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
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.
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
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:
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
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%
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.
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.
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.
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.
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.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
Item 5.
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:
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.
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:
WINFIELD CAPITAL CORP.
SUMMARY OF FINANCIAL INFORMATION
Item 7.
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.
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
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
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.
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.
Item 8. Financial Statements and Supplementary Data.
Page ----
Report of Independent Accountants ......................... Balance Sheets ............................................ Statements of Operations .................................. Statements of Changes in Shareholders' Equity .............
Statements of Cash Flows .................................. Financial Highlights (Per Share Data and Ratios/Supplemental Data) ................................ Notes to Financial Statements ............................. through Portfolio of Investments .................................. through
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
Item 10.
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.
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.
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.
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.
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.
Item 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.
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
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;
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
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
Winfield Capital Corp. Financial Statements
Item 8. Financial Statements and Supplemental Data
Page ---------
Report of Independent Accountants ....................................
Balance Sheets (At March 31, 2003 and 2002) ......................................
Statements of Operations (For each of the three years in the period ended March 31, 2003) ..
Statements of Changes in Shareholders' Equity (For each of the three years in the period ended March 31, 2003) ..
Statements of Cash Flows (For each of the three years in the period ended March 31, 2003) ..
Financial Highlights ................................................. 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-19
Portfolio of Investments .............................................-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
WINFIELD CAPITAL CORP. BALANCE SHEETS
The accompanying notes are an integral part of the financial statements.
WINFIELD CAPITAL CORP. STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of the financial statements.
WINFIELD CAPITAL CORP. STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
The accompanying notes are an integral part of the financial statements.
WINFIELD CAPITAL CORP. STATEMENTS OF CASH FLOWS
* Certain prior year amounts have been reclassified to conform with the 2003 presentation.
The accompanying notes are an integral part of the financial statements.
WINFIELD CAPITAL CORP. FINANCIAL HIGHLIGHTS
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
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
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
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.
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
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.
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
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 =========== ===========
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.
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.
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:
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.
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.
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:
(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
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".
WINFIELD CAPITAL CORP. PORTFOLIO OF INVESTMENTS March 31, 2003
Loans and Notes Receivable
- ---------- (a) non-income producing or past due as to required principal and/or interest
(b) foreclosed upon
(c) declared Chapter 7 bankruptcy
WINFIELD CAPITAL CORP. PORTFOLIO OF INVESTMENTS March 31, 2002
Loans and Notes Receivable
- ---------- (a) non-income producing or past due as to required principal and/or interest
(b) foreclosed upon
WINFIELD CAPITAL CORP. PORTFOLIO OF INVESTMENTS March 31, 2003
Equity Interests
- ----------
(a) Publicly traded at March 31, 2003
(b) Delisted at March 31, 2003
WINFIELD CAPITAL CORP. PORTFOLIO OF INVESTMENTS March 31, 2002
Equity Interests
- ---------- (a) Publicly traded at March 31, 2002
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% ======== ======== ========