=========== ===========
Shares outstanding, end of year .................................. 5,346,084 5,346,084
=========== ===========
Ratio/Supplemental Data
Shareholders' equity, end of period .............................. $ 1,491,095 $ 7,485,666
Ratio of investment expenses to average shareholders' equity ..... 94.03% 22.25%
Ratio of investment loss, net to average shareholders' equity .... 77.24% 15.77%
F-6
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
Years Ended March 31, 2003, 2002 and 2001
1. Organization:
Winfield Capital Corp. (the "Registrant" or the "Company") was
incorporated as a New York corporation in 1972. The Company is a small
business investment company ("SBIC") that was licensed by the U.S. Small
Business Administration (the "SBA") in 1972 under the Small Business
Investment Act of 1958, as amended (the "Small Business Investment Act").
The Company is a non-diversified investment company that has elected to be
regulated as a business development company ("Business Development
Company"), a type of closed-end investment company under the Investment
Company Act of 1940, as amended (the "1940 Act"). Beginning April 1, 1996,
the Company elected to be taxed as a Regulated Investment Company under
Subchapter M of the Internal Revenue Code of 1986, as amended.
The Company uses funds borrowed from the SBA, together with its own
capital, to provide loans to, and make equity investments in,
independently owned and operated business concerns that, in accordance
with SBA Regulations, (i) do not have a net worth in excess of $18 million
and do not have average net income after Federal income taxes for the
preceding two years of more than $6 million, or (ii) meet size standards
set by the SBA that are measured by either annual receipts or number of
employees, depending on the industry in which such concerns are primarily
engaged ("Eligible Concerns"). The Company invests in all kinds and
classes of securities of portfolio companies, including, but not limited
to, notes and bonds; straight, senior, subordinated, convertible and
interest-paying debentures; preferred stock; common stock; and options and
warrants to purchase the foregoing. The Company seeks both current income
and long-term growth in the value of its assets. 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
On April 11, 2003, the Company received notice from the Nasdaq Stock
Market, Inc. that effective April 15, 2003 the Company's securities will
be delisted from the Nasdaq SmallCap Market. The Company's securities are
eligible for quotation on the OTC Bulletin Board effective April 15, 2003
with the assigned symbol "WCAP" (see Note 10).
On April 30, 2003, the SBA notified the Company that it is no longer
in compliance with the SBA's capital impairment rules, as defined by
regulation 107.1830 of the SBA Regulations. Based on this non-compliance,
the SBA has accelerated the maturity date of the Company's debentures to a
single demand note including accrued interest. Interest payments are no
longer due on a semiannual basis, but interest continues to accrue. In
addition, the SBA has transferred the Company to the SBA's Office of
Liquidation where any new investments and material expenses are subject to
prior SBA approval. The SBA has the right to institute proceedings for the
appointment of the SBA or its designee as receiver.
These matters raise substantial doubt about the Company's ability to
continue as a going concern. Management has submitted a plan to the SBA
providing for the liquidation of the Company over a three-year period;
however, to date, the SBA has not indicated whether it will approve of the
proposed plan. In addition, the Company continues to pursue alternatives
to cure its impairment under the SBA regulations such as raising
additional financing. The financial statements do not include any
adjustments relating to the recoverability of the carrying amount of
F-7
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS - (Continued)
Years Ended March 31, 2003, 2002 and 2001
the recorded assets or the amount of liabilities that might result from
the outcome of these uncertainties. The Company cannot be certain that
additional equity financing will be available when required or, if
available, that it can secure it on terms satisfactory to the Company. As
such, no assurance can be made that the Company will be successful in its
ability to consummate or implement these or any other strategic
alternatives.
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.
In the fiscal year ended March 31, 2002, the Company, in accordance
with the Securities and Exchange Commission Guidelines and the AICPA Audit
of Investment Companies Guide, eliminated the blockage discount in
calculating the fair market value of its portfolio securities listed on
national exchanges. If the Company had not changed its method of
estimating the fair market value of its portfolio securities, the
additional loss for the fiscal year 2002 would have been $179,220, or an
additional loss of $.03 per share.
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 $117,940 and $0 as of March 31, 2003 and
2002, 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 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
F-8
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS - (Continued)
Years Ended March 31, 2003, 2002 and 2001
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.
At March 31, 2003 and 2002, the investment portfolio included
investments totaling $17,631,300 and $11,835,621, 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, 2003 and 2002, 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, 2003, 2002 and 2001, realized losses from
write-offs totaled $182,001, $2,337,716 and $4,179,968, 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, 2003 and 2002, the aggregate gross unrealized
depreciation of investments was $15,171,830 and $11,605,575, respectively,
and the aggregate gross unrealized appreciation of investments was
$1,001,251 and $127,008, respectively, resulting in a net unrealized
depreciation of $14,170,579 and $11,478,567, respectively (excluding
unrealized depreciation on short-term marketable securities of $7,219 and
$44,541, 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 five-year maturity,
and, in many cases, are convertible into common stock or are accompanied
by warrants to purchase common stock of the borrower at a nominal exercise
price, subject in most cases to certain conditions.
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
F-9
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS - (Continued)
Years Ended March 31, 2003, 2002 and 2001
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.
Assets Acquired in Liquidation
Assets acquired in liquidation ("Liquidations") include those loan
balances for which collateral in real estate and other assets have been
obtained by the Company and which have been or are in the process of being
liquidated. These Liquidations are carried at a value as determined in
good faith by the Board of Directors based upon amounts which the Company
expects to realize upon disposition of the collateral, on a discounted
basis, after reasonable selling expenses. The Company capitalizes
expenditures related to Liquidations subsequent to foreclosure on the
collateral, and accrued interest receivable as of the date of such
foreclosure, if the Board of Directors expects such amounts to be
recovered by the Company.
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 securities 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 year
ended March 31, 2003, 2002 and 2001, was $238,484, $821,713, and $130,894,
respectively.
Deferred Debenture Costs
SBA debenture costs are amortized over ten years, which represents
the terms of the SBA debentures. See Note 5.
F-10
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS - (Continued)
Years Ended March 31, 2003, 2002 and 2001
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 are 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 which is
depreciated under an accelerated method over five years.
Income Taxes
Effective April 1, 1996, the Company has elected to be taxed as a
Regulated Investment Company ("RIC") under Subchapter M of the Internal
Revenue Code (the "Code"). If the Company, as a RIC, satisfies certain
requirements relating to the source of its income, the diversification of
its assets and the distribution of its net income, the Company is taxed as
a pass-through entity which acts as a partial conduit of income to its
shareholders.
In order to maintain its RIC status, the Company must in general: 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).
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.
The Company elected not to distribute a net long-term capital gain
on a tax basis of $1,276,189 during the calendar year ended 2000. As a
result, the Company accrued $23,404 of Federal excise taxes. The Company
subsequently distributed this net long-term capital gain during the
calendar year ended 2001.
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
F-11
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS - (Continued)
Years Ended March 31, 2003, 2002 and 2001
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 decrease in
shareholders' equity resulting from operations for the years ended March
31, 2003, 2002 and 2001. The following table illustrates the effect on net
income and earnings 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,
-----------------------------------------------
2003 2002 2001
Net decrease in shareholders' equity, as reported $ (5,994,571) $ (14,367,075) $ (70,593,176)
Deduct: Total stock-based employee compensation
determined under fair value based method for
all awards, net of related tax effects -- (17,628) --
------------- ------------- -------------
Pro forma net decrease in shareholders' equity (5,994,571) (14,384,703) (70,593,176)
Basis - as reported $ (1.12) $ (2.69) $ (13.20)
Basis - pro forma $ (1.12) $ (2.69) $ (13.20)
The fair value of each option is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions for the fiscal year ended 2002 - expected volatility
was 132%; risk-free interest rate of approximately 4.3%; and expected
lives ranging from 3 to 6 years.
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 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
F-12
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS - (Continued)
Years Ended March 31, 2003, 2002 and 2001
securities may fluctuate significantly in response to factors, which 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 and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of income and expense during the reporting period. The
most significant estimates relate to the valuation of investments. Actual
results could differ from those estimates.
New Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others
("FIN 45"). FIN 45 requires guarantors to recognize a liability, at the
inception of a guarantee issued or modified after December 31, 2002, of
the obligation it has undertaken in issuing the guarantee. The Company has
no guarantees that meet the definition of FIN 45.
In 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (FAS) No. 148 "Accounting for
Stock-Based Compensation - Transition and Disclosure an amendment of FASB
Statement No. 123" ("FAS 148"). This Statement amends Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), to provide alternative methods of transition
for an entity that voluntarily changes to the fair value based method of
accounting for stock-based employee compensation. It also amends the
disclosure provisions of that FAS 123 to require prominent disclosure
about the effects on reported net income of an entity's accounting policy
decisions with respect to stock-based employee compensation. Finally, this
Statement amends APB Opinion No. 28, "Interim Financial Reporting", to
require disclosure about those effects in interim financial information.
The Company has adopted the disclosure provisions of FAS 148.
4. Fair Value of Financial Instruments:
Short-term marketable securities
As of March 31, 2003 and 2002, short-term marketable securities consisted
of the following:
March 31,
---------------------------
2003 2002
----------- -----------
U.S. Government obligations .............. $ 1,299,597 $ 6,073,735
Certificates of deposit .................. 2,154,629 6,679,443
----------- -----------
$ 3,454,226 $12,753,178
=========== ===========
F-13
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS - (Continued)
Years Ended March 31, 2003, 2002 and 2001
As of March 31, 2003 and 2002, unrealized depreciation on short-term
marketable securities was $7,219 and $44,541, respectively.
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. All option contracts entered into in the fiscal year ended
March 31, 2001 are presented at fair value based on the market price of
exchange-listed options. The unrealized net appreciation was $842,726 on
these option contracts for the fiscal year ended March 31, 2001. During
the fiscal year ended March 31, 2002, all option contracts became due. As
of March 31, 2003, the Company has 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, 2003, with interest
payable semi-annually, consisted of the following:
Interest Rate
Amount Due Date (per annum)
----------- ------------ -----------------
$ 750,000 ............................... 9/1/2005 6.875%
600,000 ............................... 9/1/2005 6.875%
5,000,000 ............................... 6/1/2006 7.710%
3,000,000 ............................... 3/1/2009 6.240%
4,000,000 ............................... 3/1/2009 6.240%
3,000,000 ............................... 9/1/2009 7.220%
3,300,000 ............................... 3/1/2010 7.640%
5,000,000 ............................... 3/1/2011 6.353%
-----------
$24,650,000
===========
Under the terms of the debentures, the Company may not repurchase or
retire any of its capital stock, make any distributions to its
shareholders other than dividends out of retained earnings pursuant to SBA
regulations or increase officers' salaries without the prior written
approval of the SBA. In February 2002, the Company paid a non-refundable
commitment fee of $40,000 to the SBA to reserve $4,000,000 of SBA
Guaranteed Debentures. As of March 31, 2003, the Company has not drawn
down on this commitment. In January 2001, the Company paid non-refundable
commitment fees of $150,000 to the SBA to reserve and draw down $5,000,000
of SBA Guaranteed Debentures plus an underwriters fee of $25,000.
On April 30, 2003, the SBA notified the Company that it is no longer
in compliance with the SBA's capital impairment rules, as defined by
regulation 107.1830 of the SBA Regulations.
F-14
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS - (Continued)
Years Ended March 31, 2003, 2002 and 2001
Based on this non-compliance, the SBA has accelerated the maturity date of
the Company's debentures to a single demand note including accrued
interest. Interest payments are no longer due on a semiannual basis but
interest continues to accrue. As such, the total remaining balance of debt
issuance costs of $496,214 was accelerated at March 31, 2003 due to the
acceleration of the indebtedness.
6. Commitments and Contingencies:
The Company has an operating lease on its office facility which
expires in February 2008. Rent expense was $46,150, $45,291, and $41,817
for the years ended March 31, 2003, 2002 and 2001, respectively. The
following are the minimum rental commitments for the next five fiscal
years:
Fiscal Year Ending March 31,
------------------ ---------
2004 ............................................. 43,429
2005 ............................................. 47,624
2006 ............................................. 47,421
2007 ............................................. 51,220
2008 ............................................. 48,644
---------
$ 238,338
=========
In November 2000, the Company entered into employment agreements
with two officers, which expired on October 31, 2002. The agreements
provided for aggregate compensation of $541,080 and $568,134 in 2002 and
2001, respectively. During fiscal year 2003, only one of the agreements
was extended. The agreement has been extended for two years at a
compensation of $306,180 per annum.
7. Stock Option Plan:
In October 1995, which was subsequently amended by 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 (a "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.
F-15
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS - (Continued)
Years Ended March 31, 2003, 2002 and 2001
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.
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:
2003 2002 2001
-------------------- --------------------- ---------------------
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- ---------- -------- ---------- -------- ----------
Balance, beginning of fiscal year .... 874,563 $ 1.19 862,563 $ 1.17 862,563 $ 1.17
Granted .............................. -- 12,000 1.68 --
Exercised ............................ -- -- --
Expired .............................. -- -- --
-------- -------- --------
Balance, end of fiscal year .......... 874,563 1.19 874,563 1.19 862,563 1.17
======== ======== ========
Options exercisable
at end of fiscal year ............ 778,563 $ 1.14 778,563 $ 1.14 778,563 $ 1.14
======== ======== ========
During fiscal year 2002, the Board of Directors approved the
extension of the expiration date of 856,563 stock options for an
additional number of years up to the maximum ten years stipulated in the
Plan. In accordance with Financial Accounting Standard Board
Interpretation Number 44, "Accounting for Certain Transactions Involving
Stock Compensation - An Interpretation of APB Opinion Number 25", no
compensation cost was incurred with the extension as the exercise prices
of the options were higher than their fair value at the date of
modification.
F-16
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS - (Continued)
Years Ended March 31, 2003, 2002 and 2001
The following table summarizes information about the stock options
outstanding as of March 31, 2003:
Options
Options Outstanding Exercisable
-------------------------------- -----------
Weighted-
average
Exercise Number remaining Number
Price outstanding contractual life exercisable
-------- ----------- ---------------- -----------
$ 1.11 464,277 4.99 404,277
$ 1.16 366,286 2.13 366,286
$ 1.50 4,000 4.14 4,000
$ 1.53 20,000 3.92 4,000
$ 1.68 12,000 3.70 --
$ 5.00 8,000 0.59 --
-------- --------
874,563 778,563
======== ========
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 and
short-term marketable securities of $7,850,432 and $17,170,167 at March
31, 2003 and 2002, respectively. Cash is invested with banks in amounts,
which, at times, exceed insurable limits. Short-term marketable securities
are invested in U.S. government obligations and certificates of deposits.
As of March 31, 2003, 87% of the Company's total investment value
was held in seven notes and equity securities, Accent Optical
Technologies, Inc., Engenia Software, Inc., Evoke Software Corporation,
Open Solutions, Inc., Petroleum Place, Inc., Comdial Corporation, and J.L.
French Automotive Castings, Inc. As of March 31, 2002, 71% of the
Company's total investment value was held in six equity securities, Accent
Optical Technologies, Inc., Commerce One, Inc., Engenia Software, Inc.,
Evoke Software Corporation, Open Solutions, Inc. and Petroleum Place, Inc.
F-17
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS - (Continued)
Years Ended March 31, 2003, 2002 and 2001
9. Loss Per Common Share:
The reconciliation of basic and diluted loss per common share
computation is as follows:
Years Ended March 31,
------------------------------------------
2003 2002 2001
------------ ------------ ------------
Net (loss) earnings available for common stock
equivalent shares deemed to have a dilutive effect ..... $ (5,994,571) $(14,367,075) $(70,593,176)
============ ============ ============
Per share net (decrease) increase in shareholders'
equity resulting from operations
Basic .................................................. $ (1.12) $ (2.69) $ (13.20)
============ ============ ============
Diluted ................................................ $ (1.12) $ (2.69) $ (13.20)
============ ============ ============
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, 2003, 2002 and 2001, 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 June 17, 2002, the Company received notice from the Nasdaq Stock
Market, Inc. ("Nasdaq") that for the preceding 30 consecutive trading
days, the Company's common stock had not maintained the minimum Market
Value of Publicly Held Shares of $5,000,000 as required for continued
inclusion by Marketplace Rule 4450(a)(2) (the "Rule") on the Nasdaq
National Market.
On July 23, 2002, the Company received notice from Nasdaq that for
the preceding 10 consecutive trading days, the Company's common stock had
not maintained the minimum $1.00 per share as required for continued
inclusion by Marketplace Rule 4450(a)(5) (the 'Rule') on the Nasdaq
National Market.
On September 25, 2002, the Company was notified that the staff of
the Nasdaq Listing Qualifications Department had approved the Company's
application to transfer the listing of its common stock $0.01 par value,
from the Nasdaq National Market to the Nasdaq SmallCap Market.
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
F-18
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS - (Continued)
Years Ended March 31, 2003, 2002 and 2001
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 eligible for
quotation on the OTC Bulletin Board effective April 15, 2003 with the
assigned symbol "WCAP".
F-19
WINFIELD CAPITAL CORP.
PORTFOLIO OF INVESTMENTS
March 31, 2003
Loans and Notes Receivable
Loan
Maturity Interest Fair % of Net
Company Name Industry Date Rate (%) Cost Value Assets
- ---------------------------------------------- -------------------- --------- -------- ----------- ---------- --------
Loans
D&S Diner Rte 7 Cobleskill Diner Corp. (a)(b) Restaurant 16-Oct-00 16.25 $ 24,049 $ -- 0.0%
H. Lockings Corp. Food Service 19-Jul-95 16.25 21,450 21,450 1.4%
Horizon Medical Products, Inc. Medical Devices 16-Mar-04 6.00 246,875 246,875 16.6%
HPA Monon Corp. (a)(c) Trailer Manufacturer 15-May-02 12.00 2,000,000 -- 0.0%
No-Name Deli/Grocery, Inc. (a)(b) Food Service 1-Aug-93 16.50 131,747 161,746 10.8%
Phone Management Enterprises, Inc. (a) Communication 18-Sep-01 None 61,655 -- 0.0%
Comdial Corporation Communication 27-Sep-05 12.00 1,955,835 1,955,835 131.2%
J.L. French Automotive Castings, Inc. Automotive 31-Dec-07 19.00 5,532,614 5,532,614 371.0%
Engenia Software, Inc. Software Design 30-Sep-03 8.00 90,753 90,753 6.1%
Notes Receivable
Gabriel Lamanna Real Estate 1-Mar-04 11.50 20,023 20,023 1.3%
957 South Elmora, Inc. (a) Real Estate 1-Dec-04 6.68 85,678 85,678 5.7%
John Papakonstantis Restaurant 17-Jul-17 10.00 56,547 56,547 3.8%
Vassar Development Corp. Real Estate 7-Apr-03 10.00 138,135 200,000 13.4%
----------- ---------- ------
Total Loans and Notes Receivable $10,365,361 $8,371,521 561.3%
=========== ========== ======
- ----------
(a) non-income producing or past due as to required principal and/or interest
(b) foreclosed upon
(c) declared Chapter 7 bankruptcy
F-20
WINFIELD CAPITAL CORP.
PORTFOLIO OF INVESTMENTS
March 31, 2002
Loans and Notes Receivable
Loan
Maturity Interest Fair % of Net
Company Name Industry Date Rate (%) Cost Value Assets
- ---------------------------------------------- -------------------- --------- -------- ----------- ----------- --------
Loans
D&S Diner Rte 7 Cobleskill Diner Corp. (a)(b) Restaurant 16-Oct-00 16.25 $ 24,049 $ -- 0.0%
H. Lockings Corp. Food Service 19-Jul-95 16.25 22,834 22,834 0.3%
Horizon Medical Products, Inc. Medical Devices 16-Mar-04 6.00 250,000 250,000 3.3%
HPA Monon Corp. Trailer Manufacturer 15-May-02 12.00 2,000,000 320,000 4.3%
No-Name Deli/Grocery, Inc. (a) Food Service 1-Aug-93 16.50 189,875 189,875 2.5%
Phone Management Enterprises, Inc. (a) Communication 18-Sep-01 None 61,655 -- 0.0%
Senior Housing Concepts Assisted Living 9-Sep-01 18.00 120,000 120,000 1.6%
Notes Receivable
Gabriel Lamanna Real Estate 1-Mar-04 11.50 37,881 37,881 0.5%
957 South Elmora, Inc. (a) Real Estate 1-Dec-04 7.50 70,416 70,416 0.9%
Vassar Development Corp. Real Estate 7-Apr-03 10.00 165,881 165,881 2.2%
----------- ----------- -----
Total Loans and Notes Receivable $ 2,942,591 $ 1,176,887 15.7%
=========== =========== =====
- ----------
(a) non-income producing or past due as to required principal and/or interest
(b) foreclosed upon
F-21
WINFIELD CAPITAL CORP.
PORTFOLIO OF INVESTMENTS
March 31, 2003
Equity Interests
Company Name Industry Number of Shares
- ------------------------------------- ----------------------------------- -----------------------------------------
Accent Optical Technologies, Inc. Optoelectronics 585,366 Shares,
Unregistered Series A Preferred Stock
Bigfoot Interactive, Inc. E-Marketing Services 177,815 Shares,
(formerly Big Engines Acquisition Unregistered Series B Preferred Stock
Corporation) 127,901 Shares,
Unregistered Series C Preferred Stock
Comdial Corporation (a) Communication 352,000 Shares, Common Stock
Commerce One, Inc. (a) Enterprise 25,401 Shares, Common Stock
Procurement Software 33,112 Shares, Common Stock
Creative Foods, Inc. (a) Specialty Baking Warrant to Purchase Common Stock
divine, inc. (b) Collaboration, Interaction 12,342 Shares, Common Stock
& Knowledge Solutions 3,918 Shares, Common Stock
Engenia Software, Inc. Collaborative Services Software 418,680 Shares,
Unregistered Series C Preferred Stock
etang.com, Inc. Internet Service Provider 11,306 Shares, Unregistered Common Stock
Evoke Software Corporation Data Management Software 1,219,512 Shares,
Unregistered Series E Preferred Stock
2,151,470 Shares,
Unregisterd Series AA Preferred Stock
6,454,409 Shares,
Unregisterd Series AA Preferred Stock
Hewlett-Packard Company (a) Computer Hardware & Storage 27,818 Shares, Common Stock
Homepoint Corporation Home Furnishings Management 10,875 Shares,
Software Unregistered Series B Preferred Stock
Horizon Medical Products, Inc. (a) Medical Devices 312,500 Shares, Common Stock
InfoSpace.com, Inc. (a) Internet Infrastructure Services 4,011 Shares, Common Stock
501 Shares, Common Stock
Independence Brewing Co. (b) Brewing 949,941 Shares, Common Stock
J.L. French Automotive Castings, Inc. Automotive 227,869 Warrants to Purchase Common Stock
MarketFirst Software, Inc. E-Marketing Solutions 938,881 Shares,
Unregistered Series D Preferred Stock
myGeek.com, Inc. On-Line Personal Shopper 287,969 Shares,
Unregistered Series A Preferred Stock
NeoPlanet, Inc. Branding Solutions 62,448 Shares,
Unregistered Series B Preferred Stock
Open Solutions, Inc. Electronic Commerce Banking 281,116 Shares,
& Enterprise Processing Unregistered Series F Preferred Stock
Applications
Petroleum Place, Inc. Energy Internet Marketplace 25,372 Shares,
and Portal Unregistered Series C Preferred Stock
Pinnacor Inc. (a) Digital Content Network 133,333 Common Stock
(formerly ScreamingMedia, Inc.) 31,849 Common Stock
Primedia Inc. (a) Special Interest Magazine Publisher 27,667 Shares, Common Stock
Streaming Media Corporation Rich Media Delivery 586,667 Shares,
(formerly e-Media, Inc.) Unregistered Series A Preferred Stock
U.S. Wireless Data, Inc. (a) Internet-based Wireless 83,333 Shares, Common Stock
Transaction Processing
Total Equity Interests
Cost or % of
Contributed Fair Net
Company Name Value Value Assets
- ------------------------------------- ------------ ------------ --------
Accent Optical Technologies, Inc. $ 1,200,000 $ 1,200,000 80.5%
Bigfoot Interactive, Inc. 518,364 185,369 12.4%
(formerly Big Engines Acquisition
Corporation)
Comdial Corporation (a) 103,680 75,429 5.1%
Commerce One, Inc. (a) 295,359 42,420 2.8%
499,998 55,297 3.7%
Creative Foods, Inc. (a) -- 886 0.1%
divine, inc. (b) 500,000 -- 0.0%
1,274,422 -- 0.0%
Engenia Software, Inc. 2,600,002 1,300,002 87.2%
etang.com, Inc. 412,504 -- 0.0%
Evoke Software Corporation 2,500,000 1,250,000 83.8%
47,840 47,840 3.2%
59,087 59,087 4.0%
491,882 432,570 29.0%
Hewlett-Packard Company (a)
Homepoint Corporation 682,852 105,000 7.0%
Horizon Medical Products, Inc. (a) 3,125 41,625 2.8%
InfoSpace.com, Inc. (a) 400,129 43,439 2.9%
50,000 5,426 0.4%
Independence Brewing Co. (b) 4,755 -- 0.0%
J.L. French Automotive Castings, Inc. 2,800 2,800 0.2%
MarketFirst Software, Inc. 999,908 -- 0.0%
myGeek.com, Inc. 1,000,000 100,000 6.7%
NeoPlanet, Inc. 750,000 19,689 1.3%
Open Solutions, Inc. 2,620,000 3,490,000 234.1%
Petroleum Place, Inc. 1,499,992 1,499,992 100.6%
Pinnacor Inc. (a) 470,400 138,266 9.3%
(formerly ScreamingMedia, Inc.) 185,043 38,856 2.6%
Primedia Inc. (a) 500,000 67,784 4.5%
Streaming Media Corporation 2,200,000 -- 0.0%
(formerly e-Media, Inc.)
U.S. Wireless Data, Inc. (a) 500,000 18,332 1.2%
------------ ------------ ------
Total Equity Interests $ 22,372,142 $ 10,220,109 685.4%
============ ============ ======
- ----------
(a) Publicly traded at March 31, 2003
(b) Delisted at March 31, 2003
F-22
WINFIELD CAPITAL CORP.
PORTFOLIO OF INVESTMENTS
March 31, 2002
Equity Interests
Company Name Industry Number of Shares
- ------------------------------------- ------------------------------------- ----------------------------------------
Accent Optical Technologies, Inc. Optoelectronics 585,366 Shares,
Unregistered Series A Preferred Stock
Bigfoot Interactive, Inc. E-Marketing Services 177,815 Shares,
(formerly Big Engines Acquisition Unregistered Series B Preferred Stock
Corporation)
Commerce One, Inc. (a) Enterprise 254,018 Shares, Common Stock
Procurement Software 331,128 Shares, Common Stock
Creative Foods, Inc. (a) Specialty Baking Warrant to Purchase Common Stock
divine, inc. (a) Collaboration, Interaction 308,542 Shares, Common Stock
& Knowledge Solutions 97,932 Shares, Common Stock
Engenia Software, Inc. Collaborative Services Software 418,680 Shares,
Unregistered Series C Preferred Stock
etang.com, Inc. Internet Service Provider 11,306 Shares, Unregistered Common Stock
Evoke Software Corporation Data Management Software 1,219,512 Shares,
Unregistered Series E Preferred Stock
HPA Monon Corp. Trailer Manufacturer 625,000 Shares, Unregistered Convertible
Preferred Stock
Hewlett-Packard Company (a) Computer Hardware & Storage 27,818 Shares, Common Stock
Homepoint Corporation Home Furnishings Management 10,875 Shares,
Software Unregistered Series B Preferred Stock
InfoSpace.com, Inc. (a) Internet Infrastructure Services 40,016 Shares, Common Stock
5,012 Shares, Common Stock
Independence Brewing Co. (a) Brewing 949,941 Shares, Common Stock
MarketFirst Software, Inc. E-Marketing Solutions 938,881 Shares,
Unregistered Series D Preferred Stock
myGeek.com, Inc. On-Line Personal Shopper 287,969 Shares,
Unregistered Series A Preferred Stock
National Center Residences, LLC Dormitory Management Preferred Return Units
NeoPlanet, Inc. Branding Solutions 62,448 Shares,
Unregistered Series B Preferred Stock
Open Solutions, Inc. Electronic Commerce Banking 281,116 Shares,
& Enterprise Processing Unregistered Series F Preferred Stock
Applications
Petroleum Place, Inc. Energy Internet Marketplace 25,372 Shares,
and Portal Unregistered Series C Preferred Stock
Primedia Inc. (a) Special Interest Magazine Publisher 27,667 Shares, Common Stock
ScreamingMedia Inc. (a) Digital Content Network 113,333 Shares, Common Stock
31,849 Shares, Common Stock
Streaming Media Corporation Rich Media Delivery 586,667 Shares,
(formerly e-Media, Inc.) Unregistered Series A Preferred Stock
Styleclick, Inc. (a) Web Design & Merchandising Warrant to Purchase Common Stock
U.S. Wireless Data, Inc. (a) Internet-based Wireless 83,333 Shares, Restricted Common Stock
Transaction Processing
Total Equity Interests
Cost or % of
Contributed Fair Net
Company Name Value Value Assets
- ------------------------------------- ------------ ------------ --------
Accent Optical Technologies, Inc. $ 1,200,000 $ 1,200,000 16.0%
Bigfoot Interactive, Inc. 518,364 185,369 2.5%
(formerly Big Engines Acquisition
Corporation)
Commerce One, Inc. (a) 295,359 396,268 5.3%
499,998 516,560 6.9%
Creative Foods, Inc. (a) -- 2,364 0.0%
divine, inc. (a) 500,000 154,271 2.1%
1,274,422 48,966 0.7%
Engenia Software, Inc. 2,600,002 2,600,002 34.7%
etang.com, Inc. 412,504 -- 0.0%
Evoke Software Corporation 2,500,000 1,250,000 16.7%
HPA Monon Corp.
-- -- 0.0%
Hewlett-Packard Company (a) 491,882 499,055 6.7%
Homepoint Corporation 725,036 153,595 2.1%
InfoSpace.com, Inc. (a) 400,129 60,976 0.8%
50,000 7,618 0.1%
Independence Brewing Co. (a) 4,755 -- 0.0%
MarketFirst Software, Inc. 999,908 499,908 6.7%
myGeek.com, Inc. 1,000,000 100,000 1.3%
National Center Residences, LLC 142,830 142,830 1.9%
NeoPlanet, Inc. 750,000 19,689 0.3%
Open Solutions, Inc. 2,620,000 2,620,000 35.0%
Petroleum Place, Inc. 1,499,992 1,499,992 20.0%
Primedia Inc. (a) 500,000 87,704 1.2%
ScreamingMedia Inc. (a) 470,400 247,066 3.3%
185,043 69,431 0.9%
Streaming Media Corporation 2,200,000 220,000 2.9%
(formerly e-Media, Inc.)
Styleclick, Inc. (a) -- -- 0.0%
U.S. Wireless Data, Inc. (a) 500,000 203,333 2.7%
------------ ------------ ------
Total Equity Interests $ 22,340,624 $ 12,784,997 170.8%
============ ============ ======
- ----------
(a) Publicly traded at March 31, 2002
F-23
WINFIELD CAPITAL CORP.
PORTFOLIO OF INVESTMENTS
March 31, 2003 and 2002
Assets Acquired in Liquidation
March 31, 2003
------------------------------
Fair % of Net
Company Name Cost Value Assets
- ------------ -------- -------- --------
Suburban Enterprises, Inc. ................... 24,707 -- 0.0%
-------- -------- --------
Total Assets Acquired in Liquidation ......... $ 24,707 $ -- 0.0%
======== ======== ========
March 31, 2002
------------------------------
Fair % of Net
Company Name Cost Value Assets
- ------------ -------- -------- --------
Maypat Realty Corp. .......................... $162,063 $ 77,063 1.0%
The Partition Corp. .......................... 137,816 90,287 1.2%
Suburban Enterprises, Inc. ................... 24,707 -- 0.0%
-------- -------- --------
Total Assets Acquired in Liquidation ......... $324,586 $167,350 2.2%
======== ======== ========
F-24