================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1998 Commission File Number 33-94322
WINFIELD CAPITAL CORP.
(Exact name of registrant as specified in its charter)
New York 13-2704241
(State or other jurisdiction (IRS employer
of incorporation or organization) identification no.)
237 Mamaroneck Avenue, White Plains, New York 10605
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 949-2600
Securities registered pursuant to Section 12(b) of the Act: None
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Stock, par value $.01 per share ................ Boston Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X] The aggregate market value of the voting stock held by
non-affiliates of the registrant as of June 22, 1998 was approximately
$4,547,013.
The number of outstanding shares of the registrant's common stock as of
June 22, 1998 was 5,023,361 shares.
================================================================================
(Cover page 1 of 1 page)
<PAGE>
PART I
Item 1. Business.
Winfield Capital Corp. (the "registrant" or the "Company") was incorporated
as a New York corporation in 1972. It is a small business investment company
("SBIC") that was licensed by the Small Business Administration (the "SBA") in
1972 under the Small Business Investment Act of 1958, as amended (the "Small
Business Investment Act"). The Company is a non-diversified investment company
that has elected to be regulated as a business development company ("Business
Development Company"), a type of closed-end investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Company is
qualified as a "regulated investment company" for federal income tax purposes.
The Company's offices are located at 237 Mamaroneck Avenue, White Plains, New
York 10605. Its telephone number is (914) 949-2600.
As an SBIC, the Company uses funds borrowed from the SBA, together with its
own capital, to provide loans to, and to make equity investments in,
independently owned and operated business concerns that (i) do not have a net
worth in excess of $18 million and do not have average net income after federal
income taxes for the preceding two years of more than $6 million, or (ii) meet
size standards set by the SBA that are measured by either annual receipts or
number of employees, depending on the industry in which such concerns are
primarily engaged ("Eligible Concerns"). The types and dollar amounts of the
loans and other investments the Company may make are limited by the 1940 Act,
the Small Business Investment Act and the regulations of the SBA (the "SBA
Regulations"). The SBA is authorized to examine the operations of the Company,
and the Company's ability to obtain funds from the SBA is also governed by the
Small Business Investment Act and the SBA Regulations.
The Company has no independent investment advisor. The Company's loan and
other investment decisions are made by its officers, subject to the Company's
investment policies and objectives and oversight by its Board of Directors.
Historically, the Company has relied on the efforts of its officers to identify
new financing opportunities. Following its public offering late in 1995, the
Company expanded its marketing efforts and sought referrals from venture
capitalists, investment bankers, attorneys, accountants and commercial bankers.
Prior to its public offering, the Company's investments in portfolio companies
were generally structured as straight loans, or as loans with warrants to
purchase equity securities of the portfolio companies. After its public
offering, the Company has sought to make more investments in portfolio companies
with equity features than was the case heretofore. In connection with its loans
to portfolio companies with equity features, the Company has sought and will
continue to seek security interests in the assets of the borrower. To the extent
it deems necessary, the Company also seeks to obtain personal guaranties from
the principals of its borrowers and security interests in certain of the assets
of such principals.
Characteristics of the Company's Investments
The Company invests in all kinds and classes of securities of portfolio
companies, including, but not limited to, notes and bonds; straight,
subordinated, convertible and income debentures; preferred stock; common stock;
and options and warrants to purchase any of the foregoing. The Company does not
have a policy that limits the amount that may be invested in any kind or class
of security, except that it intends to invest approximately one-third of its
assets in straight loans or debt securities and two-thirds of its assets in
loans or debt securities with equity features, such as conversion rights and
warrants, or in direct equity investments (common stock and preferred stock).
When the Company's investments are structured as loans, they are evidenced
by promissory notes and often are accompanied by warrants to acquire equity
interests in the borrower for nominal consideration. The loans are usually
secured by assets of the borrower, which security interests frequently are
senior to any other financing the borrower may have in place. When appropriate,
a personal guaranty of a borrower's major stockholder or stockholders is sought,
which may also be secured by such stockholders' personal assets. The Company's
loans typically have a fixed rate of interest at the maximum rate allowed by the
SBA (see "SBA Regulation" below), although lower rates may be negotiated
depending on the creditworthiness of the borrowers and other relevant factors.
Typically, such loans require periodic payments of principal and interest which
fully amortize the loan at maturity, and mature in five years. In addition, the
Company intends to pursue bridge loan opportunities as and to the extent
permitted by the SBA Regulations. The Company's current management believes that
the performance of its investment portfolio could be enhanced by increasing the
Company's equity investments, relative to its loan portfolio. Accordingly, the
Company's management now seeks more financing opportunities with equity
participation and more investments with equity features than were made by the
Company heretofore. There can be no assurance that the Company will find such
opportunities on terms favorable to the Company.
1
<PAGE>
Investment Objectives and Strategies
The Company seeks both current income and long-term growth in the value of
its assets. The Company's investments are made, and will continue to be made,
with the intention of having the loan repaid within five years and any equity
investment liquidated within 5 to 10 years. Situations may arise, however, where
the Company may hold an equity interest for a longer period.
Prior to May 2, 1995, when there was a change in management of the Company,
the Company's investments were made primarily in very small local retail and
service businesses. Under its current management, the Company focuses on
investments in privately held Eligible Concerns in growing industries, including
communications, transportation, consumer products and information processing.
There can be no assurance that the Company will be able to locate investments in
such industries on terms favorable to it. The Company concentrates its
investments in the Northeastern United States, but will consider investments in
other parts of the country if they are otherwise consistent with the Company's
loan and other investment selection criteria.
For the most part, the Company's existing portfolio companies are expansion
stage businesses, although some are start-up and development stage companies,
including some with negative net worth. Under the SBA Regulations, the Company
may not invest more than 20% of its "Private Capital" in any single company
without SBA approval. Under the Small Business Investment Act and the SBA
Regulations, "Private Capital" is defined as the total of paid-in capital, other
than capital obtained from federal sources, such as the SBA, and paid-in
surplus. Pursuant to current SBA Regulations, the Company is able to invest
approximately $2,200,000, or 20% of its Private Capital, in a single company. In
most instances, the Company participates in loans and other investments with
other investors. Through such participation, the Company has been able to become
involved in transactions larger than would otherwise be possible under the
investment limit of 20% of its own Private Capital.
Selection of Loan and other Investment Opportunities
Given its objective to emphasize equity investments, the Company uses the
following criteria in selecting investment opportunities:
Potentially Profitable Operations. The Company attempts to identify
companies that are profitable or that it believes are potentially
profitable.
Development Stage Companies. The Company attempts to identify and
invest in development stage companies, that is, companies with a product or
service that is beyond the testing stage. The Company generally will avoid
seed and start-up companies.
Experienced Management Team. The Company seeks portfolio companies
that have experienced management with a substantial ownership interest and
a demonstrated ability, or the potential, to accomplish the objectives set
forth in such companies' business plan.
Liquidation Value of Assets. The Company is not an "asset-based"
lender, however, the value of assets securing its loans is an important
consideration in its credit decisions. Emphasis is placed on balance sheet
assets such as inventory, plant, property and equipment.
Growth. In addition to generating sufficient cash flow to service
prospective loans, the Company requires that prospective portfolio
companies have what management believes to be a good chance of achieving
substantial annual growth.
Exit Strategy. Another investment consideration is whether there is an
opportunity to liquidate the investment in a potential portfolio company.
Such opportunity generally would allow the Company to realize a gain on its
equity interests and include public offerings, sales of the portfolio
company or repurchases by the portfolio company of the Company's equity
interests.
Certain Non-Compliance by Portfolio Companies
Although the Company's agreements with its portfolio companies require them
to furnish the Company with periodic and/or annual financial statements and to
include financial and other covenants by its borrowers in its loan agreements,
many of the portfolio companies fail to supply the financial statements or to
otherwise comply with the covenants required of them. The
2
<PAGE>
Company deals with these failures on a case-by-case basis, and its actions are
influenced by the payment records of such companies.
The aggregate face amount of the Company's loans and the value of other
portfolio investments was $14,173,714 as of March 31, 1998 with loans and notes
receivable comprising 49% (88% were performing in accordance with their terms
and 12% which were non-performing) and equity interests and assets acquired in
liquidation of defaulted loans comprising 51%.
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 $437,886 as described in the following table:
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Amount written off $79,366 $68,950 $289,570
Amount written off as a percentage of
aggregate loans and investments and assets acquired
in liquidation as of the beginning of the year 2.1% 1.6% 6.2%
</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. An SBIC can
issue such debentures in a principal amount up to either 200% or 300% of its
Private Capital, depending upon various factors.
Under the current SBA Regulations, the Company is considered to have, as of
March 31,1998, Private Capital of approximately $11,000,000, which would enable
it to sell debentures to, or with a guaranty by, the SBA up to a maximum
principal amount of approximately $33,000,000 (300% of its Private Capital). The
Company's ability to sell such debentures is subject to the availability of SBA
program funds and other funding limitations and compliance with the SBA
Regulations. See "SBA Regulation" below.
The SBA offers eligible SBICs the opportunity to sell "participating
securities" (preferred stock or debentures having interest payable only to the
extent of earnings) to the SBA or to entities that receive SBA guaranties in the
amount up to 200% of the SBIC's Private Capital. Although the Company has the
minimum amount of Private Capital necessary to be eligible for the SBA's
participating securities program (i.e., $10,000,000), the issuance of the
Debentures in the Company's public offering may disqualify the Company from
participating in the program under the provisions of the SBA Regulations and the
1940 Act. In addition, the Company believes that, to date, only partnerships
have been allowed to issue participating securities and that corporations will
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 (i) does not have a net worth in excess of $18 million and does not
have average net income after federal income taxes for the preceding two years
of more than $6 million, or (ii) meets size standards set by the SBA that are
measured by either annual receipts or number of employees, depending on the
industry in which such concern is primarily engaged, is eligible to receive
financial assistance from an SBIC (hence, it is referred to in this Form 10-K as
an "Eligible Concern"). The SBA Regulations also define a "Smaller Concern,"
which is a concern with a net worth of $6 million or less and average annual net
profits after taxes of $2 million or less, or depending on the industry in which
the concern operates, meets criteria based on the number of its employees or its
annual receipts. Commencing with its fiscal year ended March 31, 1996, the
Company was required by the SBA Regulations to earmark at least 10% of its
financing to Smaller Concerns and in each subsequent fiscal year to earmark at
least 20% of its financing to Smaller Concerns.
SBA Regulations place certain limitations on the terms of loans by SBICs.
The maximum maturity of these loans may not exceed 20 years and, subject to
certain exceptions, the minimum maturity is five years. A borrower from an SBIC
cannot be required during the first five years to repay, on a cumulative basis,
more principal than an amount calculated on a straight-line,
3
<PAGE>
five-year amortization schedule. On straight loans (without equity
features), an SBIC can charge an interest rate up to 19% and on loans with
equity features, an interest rate up to 14%. Notwithstanding the above, an SBIC
may charge more by first computing (i) a base rate using either the SBA
debenture rate currently in effect plus an applicable charge permitted by the
SBA, or (ii) 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 features, an SBIC may charge interest equal to 6% above either
(i) or (ii) and, in the case of a straight loan, 11% interest above either (i)
or (ii).
SBICs may invest directly in the equity of its 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. An SBIC may acquire options or warrants in its
portfolio companies. Such options and warrants may also have redemption
provisions, subject to certain restrictions. In general, however, SBICs may not
control a portfolio company. "Control" is defined as a 50% interest in the
outstanding voting securities of a portfolio company if it is held by fewer than
50 shareholders, or if there are 50 or more shareholders, a 20% to 25% interest
(depending on the holdings of other shareholders of the portfolio company).
With certain limited exceptions, SBICs may not invest overseas, in real
estate or in passive businesses, that is, businesses which are not regular and
continuous.
Regulation as a Business Development Company
The Company is a closed-end, non-diversified investment company that has
elected to be regulated as a Business Development Company under the 1940 Act
and, as such, is subject to regulation under that Act. Among other things, the
1940 Act contains prohibitions and restrictions relating to transactions between
the Company and its affiliates, principal underwriters and affiliates of those
affiliates or underwriters and requires that a majority of the Company's
directors be persons other than "interested persons," as defined in the 1940
Act. In addition, the 1940 Act prohibits the Company from changing the nature of
its business so as to cease to be, or to withdraw its election as, a Business
Development Company unless so authorized by the vote of the holders of a
majority of its outstanding voting securities.
A Business Development Company is permitted, under specified conditions, to
issue multiple classes of indebtedness and one class of stock senior to the
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 an SBIC, the only
asset coverage requirement applicable to it would give the holders of its Senior
Securities constituting indebtedness, including the Debentures, the right to
elect a majority of the Board of Directors, if on the last business day of each
of 12 consecutive calendar months, the Company failed to maintain at least 100%
asset coverage. Also, while Senior Securities constituting preferred stock are
outstanding (other than preferred stock issued to or guaranteed by the SBA),
provision must be made to prohibit any distributions to shareholders or the
repurchase of such securities or shares unless the applicable asset coverage
ratios are met at the time of the distribution or repurchase. The Company may
also borrow amounts up to 5% of the value of its total assets for temporary
purposes.
Under the 1940 Act, a Business Development Company may not acquire any
asset, other than assets of the type listed in Section 55(a) of the 1940 Act
("Qualifying Assets") unless, when the acquisition is made, such Qualifying
Assets represent at least 70% of its total assets. The principal categories of
Qualifying Assets relevant to the business of the Company are the following:
(1) Securities purchased in transactions not involving any public offering
from the issuer of such securities, which issuer is an eligible
portfolio company. An "eligible portfolio company" is defined, in
pertinent part, in the 1940 Act as any issuer which:
(a) is organized under the laws of, and has its principal place
of business in, the United States;
(b) is not an investment company other than another SBIC that is
wholly-owned by the Company; and
(c) does not have any class of securities with respect to which
margin credit may be extended under federal law.
(2) Securities of any eligible portfolio company which is controlled by
the Business Development Company.
4
<PAGE>
(3) Securities received in exchange for or distributed on or with respect
to securities described in item (1) or (2) above, or pursuant to the
exercise of options, warrants or rights relating to such securities.
(4) Cash, cash items, government securities, or high quality debt
securities maturing in one year or less from the time of investment.
In addition, a Business Development Company must have been organized (and
have its principal place of business) in the United States for the purpose of
making investments in the types of securities described in item (1) or (2) above
and, in order to count the securities as Qualifying Assets for the purpose of
the 70% test, the Business Development Company must either control the issuer of
the securities or make available to the issuer of the securities significant
managerial assistance. Making available significant managerial assistance means,
among other things, any arrangement whereby a Business Development Company,
through its directors, officers or employees, offers to provide, and, if
accepted, does so provide, significant guidance and counsel concerning the
management, operations or business objectives and policies of a portfolio
company; or in the case of an SBIC (such as the Company), making loans to a
portfolio company.
Fundamental and Other Investment Policies
The Company's investment objectives are to achieve a high level of current
income from interest and long-term growth through equity interests in its
portfolio companies.
Fundamental Policies
In making investments and managing its portfolio, the Company will adhere
to the following fundamental policies, which may not be changed without the
approval of (i) the holders of 50% or more of the Company's outstanding voting
securities, or (ii) the holders of 67% or more of the Company's outstanding
voting securities present at a meeting of securityholders at which holders of
50% or more of such securities are present in person or by proxy:
1. The Company will conduct its business so as to retain its status as an
SBIC and as a Business Development Company, and to qualify as a "regulated
investment company" (as defined under the Code). In order to retain its status
as an SBIC, the Company must limit its investments to Eligible Concerns and meet
the minimum financing obligations applicable to Smaller Concerns (see "SBA
Regulation"). In order to retain its status as a Business Development Company,
the Company may not acquire assets (other than non-investment assets necessary
and appropriate to its operations as a Business Development Company) if, after
giving effect to such acquisition, the value of its Qualifying Assets is less
than 70% of the value of its total assets. See "Regulation as a Business
Development Company". In order to qualify as a "regulated investment company,"
the Company 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 "regulated investment company" for the fiscal year ended March
31, 1998.
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 Securities
Act of 1933, as amended (the "Securities Act") of securities purchased by it in
private transactions), (ii) purchase or sell real estate or interests in real
estate or real estate investment trusts (except that the Company may acquire
real estate which collateralizes its loans or guaranties of its loans upon
defaults of such loans and may dispose of such real estate as and when market
conditions permit), (iii) sell securities short, (iv) purchase securities on
margin (except to the extent that the registrant may be deemed to have done so
as a result of its acquisition of securities in connection with loans made to
portfolio companies which are funded with borrowed money), or (v) purchase or
sell commodities or commodity contracts, including futures contracts (except
where necessary in working out distressed loans or investments).
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.
5
<PAGE>
6. The Company has no policy with respect to concentration of investments
in a particular company, industry or groups of industries, except that it will
not lend money to, or invest in, any company if such loan or investment exceeds
20% of the Company's Private Capital, without SBA approval.
7. The Company may make straight loans and loans with equity features to
the extent permitted under the Small Business Investment Act and the 1940 Act.
Other Investment Policies
The Company's investment policies described below are not fundamental
policies, and may be changed, subject to the Small Business Investment Act and
the SBA Regulations, by the Company's Board of Directors without shareholder
approval:
1. Except for subsidiaries organized by the Company to hold assets acquired
in foreclosures of defaulted loans, the Company will not acquire (i) 50% or more
of the outstanding voting securities of any issuer held by fewer than 50
shareholders, (ii) 25% or more of the outstanding voting securities of any
issuer having 50 or more shareholders, or (iii) 20% or more of the outstanding
voting securities of any issuer having 50 or more shareholders if, as a result
of such acquisition, the Company would hold a number of voting securities equal
to or greater than the largest other holding of such securities.
2. The Company will not invest in companies for the purpose of controlling
management of such companies.
3. The Company will not invest in finance companies, foreign companies,
passive businesses or real estate companies, except as permitted by the SBA.
4. The Company has no policy with respect to portfolio turnover. Moreover,
because borrowers have certain prepayment rights pursuant to SBA Regulations,
the Company cannot control or predict the frequency of portfolio turnover.
5. Pending the investment of its funds in Eligible Concerns (including
Smaller Concerns) or as otherwise permitted by the SBA, the Company may invest
its funds in direct obligations of, or obligations guaranteed as to principal
and interest by, the United States which mature in 15 months or less, repurchase
agreements with federally insured institutions with respect to such obligations
which mature in seven days or less, or certificates of deposit issued by a
qualified federally insured institution which mature in one year or less, or
will be deposited in a qualified federally insured institution in accounts which
may be subject to withdrawal restrictions not to exceed one year.
Competition
Many entities, including banks, lending companies (including other SBICs),
venture capital funds and other sources of capital, compete for loan
originations and investments similar to those made by the Company. The Company's
competition is not limited to entities which operate in the same geographical
area as the Company, as many of the Company's competitors operate throughout the
United States. Furthermore, competition for loan origination has increased as
the financial strength of the banking community has improved over the last few
years. Many of the Company's competitors have far greater financial and
personnel resources than the Company. In addition, many other SBICs use
professional investment advisors to seek and evaluate potential investments. The
Company does not have an independent investment advisor and it does not intend
to retain one.
Facilities; Personnel
The Company operates from rented quarters, consisting of approximately
2,000 square feet, located in a four story office building under a lease
expiring in November, 2002. The lease is cancelable at the Company's option on
90 days prior written notice. Management considers that such quarters will be
adequate for the near term for the conduct of the Company's business. The
Company maintains its investment and business records at its executive offices.
As of June 22, 1998, the Company had three full-time employees, two of whom
are Messrs. Paul A. Perlin, Chief Executive Officer and David Greenberg, Chief
Operating Officer, and one of whom handles clerical matters. R. Scot Perlin is
the Company's part-time salaried Chief Financial Officer and Bruce A. Kaufman is
the Company's non-salaried Treasurer and Secretary. 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.
6
<PAGE>
Legal Proceedings
From time to time in the ordinary course of business, the Company initiates
legal proceedings against borrowers in default and, where warranted, their
guarantors to seek payment of loan obligations and to take possession of
collateral. In the latter instances, these proceedings are sometimes followed by
court authorized liquidations. All such proceedings require outside counsel with
attendant professional fees and expenses.
The Company has never been named as a defendant in any material litigation.
Item 2. Properties.
For a description of the Company's loans and other investments, as of March
31, 1998 and March 31, 1997 see pages F-20 to F-24.
Item 3. Legal Proceedings.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The registrant's common stock trades in the NASDAQ SmallCap Market under
the symbol, "WCAP". The registrant's common stock is listed on the Boston Stock
Exchange under the symbol, "WNF", but there has been no meaningful trading of
such securities on that Exchange since the registrant's initial public offering,
which was made on October 26, 1995. The warrants issued in connection with the
Company's initial public offering traded in the NASDAQ SmallCap Market and were
listed on the Boston Stock Exchange under the symbols "WCAPW" and "WNFW",
respectively. The reported high and low bid quotations for the registrant's
common stock and warrants on the NASDAQ SmallCap Market from April 1, 1996 to
June 22, 1998 were as follows:
<TABLE>
<CAPTION>
Common Stock Warrants
------------ --------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
April 1 - June 30, 1996 $7.125 $2.25 $2.50 $ .50
July 1 - September 30, 1996 2.625 1.375 1.50 .375
October 1 - December 31, 1996 2.125 1.25 1.25 .50
January 1 - March 31, 1997 2.5625 1.29687 .875 .50
April 1 - June 30, 1997 2.0625 1.125 .625 .1875
July 1 - September 30, 1997 1.625 1.1875 .1875 .0625
October 1 - December 31, 1997 1.625 .625 .0625 .0625
January 1 - March 31, 1998 1.375 .875 * *
April 1, 1998 - June 22, 1998 1.75 1.00 * *
</TABLE>
*These warrants expired according to their terms on October 25, 1997.
The foregoing quotations reflect inter-dealer prices, without retail
markup, markdown or commission, and do not necessarily represent actual
transactions.
As of June 22, 1998, the Company estimates that its shares of common stock
are held by approximately 1,718 beneficial holders.
Item 6. Selected Financial Data.
See Summary of Financial Information for the years ended March 31, 1998,
1997, 1996, 1995 and 1994 on the following page:
7
<PAGE>
<TABLE>
<CAPTION>
WINFIELD CAPITAL CORP.
SUMMARY OF FINANCIAL INFORMATION
YEARS ENDED MARCH 31,
---------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Total investment income .............. $ 1,118,127 $ 1,436,957 $ 599,537 $ 290,972 $ 403,024
Total investment expenses ............ $ 1,844,342 $ 1,731,499 $ 995,985 $ 674,903 $ 765,208
Net realized gains (losses)
on disposition of investments ..... $ (184,206) $ 57,349 $ 77,550 $ (26,926) $ (50,560)
Unrealized appreciation (depreciation)
on loans and investments ........... $ (1,074,053) $ 581,745 $ (133,195) $ (120,000) $ (30,000)
Net income (loss) .................... $ (1,984,474) $ 344,552 $ (452,093) $ (530,857) $ (442,744)
Earnings (loss) per share ............ $ (.40) $ .07 $ (.13) $ (.90) $ (.75)
Weighted average number of
shares outstanding ................. 5,023,361 5,023,361 3,484,630 591,608 591,608
OTHER OPERATING DATA
Number of loans and other investments
outstanding at end of period ....... 46 42 43 51 55
Number of loans and other investments
originated ......................... 16 7 3 3 6
Principal amount of loans and other
investments originated ............. $ 11,314,223 $ 3,959,335 $ 1,157,090 $ 287,115 $ 290,932
Investment expenses as a percentage
of average net assets .............. 19.5% 16.6% 19.3% 216.0% 95.7%
BALANCE SHEET DATA
Loans and investment portfolio
including assets acquired in
liquidation ........................ $ 13,364,711 $ 4,908,905 $ 3,977,593 $ 3,724,118 $ 4,295,680
Total assets ......................... $ 18,233,115 $ 20,748,682 $ 15,852,084 $ 4,448,322 $ 4,971,472
SBA debentures ....................... $ 8,300,000 $ 8,900,000 $ 4,500,000 $ 3,750,000 $ 3,750,000
Common stock (including additional
paid-in capital) ................... $ 9,492,599 $ 10,901,063 $ 10,901,063 $ 1,250,000 $ 1,250,000
Realized retained earnings (deficit) . $ (58,048) $ (556,091) $ (318,898) $(1,019,450) $ (608,593)
Total shareholders' equity ........... $ 8,625,548 $ 10,610,022 $ 10,265,470 $ 47,050 $ 577,907
</TABLE>
8
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Years Ended March 31, 1998, 1997 and 1996
Investment Income
Investment income decreased by $318,830 from $1,436,957 for the year ended
March 31, 1997 to $1,118,127 for the year ended March 31, 1998, a decrease of
22.2%. This reflected principally $175,036 in decreased interest from
temporarily invested funds as a result of the increased pace of the Company's
investments originated and lower prevailing interest rates. There was also a
decrease in earnings from the loan processing fees and other income of $107,938
and $53,668, respectively, with the former reflecting the higher percentage of
new equity versus loan investments. There are often no processing or commitment
fees on equity investments.
Investment income increased by $837,420 from $599,537 for the year ended
March 31, 1996 to $1,436,957 for the year ended March 31, 1997, an increase of
139.7%. Interest from loans to small business concerns increased $330,809
principally due to new loan generation and the collection of approximately
$90,000 of past due interest. Interest from invested idle funds increased by
$358,660 mainly as a result of the interest earned for a full year on the net
proceeds received from the Company's public offering completed in November, 1995
and interest earned on the proceeds from the issuance of $5,000,000 of
debentures to the SBA. Commitment and loan processing fee income increased by
$136,485 concomitant with the increased loan activity and other investments
while other income increased 25.9% from $44,184 to $55,650 reflecting a
preferred stock dividend received upon early redemption of the stock.
Interest Expense
Interest expense increased by $33,663 from $780,646 for the year ended
March 31, 1997 to $814,309 for the year ended March 31, 1998, due to the
increased indebtedness of $5,000,000 to the SBA partially offset by the
repayment of $600,000 to the SBA on September 1, 1997. Interest expense
increased by $376,398 from $404,248 for the year ended March 31, 1996 to
$780,646 for the year ended March 31, 1997 due to both the increased
indebtedness to the SBA of $5,000,000 and the payment of interest for a full
year on the 6.5% debentures issued in conjunction with the Company's public
offering of equity securities.
Operating Expenses
The Company's operating expenses consist of employee compensation and
benefits, rent, insurance, professional and consulting fees, marketing and
investment solicitation expenses and losses on loans receivable and assets
acquired in liquidation. The Company's operating expenses increased from
$950,853 for the year ended March 31, 1997 to $1,030,033 for the year ended
March 31, 1998, primarily as a result of increases in payroll and payroll
related expenses of $51,450 and in professional fees of $36,135. The Company's
operating expenses increased from $591,737 for the year ended March 31, 1996 to
$950,853 for the year ended March 31, 1997, mostly due to increases in payroll
and payroll related expenses, general and administrative expenses and
professional fees of $173,701, $104,308 and $54,431, respectively.
Realized Gains or Losses on Equity Investments
The Company realizes gains or losses on its equity investments or rights to
acquire equity investments upon the disposition or write-offs thereof. The
realized loss for the year ended March 31, 1998 of $184,206 included losses on
assets acquired in liquidation, write-offs and write-downs totaling $289,570
partially offset by a gain on the sale of common stock and other portfolio
assets totaling $105,364. The realized gains of $57,349 and $77,550 for the
years ended March 31, 1997 and March 31, 1996 included gains of $124,960 on the
sale of warrants partially offset by losses on loan receivables of $68,950 and
$156,916 on the sale of portfolio company warrants partially offset by losses on
loan receivables of $79,366, respectively.
Unrealized Appreciation or Depreciation of Loans and Investments.
As an investment company, the Company evaluates its investment portfolio
periodically to determine the fair value of the portfolio and, accordingly, does
not maintain an allowance for loan losses similar to commercial banks. Any
change in the fair value of loans and other investments is reflected in
unrealized appreciation or depreciation of loans and investments. There was
unrealized depreciation on loans and investments of $1,074,053 for the year
ended March 31, 1998, unrealized appreciation of $581,745 for the year ended
March 31, 1997 and unrealized depreciation of $133,195 for the year ended March
31, 1996.
9
<PAGE>
Liquidity and Capital Resources
In January, 1998, the Company paid a non-refundable commitment fee of
$100,000 to the SBA to reserve $10,000,000 of SBA guaranteed debentures through
September, 2002. During the year ended March 31, 1998, the Company retired a
debenture payable to the SBA due September 1, 1997 with a principal amount of
$600,000 and bearing an interest rate of 10.35% per annum.
At March 31, 1998, the Company had cash and certificates of deposit
totaling $4,311,364, a decrease of 72% from the year ended March 31, 1997. This
principally reflected an increase in investments originated in fiscal 1998 of
$11,314,223, or a 185.8% increase from the same period a year earlier. The cash
and certificates of deposit were all invested with banks that meet the Federal
Deposit Insurance Corporation's definition of well-capitalized institutions. The
Company believes that its cash and short-term investments along with its new SBA
funding commitment at March 31, 1998 will be adequate to meet both its working
capital needs and the long-term investment opportunities that it seeks through
March 31, 1999.
Newly Issued Acounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." It establishes a standard for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements which is effective for financial statements issued for
periods beginning after December 15, 1997. Management does not believe that the
future adoption of SFAS No. 130 will have a material effect on the Company's
financial position and results of operations.
Item 8. Financial Statements and Supplementary Data.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Reports of Independent Accountants ................................ F-1 and F-2
Balance Sheets ..................................................... F-3
Statements of Operations ........................................... F-4
Statements of Shareholders' Equity ................................. F-5
Statements of Cash Flows ........................................... F-6
Financial Highlights (Per Share Data and Ratios/Supplemental Data).. F-7
Notes to Financial Statements ...................................... F-8 through F-19
Portfolio of Investments ........................................... F-20 and F-24
</TABLE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Incorporated by reference to the registrant's definitive proxy statement to
be filed not later than 120 days after March 31, 1998.
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, 1998.
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, 1998.
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, 1998.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Financial Statements:
See Item 8 of Part II hereof.
10
<PAGE>
(b) Financial Statement Schedules: The schedules specified under
Regulation S-X are either not applicable or are immaterial to the
Company's financial statements for each of three years in the period
ended March 31, 1998.
(c) Exhibits:
3(A). Certificate of Incorporation, as amended, incorporated by
reference to Exhibit 1(A) to the registrant's registration
statement in SEC File No. 33-94322.
3(B). Certificate of Amendment of Certificate of Incorporation,
incorporated by reference to Exhibit 1(B) to the
registrant's registration statement in SEC File No.
33-94322.
3(C). By-laws, as amended, incorporated by reference to Exhibit 2
to the registrant's registration statement in SEC File No.
33-94322.
4(A). Warrant Agreement, including Form of Warrant, incorporated
by reference to Exhibit 3(B) to the registrant's
registration statement in SEC File No. 33-94322.
4(B). Form of Debenture incorporated by reference to Exhibit 3(C)
to the registrant's registration statement in SEC File No.
33-94322.
4(C). Agency Agreement for the Debentures, incorporated by
reference to Exhibit 3(D) to the registrant's registration
statement in SEC File No. 33-94322.
10(A). Indemnification Agreement, incorporated by reference to
Exhibit 4 to the registrant's registration statement in SEC
File No. 33-94322.
10(B). Stock Option Plan, incorporated by reference to Exhibit 5 to
the registrant's registration statement in SEC File No.
33-94322.
10(C). Registrant's License from SBA, incorporated by reference to
Exhibit 6 to the registrant's registration statement in SEC
File No. 33-94322.
10(D). Stock Purchase Agreement dated as of August 25, 1994, as
amended, incorporated by reference to Exhibit 7 to the
registrant's registration statement in SEC File No.
33-94322.
10(E)(1). Employment Agreement with Paul A. Perlin, incorporated by
reference to Exhibit 8(A) to the registrant's registration
statement in SEC File No. 33-94322.
10(E)(2). Stock Option Agreement with Paul A. Perlin, incorporated by
reference to Exhibit 8(B) to the registrant's registration
statement in SEC File No. 33-94322.
10(F)(1). Employment Agreement with Stanley M. Pechman, incorporated
by reference to Exhibit 9(A) to the registrant's
registration statement in SEC File No. 33-94322.
10(F)(2). Stock Option Agreement with Stanley M. Pechman, incorporated
by reference to Exhibit 9(B) to the registrant's
registration statement in SEC File No. 33-94322.
10(G). Employment Agreement with David Greenberg, incorporated by
reference to Exhibit 9(C) to the registrant's registration
statement in SEC File No. 33-94322.
10(H). Lock-up Agreement with Officers and Directors, incorporated
by reference to Exhibit 9(D) to the registrant's
registration statement in SEC File No. 33-94322.
11. Statement of Computation of Earnings (Loss) Per Share.
11
<PAGE>
12. Letter of Joel Popkin & Company, P.C. to the Securities and
Exchange Commission dated June 5, 1997, incorporated by
reference to Item 7. (c) Exhibit 1 to the registrant's
Current Report on Form 8-K dated June 5, 1997 in SEC File
No. 33-94322.
(d) No reports on Form 8-K were filed during the fourth quarter of the
registrant's fiscal year ended March 31, 1998.
12
<PAGE>
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, 1998 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, 1998 By: /s/ PAUL A. PERLIN
-----------------------------
Paul A. Perlin
Chairman of the Board
(Chief Executive Officer) and Director
Dated: June 26, 1998 By: /s/ R. SCOT PERLIN
-----------------------------
R. Scot Perlin
(Chief Financial Officer &
Chief Accounting Officer) and Director
Dated: June 26, 1998 By: /s/ BRUCE A. KAUFMAN
-----------------------------
Bruce A. Kaufman
Treasurer
Dated: June 26, 1998 By: /s/ DAVID GREENBERG
---------------------
David Greenberg
Chief Operating Officer and Director
Dated: June 26, 1998 By: /s/ JOEL I. BARAD
-----------------------------
Joel I. Barad
Director
Dated: June 26, 1998 By: /s/ BARRY J. GORDON
-----------------------------
Barry J. Gordon
Director
Dated: June 26, 1998 By: /s/ ALLEN L. WEINGARTEN
-----------------------------
Allen L. Weingarten
Director
Dated: June 26, 1998 By: /s/ SCOTT A. ZIEGLER
-----------------------------
Scott A. Ziegler
Director
13
<PAGE>
INDEX TO FINANCIAL STATEMENTS
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
PAGE
--------
Reports of Independent Accountants ............................... F-1-F-2
Balance Sheets
(As of March 31, 1998 and 1997) .................................. F-3
Statements of Operations
(For the years ended March 31, 1998, 1997 and 1996) .............. F-4
Statements of Shareholders' Equity
(For the years ended March 31, 1998, 1997 and 1996) .............. F-5
Statements of Cash Flows
(For the years ended March 31, 1998, 1997 and 1996) .............. F-6
Financial Highlights ............................................. F-7
Per Share Data
(For the years ended March 31, 1998 and 1997)
Ratios/Supplemental Data
(For the years ended March 31, 1998 and 1997)
Notes to Financial Statements .................................... F-8-F-19
Portfolio of Investments ......................................... F-20-F-24
15
<PAGE>
[COOPERS & LYBRAND LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Winfield Capital Corp.
(A Small Business Investment Company licensed by
the U.S. Small Business Administration):
We have audited the accompanying balance sheets of Winfield Capital Corp.
as of March 31, 1998 and 1997, including portfolio of investments as of March
31, 1998 and 1997 and the related statements of operations, shareholders' equity
and cash flows for the years then ended and the financial highlights for the
periods indicated thereon. These financial statements and financial highlights
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included verification of investments owned as of
March 31, 1998 and 1997 by examination and correspondence with custodians. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the 1998 and the 1997 financial statements and the
financial highlights referred to above present fairly, in all material respects,
the financial position of Winfield Capital Corp. as of March 31, 1998 and March
31, 1997, and the results of its operations and its cash flows for the years
then ended and the financial highlights for the periods indicated thereon, in
conformity with generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
---------------------------------
Coopers & Lybrand L.L.P.
New York, NY
June 11, 1998
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
(Joel Popkin and Company Letterhead)
To the Board of Directors and Shareholders
Winfield Capital Corp.
A Small Business Investment Company
Licensed by the SBA
White Plains, New York
We have audited the accompanying statement of operations, shareholders'
equity and cash flows of Winfield Capital Corp. for the year ended of March 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the results of operations and cash flows of Winfield Capital Corp.
for the year ended March 31, 1996 in conformity with generally accepted
accounting principles.
/s/ JOEL POPKIN & COMPANY, P.C.
---------------------------------
Joel Popkin & Company, P.C.
New York, New York
May 24, 1996
F-2
<PAGE>
<TABLE>
<CAPTION>
WINFIELD CAPITAL CORP.
BALANCE SHEETS
March 31,
------------------------------
ASSETS: 1998 1997
------------ ------------
<S> <C> <C>
Investments, at value:
Loans and notes receivable (cost: $6,948,875 and $3,244,529,
respectively) ............................................................... $ 6,598,875 $ 2,552,030
Equity interests in small business concerns (cost: $5,758,404 and
$286,755, respectively) ..................................................... 6,051,901 1,549,304
Assets acquired in liquidation (cost: $1,466,435 and $1,112,571,
respectively) ............................................................... 713,935 807,571
------------ ------------
Total investments ...................................................... 13,364,711 4,908,905
Cash ........................................................................... 848,777 3,314,875
Short-term marketable securities ............................................... 3,462,587 12,108,274
Accrued interest receivable .................................................... 164,556 72,088
Furniture and equipment (net of accumulated depreciation of $68,250
and $61,817, respectively) .................................................... 18,615 11,849
Other assets (principally deferred debenture costs) ............................ 373,869 332,691
------------ ------------
Total assets ............................................................ $ 18,233,115 $ 20,748,682
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Debentures payable to the U.S. Small Business Administration ................... $ 8,300,000 $ 8,900,000
Subordinated debentures payable ................................................ 983,502 942,665
Accrued expenses ............................................................... 279,162 295,995
Deferred income ................................................................ 44,903
------------ ------------
Total liabilities ....................................................... 9,607,567 10,138,660
------------ ------------
Commitments and contingencies (Note 7)
Shareholders' equity:
Preferred stock - .001 par value; Authorized 1,000,000 shares
Issued and outstanding - none
Common stock - $.01 par value; Authorized - 10,000,000 shares;
Issued and outstanding - 5,023,361 shares at March 31, 1998
and 1997 .................................................................... 50,234 50,234
Additional paid-in capital ................................................... 9,442,365 10,850,829
Accumulated deficit (dated May 2, 1995) ...................................... (58,048) (556,091)
Unrealized appreciation (depreciation) on investments, net ................... (809,003) 265,050
------------ ------------
Total shareholders' equity .............................................. 8,625,548 10,610,022
------------ ------------
Total liabilities and shareholders' equity .............................. $ 18,233,115 $ 20,748,682
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
WINFIELD CAPITAL CORP.
STATEMENTS OF OPERATIONS
Years ended March 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Investment income:
Interest from small business concerns ................... $ 557,267 $ 539,455 $ 208,646
Interest from invested idle funds ....................... 519,831 694,867 336,207
Loan processing fees .................................... 39,047 146,985 10,500
Other income ............................................ 1,982 55,650 44,184
----------- ----------- -----------
Total investment income ......................... 1,118,127 1,436,957 599,537
----------- ----------- -----------
Expenses:
Interest ................................................ 814,309 780,646 404,248
Payroll and payroll related expenses .................... 526,140 474,690 300,989
General and administrative expenses ..................... 262,680 259,043 154,735
Professional fees ....................................... 189,424 153,289 98,858
Depreciation and amortization ........................... 29,771 19,933 7,150
Other operating costs ................................... 22,018 43,898 30,005
----------- ----------- -----------
Total investment expenses ....................... 1,844,342 1,731,499 995,985
----------- ----------- -----------
Investment loss - net ........................... (726,215) (294,542) (396,448)
----------- ----------- -----------
Realized gain (loss) on investments ....................... (184,206) 57,349 77,550
Change in unrealized appreciation (depreciation) of
investments ............................................. (1,074,053) 581,745 (133,195)
----------- ----------- -----------
Gain (loss) on investments, net ................. (1,258,259) 639,094 (55,645)
----------- ----------- -----------
Net increase (decrease) in shareholders'
equity resulting from operations .............. $(1,984,474) $ 344,552 $ (452,093)
=========== =========== ===========
Per share net increase (decrease) in shareholders' equity
resulting from operations
Basic ................................................... $ (0.40) $ 0.07 $ (0.13)
Diluted ................................................. $ (0.40) $ 0.07 $ (0.13)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
WINFIELD CAPITAL CORP.
STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated (Deficit)
--------------------------- Unrealized
Common Stock Additional Undistributed Net Undistributed Appreciation
--------------------- Paid-In Net Investment Realized (Depreciation) on
Shares Amount Capital Income Gain/(Loss) Investments - net Total
--------- --------- ------------ ----------- ---------- ----------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - April 1, 1995 .. 591,608 $ 5,916 $ 1,244,084 $(1,019,450) $(183,500) $ 47,050
Sale of common stock ..... 2,591,753 25,918 2,852,764 2,878,682
Reorganization ........... (1,019,450) 1,019,450
Sale of common stock and
warrants ............... 1,840,000 18,400 7,773,431 7,791,831
Net decrease in
shareholders'
equity resulting from
operations .............. (318,898) (133,195) (452,093)
--------- --------- ------------ ----------- ---------- --------- ----------
Balance - March 31, 1996 . 5,023,361 50,234 10,850,829 (318,898) (316,695) 10,265,470
Net increase in
shareholders'
equity resulting from
operations .............. (237,193) 581,745 344,552
--------- --------- ------------ ----------- ---------- --------- ----------
Balance - March 31, 1997 . 5,023,361 50,234 10,850,829 (556,091) 265,050 10,610,022
Net decrease in
shareholders'
equity resulting from
operations .............. (726,215) $ (184,206) (1,074,053) (1,984,474)
Reclassification pursuant
to SOP 93-2 ............. (1,408,464) 1,282,306 126,158
--------- --------- ------------ ----------- ---------- --------- ----------
Balance - March 31, 1998 . 5,023,361 $ 50,234 $ 9,442,365 $ 0 $ (58,048) $(809,003) $8,625,548
========= ========= ============ =========== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
WINFIELD CAPITAL CORP.
STATEMENTS OF CASH FLOWS
Years ended March 31,
--------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Operating activities:
Net increase (decrease) in shareholders' equity
resulting from operations ....................................... $ (1,984,474) $ 344,552 $ (452,093)
Adjustments to reconcile net increase (decrease)
in shareholders' equity resulting from operations
to net cash used in operating activities:
Realized loss (gain) on investment ............................. 184,206 (57,349) (77,550)
Dividend reinvested ............................................ (159)
Amortization of discount ....................................... 40,837 40,837 17,015
Change in unrealized (appreciation)
depreciation on investments ................................... 1,074,053 (581,745) 133,195
Capitalized interest ........................................... (15,431)
Depreciation and amortization of fixed assets .................. 6,433 3,671 3,161
Amortization of debenture costs ................................ 52,067 45,016 11,948
(Increase) decrease in accrued interest receivable ............. (92,468) 4,636 29,450
Decrease in other assets ....................................... (6,724) 269 15,313
Increase in deferred income .................................... 44,903
Increase (decrease) in accrued expenses ........................ (16,833) 140,659 (14,636)
------------ ------------ ------------
Net cash used in operating activities ...................... (698,159) (59,454) (349,628)
------------ ------------ ------------
Investing activities:
Purchases of short-term marketable securities .................... (4,845,368) (14,683,274) (22,277,149)
Proceeds from the maturity of short-term marketable
securities ...................................................... 13,491,055 10,706,149 14,146,000
Assets acquired in liquidation ................................... (10,359)
Proceeds from sale of equity interests ........................... 105,198 376,299 156,916
Investments originated ........................................... (11,314,223) (3,959,335) (1,157,090)
Proceeds from collection of loans ................................ 1,508,598 3,290,817 746,290
Acquisition of fixed assets ...................................... (13,199) (6,199) (4,217)
Proceeds on sale of assets acquired in liquidation ............... 2,250
(Decrease) increase in funds held in escrow ...................... (24,450) 11,453
------------ ------------ ------------
Net cash used in investing activities ...................... (1,067,939) (4,299,993) (8,385,906)
------------ ------------ ------------
Financing activities:
Sale of common stock ............................................. 10,743,678
Proceeds from debentures payable to the SBA ...................... 5,000,000 1,491,167
Repayment of debentures payable to the SBA
and bank note ................................................... (600,000) (605,000) (495,000)
Debenture costs paid ............................................. (100,000) (131,250) (35,438)
------------ ------------ ------------
Net cash provided by (used in) financing activities ........ (700,000) 4,263,750 11,704,407
------------ ------------ ------------
(Decrease) increase in cash ................................. (2,466,098) (95,697) 2,968,873
Cash - beginning of year ......................................... 3,314,875 3,410,572 441,699
------------ ------------ ------------
Cash - end of year ............................................... $ 848,777 $ 3,314,875 $ 3,410,572
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest ........................................... $ 749,723 $ 589,663 $ 385,047
============ ============ ============
Supplemental schedule of non-cash investing and
financing activities:
Assets acquired in liquidation of loans ........................ $ 688,809 $ 317,885 $ 246,278
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
WINFIELD CAPITAL CORP
Financial Highlights
Years ended March 31,
---------------------------
1998 1997
---------- -----------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Shareholders' equity, beginning of period ............................ $ 2.11 $ 2.04
---------- -----------
Investment loss - net ................................................ (0.15) (0.06)
Net realized and unrealized gain (loss)
on investments ..................................................... (0.25) 0.13
---------- -----------
Total from investment operations ..................................... (0.40) 0.07
---------- -----------
Shareholders' equity, end of period .................................. $ 1.71 $ 2.11
========== ===========
Per share market value, end of period ............................... $ 1.875 $ 2.00
========== ===========
Shares outstanding, end of period .................................... 5,023,361 5,023,361
========== ===========
RATIO/SUPPLEMENTAL DATA
Shareholders' equity, end of period .................................. $8,625,548 $10,610,022
Ratio of investment expenses to average shareholders' equity ......... 19.50% 16.59%
Ratio of investment (loss) income, net to average
shareholders' equity ............................................... (7.68%) (2.82%)
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE>
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
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, subordinated, convertible and income debentures; preferred
stock; common stock; and options and warrants to purchase any of the
foregoing. The Company seeks both current income and long-term growth in
the value of its assets. The Company's investments are made, and will
continue to be made, with the intention of having loans repaid within five
years and equity investments liquidated within 5 to 10 years. Situations
may arise, however, where the Company may hold an equity interest for a
shorter or longer period.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Valuation of Investments
Securities that are traded on a securities exchange or the NASDAQ National
Market System, which are not deemed to be restricted investments, are
valued at the security's last sales price on the last trading day of the
period. Securities traded over-the-counter are valued at the closing price
on the valuation date. A valuation discount is applied if the number of
securities held is substantial in relation to the average daily trading
volume.
F-8
<PAGE>
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
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 40%, which is determined by the Board of Directors of the Company
(the "Board of Directors") based upon applicable factors such as resale
restrictions, contractual agreement, size of position held and trading
history of the investee company.
Loans and other investments for which no public market exists are stated at
"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 plus amortized original issue discount, if any, unless adverse
factors lead to a determination of value at a lower amount. In such
instances, the Company records an increase in unrealized depreciation of
investments to reduce the carrying value of such loans to a value, as
determined by the Board of Directors.
Investments in 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 positive cash flows from operations, the market of comparable
publicly traded companies (discounted for illiquidity) and other pertinent
factors. The values assigned to these securities are based upon available
information and do not necessarily represent amounts which might ultimately
be realized, since such amounts depend on future circumstances and cannot
reasonably be determined until the individual positions are liquidated.
Certain of the Company's loans are delinquent as to the required principal
and/or interest due under the respective loan agreements. Loans are
generally considered to be in default when they become 180 days past due
pursuant to SBA regulations. However, on a case by case basis, management
will consider, based on available information, the appropriateness of the
continued accrual of interest and the carrying value of the loan.
At March 31, 1998 and March 31, 1997, the investment portfolio included
investments totaling $13,108,959 and $3,678,101, respectively, whose values
had been estimated by the Board of Directors in the absence of readily
ascertainable market values. Because of the inherent uncertainty of the
valuations, the values may differ significantly from the values that would
F-9
<PAGE>
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
have been used had a ready market for the securities existed, and the
differences could be material.
At March 31, 1998, 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.
All other changes in the valuation of portfolio investments are included as
changes in the unrealized appreciation or depreciation of investments in
the statement of operations.
Description of Loan Terms
The Company's loans to small business concerns range up to approximately
$2,000,000 in size, have a five-year maturity, and, in many cases, are
convertible into common stock or are accompanied by warrants to purchase
common stock of the borrower at a nominal exercise price, subject in most
cases to certain conditions, including certain "put" rights in favor of the
Company. The Company seeks to maximize the difference, or "spread," between
the rate at which it borrows funds from the SBA and the rate at which it
lends these funds to small business concerns. Interest rates are subject to
a cap determined by the SBA.
The loans bear interest at rates ranging from 7.5% to 17.00%, per annum.
Interest is payable in monthly, quarterly, or semi-annual installments with
principal payments payable either over the term of the loan or at maturity.
These loans are generally collateralized by the assets of the borrower,
certain of which are subject to prior liens, and/or guarantees.
The Company also participates in syndicated loans and equity investments.
Assets Acquired in Liquidation
Assets acquired in liquidation ("Liquidations") include those loan balances
for which collateral in real estate and other assets have been obtained by
the Company and which have been or are in the process of being liquidated.
These Liquidations are carried at a value as determined in good faith by
the Board of Directors based upon amounts which the Company expects to
realize upon disposition of the collateral, on a discounted basis, after
reasonable selling
F-10
<PAGE>
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
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.
Deferred Debenture Costs
SBA debenture costs are amortized over ten years which represents the terms
of the SBA debentures.
Revenue Recognition
Interest income is recognized as it is earned on short-term marketable
securities and debt investments. Dividend income from equity investments is
recognized as of the ex-dividend date.
Deferred Income
Loan origination fees paid to the Company are deferred and amortized over
the terms of the respective loans. Upon prepayment of loans, loan
processing fees are recognized in full.
Furniture and Equipment
Furniture and equipment are carried at cost. The Company depreciates
furniture and equipment over the estimated useful life of 10 years using
the straight-line method except for computer equipment which is depreciated
under an accelerated method over five years.
Income Taxes
Prior to May 2, 1995, the Company had been treated as an S Corporation for
Federal and State income tax purposes. During that time, the Company's
profits and losses were reported and taxed directly to the Company's
shareholders. Effective with the sale of securities on May 2, 1995, the
Company became a C Corporation and its income was subject to taxes at the
corporate level. During this period, the Company was subject to state
income taxes on interest.
Effective April 1, 1996, the Company has elected to be taxed as a regulated
investment company ("RIC") under Subchapter M of the Internal Revenue Code
(the "Code"). If the Company, as a RIC, satisfies certain requirements
relating to the source of its income, the diversification of its assets and
the distribution of its net income, the Company is taxed as a pass-through
entity which acts as a partial conduit of income to its shareholders.
In order to maintain its RIC status, the Company must in general: a) derive
at least 90% of its gross income from dividends, interest and gains from
the sale or disposition of securities
F-11
<PAGE>
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
b) derive less than 30% of its gross income from the sale or disposition of
securities held for less than three months, c) meet investment
diversification requirements defined by the Code and d) distribute to
shareholders 90% of its net income (other than long-term capital gains).
The 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 which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments of net operating losses. All reclassifications have been
reflected on the statements of shareholders' equity.
The aggregate gross unrealized depreciation of investments was $1,102,500
and the aggregate gross unrealized appreciation of investments was $293,497
resulting in a net unrealized depreciation of $809,003.
Stock Options
The Company uses the intrinsic value based method, as permitted by
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation", to account for the granting of stock options
to employees. This method generally does not result in compensation costs.
Per Share Data
The Company adopted statement of Financial Accounting Standards No. 128
"Earnings Per Share" ("FAS 128") which supersedes Accounting Principles
Board Opinion No. 15. Under FAS 128, net increase (decrease) in
shareholders' equity per share is computed by dividing net increase
(decrease) in shareholders' equity 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. The effect of using FAS 128 was
not significant.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of income and expense during
the reporting
F-12
<PAGE>
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
period. The most significant estimates relate to the valuation of
non-public securities and restricted investments. Actual results could
differ from those estimates.
Reclassification
Certain amounts for 1996 have been reclassified to conform with the 1998
and 1997 presentation.
Newly Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("FAS") No. 130, "Reporting Comprehensive
Income." It establishes a standard for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements which is effective for financial statements issued for
periods beginning after December 15, 1997. Management does not believe that
the future adoption of FAS No. 130 will have a material effect on the
Company's financial position and results of operations.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Cash and Short-Term Marketable Securities
The carrying amount reported in the balance sheet for cash and short-term
marketable securities approximates fair value.
Debentures payable to the U.S. Small Business Administration
The carrying amount of the Company's debentures payable to the SBA
approximates fair value.
F-13
<PAGE>
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
4. DEBENTURES PAYABLE TO THE U.S. SMALL BUSINESS ADMINISTRATION:
Debentures payable to the SBA at March 31, 1998, with interest payable
semi-annually, consist of the following:
INTEREST RATE
AMOUNT DUE DATE (PER ANNUM)
------------- -------- -------------
$ 300,000 6/1/99 8.950%
450,000 ............. 9/1/99 8.800%
300,000 ............. 6/1/00 9.300%
900,000 ............. 9/1/01 8.330%
750,000 ............. 9/1/05 6.875%
600,000 ............. 9/1/05 6.875%
5,000,000 ............. 6/1/06 7.710%
-----------
$83,000,000
===========
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 January, 1998 the Company paid a non-refundable commitment fee of
$100,000 to the Small Business Administration to reserve $10,000,000 of SBA
Guaranteed Debentures through September 30, 2002. An additional fee of
$200,000 will be deducted pro rata as commitment proceeds are drawn down.
5. SUBORDINATED DEBENTURES:
In October, 1995 in conjunction with its public offering of common stock,
the Company issued 6.5% subordinated debentures due in 2000 with warrants
attached. The debentures are unsecured, have no sinking fund provision and
are not issued under a trust agreement. The debentures are carried, net of
unamortized discount, as follows:
1998 1997
---------- ----------
Face value of debentures ........ $1,089,000 $1.089,000
Less, unamortized discount ...... 105,498 146,335
---------- ----------
$ 983,502 $ 942,665
========== ==========
F-14
<PAGE>
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
The debentures have been discounted to yield an effective interest rate of
8.0%. The warrants issued in connection with the unit offering were valued
at $.25 and according to their terms, expired on October 25, 1997.
6. TRANSACTIONS WITH AFFILIATES:
Mr. Stanley M. Pechman, the Company's former President, and Maple
Investors, Inc., a corporation whose shares are held in trust for members
of Stanley M. Pechman's family, have on occasion participated with the
Company in portfolio investments. At March 31, 1998, 1997 and 1996, Mr.
Pechman and Maple Investors, Inc. were participants in loans of
approximately $88,000, $93,000, and $102,000, respectively. During the year
ended March 31, 1998, certain officers and directors of the Company
acquired participations totaling $435,000 in a loan of $2,000,000 which was
satisfied by year end; they continue to hold a beneficial interest in a
warrant which was issued to the Company in relation to this loan.
7. COMMITMENTS:
The Company has operating leases on real property expiring through November
30, 2002 with aggregate minimum rental commitments as follows:
MARCH 31,
Year ending --------
1999 ....................................... $ 37,314
2000 ....................................... 38,625
2001 ....................................... 39,988
2002 ....................................... 41,406
2003 ....................................... 28,251
--------
$185,584
========
Rent expense was $35,579, $38,274 and $38,521 for the years ended March 31,
1998, 1997 and 1996, respectively.
F-15
<PAGE>
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
8. SHAREHOLDERS' EQUITY:
Common Stock
On May 2, 1995, the Company's Certificate of Incorporation was amended
increasing the authorized number of common shares from 1,000,000 shares to
10,000,000 shares and reducing the par value per share from ten cents to
one cent per share. In connection with the foregoing amendment, the
outstanding shares of the company were subject to a 10 for 1 stock split.
On June 26, 1995, the Company's Board of Directors approved a 5 for 7
reverse stock split. The stock splits resulted in the previously
outstanding 82,825 common shares being converted to 591,608 common shares
which has been retroactively reflected in the financial statements. In
addition, upon the Company's reorganization, the Company charged against
the additional paid-in capital an amount equal to the accumulated deficit.
In the opinion of management, there was no indication of impairment of its
assets at that date which would have required their write-down in
conjunction with the reorganization.
On May 2, 1995 and June 29, 1995, the Company completed the sale of
2,591,753 shares of common stock for $3,011,600 less costs of approximately
$132,918.
In an initial public offering on October 26, 1995, the Company sold
1,840,000 shares of common stock and 816,750 warrants for $9.2 million less
costs of approximately $1.6 million. The warrants entitled the holder to
purchase one share of common stock at $6.00 per share. The warrants expired
on October 25, 1997. No warrants were exercised.
Preferred Stock
The Company is authorized to issue up to 1,000,000 shares of preferred
stock, $.001 par value per share.
Stock Option Plan
In October 1995, the Company adopted the 1995 Stock Option Plan (the
"Plan") by which 800,000 shares of common stock were reserved pursuant to
the Plan, of which 100,000 were available for non-employee directors under
automatic options ("Formula Options") and 700,000 shares were available for
key employees ("Eligible Employees"). In September 1997, the Plan was
amended by shareholders to increase the number of shares of common stock
reserved pursuant to the Plan from 800,000 shares to 1,250,000 shares, of
which 1,150,000 shares are available for key employees, non-employee
directors and eligible consultants. Under the Plan, options intended to
qualify as "Incentive stock options" under Section 422 of the Code
("Qualified
F-16
<PAGE>
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
Options"), options not intended to qualify, stock appreciation rights
("SARs") and shares of Restricted Common Stock may be granted or issued.
On each March 31, each non-employee director who has served as a director
of the Company for twelve consecutive months will automatically receive a
Formula Option to purchase 2,000 shares, at the fair market value of the
Common Stock. (Directors in office on March 31, 1996 received a Formula
Option for 2,000 shares, whether or not they have served twelve consecutive
months.) Each Formula Option will be exercisable immediately and will have
a five year duration, whether or not the optionee terminates his or her
service as a director for any reason other than cause. Non-employee
directors may also be eligible for other options, SARs or restricted
stock under the Plan.
Qualified Options granted to Eligible Employees under the Plan will be
exercisable at a price equal to the fair market value of the shares at the
time the Qualified Option is granted, or, if no such market value is
determinable, at the current net asset value of such shares, except with
respect to options granted to any employee who owns 10% or more of the
outstanding stock of the Company (a "10% stockholder"), 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,
except that such period may not exceed five years in the case of an option
granted to a 10% stockholder.
Options not intended to qualify as "incentive stock options" under the Code
may be granted to Eligible Employees under the Plan and shall have such
exercise prices and such other terms and conditions as the Committee may
determine in its discretion, subject to the requirements of the 1940 Act.
The Plan is administered by the Board of Directors. The Board of Directors
will determine 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
terminate upon termination for cause of the holder's employment or
directorship.
F-17
<PAGE>
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
The Plan also provides that shares of restricted Common Stock may be
granted to eligible employees on such terms and in such amounts as the
Committee determines. Such shares of Stock will be issued under a written
agreement which will contain restrictions on transfers thereof as may be
required by law and as the Committee may determine in its discretion.
The Plan will terminate when there have been granted shares of Common Stock
and options on the total number of shares authorized by the Plan or by
action of the Board of Directors, but in no event later than June 12, 2005.
The authorized number of shares may be increased, and the Plan's date of
termination may be extended, only by shareholder action. Stock option
transactions are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------- --------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------------- ------------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, April 1 ...... 458,572 $ 1.24 438,572 $ 1.23
Granted ............... 791,000 1.11 20,000 1.53 438,572 $ 1.23
--------- ------- -------
Balance, March 31 ..... 1,249,572 1.16 458,572 1.24 438,572 1.23
========= ======= =======
Options
exercisable
at March 31 ......... 980,572 1.13 434,572 1.17 428,572 1.16
========= ======= =======
</TABLE>
The Company applied the intrinsic value based method permitted by FAS 123
in accounting for its stock-based compensation plans and awards.
Accordingly, no compensation expense has been recognized since the
options were granted with exercise prices equal to the market value of
the common stock on the date of grant. As of March 31, 1998, no options
have been exercised or canceled.
Had the Company measured compensation expense under the fair value based
method for the stock options granted in 1998, 1997 and 1996, the
Company's net income and net income per share would have been reduced to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
----------- -------- ---------
<S> <C> <C> <C>
Net income (loss) - as reported ....................... $(1,984,474) $344,552 $(452,093)
Net income (loss) - pro forma ......................... $(2,381,208) $332,435 $(706,999)
Net income (loss) per share - as reported ............. $ (.40) $ .07 $ (.13)
Net income (loss) per share - pro forma ............... $ (.47) $ .06 $ (.20)
</TABLE>
F-18
<PAGE>
WINFIELD CAPITAL CORP.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants - expected volatility of 40%; risk-free
interest rate of approximately 6.1%; and expected lives ranging from 3 to
6 years.
9. CONCENTRATION OF CREDIT RISK:
At March 31, 1998, the Company's cash and marketable securities,
principally certificates of deposit, were all invested with banks which
meet the Federal Deposit Insurance Corporation's definition of
well-capitalized institutions.
10. EARNINGS (LOSS) PER COMMON SHARE:
The reconciliation of basic and diluted per common share computation is as
follows:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Net (loss) earnings in shareholders's equity
resulting from operations .............................. $(1,984,474) $ 344,552 $ (452,093)
=========== ========== ==========
(Loss) earnings per common share
Basic .................................................. $ (0.40) $ 0.07 $ (0.13)
=========== ========== ==========
Diluted (A) ............................................ $ (0.40) $ 0.07 $ (0.13)
=========== ========== ==========
Shares used in computation:
Basic:
Weighted average common shares ........................ 5,023,361 5,023,361 3,484,630
========= ========= =========
Diluted:
Weighted average common shares ........................ 5,023,361 5,023,361 3,484,630
Common stock equivalents (A) 191,932 (A)
--------- --------- ---------
5,023,361 5,215,293 3,484,630
========= ========= =========
</TABLE>
(A) For the years ended March 31, 1998 and 1996 the fully diluted earnings
per share would be anti-dilutive and was not considered.
F-19
<PAGE>
<TABLE>
<CAPTION>
WINFIELD CAPITAL CORP.
PORTFOLIO OF INVESTMENTS
MARCH 31, 1998
LOANS AND NOTES RECEIVABLES
LOAN
MATURITY
DATE INTEREST % OF TOTAL
COMPANY NAME INDUSTRY (ORIGINAL) RATE (%) COST VALUE INVESTMENTS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
LOANS
Bob's Auto Body Shop (a) Auto Repairs 01-Mar-98 15.50 $ 23,126 $ 23,126 0.2%
Buona Pasta, Ltd. Food Service 31-Mar-98 12.00 57,775 57,775 0.4%
Carpenito's Restaurant, Inc. (a) Restaurant 01-Feb-01 12.00 149,382 119,382 0.9%
Cyberian Outpost, Inc. Internet Computer
Retailer 31-Oct-98 12.50 750,000 750,000 5.6%
DIA Annapolitan Senior Living, LLC Assisted Living 28-Oct-98 16.00 600,000 600,000 4.5%
DIA Odenton Senior Living, LLC Assisted Living 10-Aug-98 12.00 330,000 330,000 2.5%
D&S Diner Rte 7 Cobleskill Diner Corp. Restaurant 16-Oct-00 16.25 96,371 96,371 0.7%
Diversified Development, LLC Land Development 20-Jun-01 14.00 600,000 600,000 4.5%
Diversified Development, LLC Land Development 23-Dec-02 16.00 430,000 430,000 3.2%
Fishmarket Inn, Inc. (a) Restaurant 01-May-93 15.75 147,746 32,746 0.2%
Francis A. Lee, Inc. (a) Construction 01-Sept-97 15.00 63,071 63,071 0.5%
Global Network Communications, Inc. (a) Communication 01-Jun-99 13.50 37,847 37,847 0.2%
H. Lockings Corp. (a) Food Service 19-Jul-95 16.25 40,145 40,145 0.3%
HPA Monon Corp. Trailer
Manufacturer 15-May-02 12.00 2,000,000 2,000,000 15.0%
Improved Drinking Water & Pool Co. (a) Swimming Pools 31-Dec-99 12.00 21,555 11,555 0.1%
Jerusalem Refrigeration Corp. Refrigeration 01-May-00 15.50 42,668 42,668 0.3%
NAI Technologies, Inc. Computer Systems 15-Jan-01 12.00 400,000 400,000 3.0%
No-Name Deli/Grocery, Inc. (a) Food Service 28-Jul-93 16.50 138,036 63,036 0.5%
Phone Management Enterprises, Inc.(a) Communication 15-Aug-95 None 67,506 47,506 0.4%
Schiattin Realty Corp. (a) Construction 15-Oct-92 16.00 120,949 20,949 0.2%
NOTES RECEIVABLE
Barrier Motor Fuels, Inc. Gas Retailing 01-Aug-99 15.00 119,304 119,304 0.9%
Courtney Properties Ltd. Real Estate 01-Dec-00 10.00 330,000 330,000 2.5%
Gabriel Lamanna Real Estate 01-Apr-04 11.50 91,086 91,086 0.7%
Gisante Realty Corp. (a) Real Estate 08-Mar-96 11.00 12,962 12,962 0.1%
957 South Elmora, Inc. Real Estate 01-Dec-04 7.50 115,314 115,314 0.8%
Vassar Development Corp. Real Estate 07-Apr-03 10.00 164,032 164,032 1.2%
---------- ---------- -----
Total Loans and Notes Receivable $6,948,875 $6,598,875 49.4%
========== ========== =====
</TABLE>
- ----------
(a) non-income producing or past due as to required principal and/or interest
(b) foreclosed upon during the year
(c) foreclosed upon subsequent to year end
The accompanying notes are an integral part of this schedule.
F-20
<PAGE>
<TABLE>
<CAPTION>
WINFIELD CAPITAL CORP.
PORTFOLIO OF INVESTMENTS
MARCH 31, 1997
LOANS AND NOTES RECEIVABLES
LOAN
MATURITY
DATE INTEREST % OF TOTAL
COMPANY NAME INDUSTRY (ORIGINAL) RATE (%) COST VALUE INVESTMENTS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
LOANS
Bob's Auto Body Shop Auto Repairs 01-Mar-98 15.50 $ 48,452 $ 48,452 1.0%
Buona Pasta, Ltd. Food Service 31-Mar-98 12.00 69,000 69,000 1.4%
Carpenito's Restaurant, Inc. Restaurant 01-Feb-01 12.00 151,800 151,800 3.1%
D&S Diner Rte 7 Cobleskill Diner Corp. Restaurant 16-Oct-00 16.25 92,571 92,571 1.9%
Diversified Development, LLC Land Development On Demand 14.00 500,000 500,00 10.2%
1155 Deli, Inc. Food Service 10-Jul-99 16.68 79,534 79,534 1.6%
Fishmarket Inn, Inc. (a) Restaurant 01-May-93 15.75 140,389 55,389 1.1%
Francis A. Lee, Inc. Construction 01-Sept-97 15.00 68,482 68,482 1.4%
Global Network Communications, Inc. (a) Communication 01-Jun-99 13.50 103,520 68,520 1.4%
H. Lockings Corp. (a) Food Service 19-Jul-95 16.25 48,122 48,122 1.0%
Improved Drinking Water & Pool Co. (a) Swimming Pools 31-Dec-99 12.00 22,806 12,806 0.2%
Jerusalem Refrigeration Corp. Refrigeration 01-May-00 15.50 58,050 58,050 1.2%
Keystone Terminal Operating Corp. (a) Gasoline Dist. 21-Apr-94 16.63 34,924 19,924 0.4%
La Torinese USA, Inc. (c) Specialty Baking 08-Mar-01 14.00 600,000 300,000 6.1%
NAI Technologies, Inc. Computer Systems 15-Jan-01 12.00 400,000 400,000 8.1%
No-Name Deli/Grocery, Inc. (a) Food Service 28-Jul-93 16.50 124,554 74,554 1.5%
Phone Management Enterprises, Inc.(a) Communication 15-Aug-95 None 70,959 50,959 1.0%
Saints & Sinners, Inc.(a) Food Service 17-Oct-91 15.50 22,491 2,491 0.1%
Savo Contracting Corp. (a) Construction 02-May-93 15.75 70,842 5,842 0.1%
Schiattin Realty Corp. (a) Construction 15-Oct-92 16.00 133,699 58,699 1.2%
Suburban Enterprises, Inc. (b) Construction 01-Sept-98 13.50 24,706 7,209 0.1%
Volz Collision Inc. (Mahopac) Auto Repair 01-Apr-00 17.00 115,444 115,444 2.4%
NOTES RECEIVABLE
Barrier Motor Fuels, Inc. Gas Retailing 01-Aug-99 15.00 124,580 124,580 2.5%
Gisante Realty Corp. (a) Real Estate 08-Mar-96 11.00 12,962 12,962 0.3%
957 South Elmora, Inc. Real Estate 01-Dec-04 7.50 126,642 126,640 2.6%
-------------------------------------
Total Loans and Notes Receivable $3,244,529 $2,552,030 51.9%
=====================================
</TABLE>
- ----------
(a) non-income producing or past due as to required principal and/or interest
(b) foreclosed upon during the year
(c) foreclosed upon subsequent to year end
The accompanying notes are an integral part of this schedule.
F-21
<PAGE>
<TABLE>
<CAPTION>
WINFIELD CAPITAL CORP.
PORTFOLIO OF INVESTMENTS
MARCH 31, 1998
EQUITY INTERESTS
COST OR % OF
NUMBERS OF SHARES/ CONTRIBUTED TOTAL
COMPANY NAME INDUSTRY OWNERSHIP PERCENTAGE VALUE VALUE INVESTMENTS
- ------------------------- ------------------- ---------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C>
Alliance National, Inc. Office Rental 65,000 Shares, Unregistered $ $ 58,500 0.4%
Common Stock; 1.46%
Cool Zone, Inc. Cooling Systems 40,000 Shares, Unregistered 200,000 200,000 1.5%
common stock; 3.83%
Creative Foods, Inc. Specialty Baking Warrant to Purchase Common 9,000 0.1%
(formerly Desserts Stock; 3%
& Cafes, Inc.)
Cyberian Outpost, Inc. Internet Computer 155,443.47 Shares, Unregistered 715,040 715,040 5.4%
Retailer Preferred Series B Stock; 6.4%
125,000 Shares, Unregistered 1,000,000 100,0000 7.5%
Preferred Series C Stock; %
included above
Warrant to Purchase 44,687.50
shares of Unregistered Common
Stock
Diversified Development, Land Development Warrant to Purchase Common
LLC. Stock; 49.9%
Dowling, LLC. Dormitory Preferred Return Units, 9.5% or 250,325 250,325 1.9%
Management 5 units @1.9%
HPA Monon Corp. Trailer 625,000 Shares, Unregistered
Manufacturer Convertible Preferred Stock; 6.23%
Improved Drinking Water Swimming Pools 12.75% Preferred Stock, 25,000
& Pool Co. convertible into Common Stock; 20%
Independence Brewing Brewing 949,941 Shares, Restricted 4,755 55,752 0.4%
Company Common Stock, 29.6%; 66.3%
assuming warrant exercise
NAI Technologies, Inc. Computer Convertible Note into 200,000 200,000 1.5%
Systems Shares of Common Stock, Warrant
to Purchase 100,000 Shares of
Common Stock; 1.94%
New York Restaurant Own and Manage 16,920 Shares, Unregistered 163,278 163,278 1.2%
Group, Inc. Restaurants Series A Preferred Stock; .2%
Park N'View, Inc. In-Cab Cable TV 93,750 Shares, Unregistered 750,000 750,000 5.6%
and Phone Service Series C Preferred Stock; 1.3%
Vivid Semiconductor, Semi-Conductor 440,000 Shares, Unregistered 1,650,000 1,650,000 12.3%
Inc. Manufacturer Series E Preferred Stock; 1.7%
World Gate Internet Access 140,846 Shares, Unregistered 1,000,006 1,000,006 7.5%
Communications, Inc. via TV Series B Preferred Stock; .6%
-----------------------------------
Total Equity Interests $5,758,404 $6,051,901 45.3%
===================================
</TABLE>
The accompanying notes are an integral part of this schedule.
F-22
<PAGE>
<TABLE>
<CAPTION>
WINFIELD CAPITAL CORP.
PORTFOLIO OF INVESTMENTS
MARCH 31, 1997
EQUITY INTERESTS
COST OR % OF
NUMBERS OF SHARES/ CONTRIBUTED TOTAL
COMPANY NAME INDUSTRY OWNERSHIP PERCENTAGE VALUE VALUE INVESTMENTS
- -------------------------- ---------------- ----------------------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C>
Academic Industries, Inc. Movie 1,000 Shares, Series A Preferred $ 7,000 $ 1,000 --
Production Stock
Alliance National, Inc. Office Rental 65,000 Shares, Unregistered 58,500 1.2%
Common Stock; 1.46%
Complete Wellness Holistic 33,333 Shares Warrant to Purchase 48,333 1.0%
Centers, Inc. Therapy Common Stock (Restricted); 2.36%
Desserts & Cafes, Inc. Specialty Warrant to Purchase Common 9,000 0.2%
Baking Stock; 11%
Diversified Development, Land Warrant to Purchase Common
LLC. Development Stock; 49.9%
Dowling, LLC. Dormitory Preferred Return Units, 9.5% or 5 250,000 250,000 5.1%
Management units @1.9%
Improved Drinking Water Swimming Pools 12.75% Preferred Stock, 25,000
& Pool Co. convertible into Common Stock; 20%
Independence Brewing Brewing 949,941 Shares, Restricted Common 4,755 509,971 10.4%
Company Stock, 29.6%; 66.3% assuming
warrant exercise
La Torinese USA, Inc. Specialty Warrant to Purchase Common
Baking Stock; 2.64%,
NAI Technologies, Inc. Computer Convertible Note into 200,000 672,500 13.7%
Systems Shares of Common Stock, Warrant
to Purchase 100,000 Shares of
Common Stock; 1.94%
----------------------------------------
Total Equity Interests $ 286,755 $1,549,304 31.6%
========================================
</TABLE>
The accompanying notes are an integral part of this schedule.
F-23
<PAGE>
<TABLE>
<CAPTION>
WINFIELD CAPITAL CORP.
PORTFOLIO OF INVESTMENTS
MARCH 31, 1998 AND 1997
ASSETS ACQUIRED IN LIQUIDATION
MARCH 31, 1998
---------------------------------------------
% OF TOTAL
COMPANY NAME COST VALUE INVESTMENTS
- ------------------------------------------------------------ ----------- ------------ ---------------
<S> <C> <C> <C>
Bashert Enterprises, Inc. ...................................... $ 208,197 $ 158,197 1.1%
Hall Diner ..................................................... 104,907 19,907 0.1%
Keystone Terminal Operating Corp. .............................. 32,317 17,317 0.1%
Maypat Realty Corp. ............................................ 162,063 77,063 0.6%
Panebello USA .................................................. 802,928 302,928 2.3%
The Partition Corp. ............................................ 131,317 131,317 1.0%
Suburban Enterprises, Inc. ..................................... 24,706 7,206 0.1%
----------- ----------- --------------
Total Assets Acquired in Liquidation ...................... $ 1,466,435 $ 713,935 5.3%
=========== =========== ==============
<CAPTION>
MARCH 31, 1997
---------------------------------------------
% OF TOTAL
COMPANY NAME COST VALUE INVESTMENTS
- ------------------------------------------------------------ ----------- ----------- --------------
<S> <C> <C> <C>
A.D.L Contracting Corp. ........................................ $ 98,440 $ 18,440 0.4%
Bashert Enterprises, Inc. ...................................... 208,197 208,197 4.2%
Hall Diner ..................................................... 104,907 44,907 0.9%
The Partition Corp. ............................................ 131,317 131,317 2.7%
Ne James/Malaky #1 ............................................. 160,827 100,827 2.1%
Ne James/Malaky #3 ............................................. 33,843 33,843 0.7%
Maypat Realty Corp. ............................................ 162,063 77,063 1.6%
Paolo Enterprises, Inc. #1 ..................................... 132,977 112,977 2.3%
Paolo Enterprises, Inc. #2 ..................................... 80,000 80,000 1.6%
----------- ----------- -------------
Total Assets Acquired in Liquidation ...................... $ 1,112,571 $ 807,571 16.5%
=========== =========== =============
</TABLE>
The accompanying notes are an integral part of this schedule.
F-24
<TABLE>
<CAPTION>
EXHIBIT 11
WINFIELD CAPITAL CORP.
STATEMENT OF COMPUTATION EARNINGS (LOSS) PER SHARE
YEARS ENDED MARCH 31,
------------------------------------------------------
1998 1997 1996
----------------- ---------------- ----------------
<S> <C> <C> <C>
Basic and diluted (loss) earnings per common share
Net (loss) earnings available for common stock
equivalent shares deemed to have a dilutive effect .......... $ (1,984,474) $ 344,552 $ (452,093)
============ ========== ===========
(Loss) earnings per common share
Basic ....................................................... $ (0.40) $ 0.07 $ (0.13)
============ ========== ===========
Diluted (A) ................................................. $ (0.40) $ 0.07 $ (0.13)
============ ========== ===========
Shares used in computation:
Basic:
Weighted average common shares ............................ 5,023,361 5,023,361 3,484,630
============ ========== ===========
Diluted:
Weighted average common shares ............................ 5,023,361 5,023,361 3,484,630
Common stock equivalents (A) 191,932 (A)
------------ ---------- -----------
5,023,361 5,215,293 3,484,630
============ ========== ===========
</TABLE>
(A) For the years ended March 31, 1998 and 1996 the fully diluted earnings per
share would be anti-dilutive and was not considered.
RISKS
Pursuant to Section 64(b)(1) of the Investment Company Act of 1940, we are
required to advise you annually that Winfield Capital Corp. (the "Company") is
engaged in a high risk business. Loans and other investments to small business
concerns are extremely speculative. Most of such concerns are privately held.
Even if a public market for the securities of such concerns exists, the loans
and other securities purchased by the Company are often restricted against sale
or other transfer for specified periods of time. Thus, such loans and other
investments have little, if any, liquidity, and the Company and you, as its
shareholders, must bear significantly larger risks, including possible losses on
such investments, than would be the case with traditional investment companies.
In addition, the Company's capital structure includes a large amount of
debt securities, mostly debentures issued to the Small Business Administration
at fixed interest rates. Therefore, unless and until the Company is able to
invest all or substantially all of the proceeds from such debt securities at
interest and/or other returns that substantially exceed the carrying costs of
such debt securities, its operating results will be adversely affected, and that
can be expected to have a depressant effect on the market value of the Company's
shares of common stock.
<TABLE> <S> <C>
<ARTICLE> 6
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 18,485,078
<INVESTMENTS-AT-VALUE> 17,676,075
<RECEIVABLES> 0
<ASSETS-OTHER> 557,040
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 18,233,115
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 9,283,502
<OTHER-ITEMS-LIABILITIES> 324,065
<TOTAL-LIABILITIES> 9,607,567
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9,492,599
<SHARES-COMMON-STOCK> 5,023,361
<SHARES-COMMON-PRIOR> 5,023,361
<ACCUMULATED-NII-CURRENT> (58,048)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (809,003)
<NET-ASSETS> 8,625,548
<DIVIDEND-INCOME> 499
<INTEREST-INCOME> 1,077,098
<OTHER-INCOME> 40,530
<EXPENSES-NET> 1,844,342
<NET-INVESTMENT-INCOME> (726,215)
<REALIZED-GAINS-CURRENT> (184,206)
<APPREC-INCREASE-CURRENT> (1,074,053)
<NET-CHANGE-FROM-OPS> (1,258,259)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (1,984,474)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 814,309
<GROSS-EXPENSE> 1,844,342
<AVERAGE-NET-ASSETS> 9,457,024
<PER-SHARE-NAV-BEGIN> 2.11
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.71
<EXPENSE-RATIO> 19.50
<AVG-DEBT-OUTSTANDING> 9,418,188
<AVG-DEBT-PER-SHARE> 1.87
</TABLE>
