10-Q 1 d57407_10q.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to ____________________ Commission File Number 33-94322 WINFIELD CAPITAL CORP. Incorporated in the IRS Employer Identification State of New York Number 13-2704241 237 Mamaroneck Avenue White Plains, New York 10605 (914) 949-2600 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 whether the registrant is an accelerated filer (as defined in Rule 12-b-2 of the Exchange Act). Yes |_| No |X| Registrant had 5,346,084 shares of common stock outstanding as of September 30, 2003. -------------------------------------------------------------------------------- This report consists of 26 pages Form 10-Q Quarterly Report INDEX Page No. -------- PART I - FINANCIAL INFORMATION Item 1. Condensed Statements of Operations - Six and Three Months ended September 30, 2003 and 2002 3 - 4 Condensed Balance Sheets - as of September 30, 2003 and March 31, 2003 5 - 6 Condensed Statements of Cash Flows - Six Months Ended September 30, 2003 and 2002 7 Notes to Condensed Financial Statements 8 - 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 - 16 Item 3. Quantitative and Qualitative Disclosures About Market Risk 16 - 17 Item 4. Controls and Procedures 17 - 18 PART II - OTHER INFORMATION Item 1. Legal Proceedings 18 Item 2. Changes in Securities and Use of Proceeds 18 Item 3. Defaults Upon Senior Securities 18 Item 4. Submission of Matters to a Vote of Security Holders 18 - 19 Item 5. Other Information 19 Item 6. Exhibits and Reports on Form 8-K 20 SIGNATURES 20 Exhibit 31.1 - Section 302 Officer Certification 21 - 22 Exhibit 31.2 - Section 302 Officer Certification 23 - 24 Exhibit 32.1 - Section 906 Officer Certification 25 Exhibit 32.2 - Section 906 Officer Certification 26 Item 1. WINFIELD CAPITAL CORP. CONDENSED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these condensed financial statements. -3- WINFIELD CAPITAL CORP. CONDENSED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these condensed financial statements. -4- WINFIELD CAPITAL CORP. CONDENSED BALANCE SHEETS ASSETS Sept. 30, March 31, 2003 2003 ----------- ----------- Investments at value: Loans and notes receivable $ 8,220,703 $ 8,371,521 Equity interests in small business concerns 10,972,297 10,220,109 ----------- ----------- Total investments 19,193,000 18,591,630 Cash and cash equivalents 3,360,422 4,396,206 Short-term marketable securities 1,788,602 3,454,226 Accrued interest receivable 72,573 85,276 Due from broker 122,878 -- Furniture and equipment (net of accumulated depreciation of $44,434 at September 30, 2003 and $41,880 at March 31, 2003) 10,692 13,246 Other assets 32,279 115,670 ----------- ----------- Total assets $24,580,446 $26,656,254 =========== =========== -5- WINFIELD CAPITAL CORP. CONDENSED BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' EQUITY Sept. 30, March 31, 2003 2003 ------------ ------------ Liabilities Debentures payable to the U.S. Small Business Administration $ 21,350,000 $ 24,650,000 Deferred income 115,512 129,102 Accrued expenses 1,170,894 386,057 ------------ ------------ Total liabilities 22,636,406 25,165,159 ------------ ------------ Commitments and contingencies Shareholders' equity Preferred stock - $.001 par value; Authorized 1,000,000 shares Issued and outstanding - none Common stock - $.01 par value; Authorized - 30,000,000 shares; Issued and outstanding - 5,346,084 shares at September 30, 2003 and at March 31, 2003 53,461 53,461 Additional paid-in capital 19,709,170 19,709,170 Accumulated deficit (4,950,829) (4,093,738) Unrealized depreciation on investments - net (12,867,762) (14,177,798) ------------ ------------ Total shareholders' equity 1,944,040 1,491,095 ------------ ------------ Total liabilities and shareholders' equity $ 24,580,446 $ 26,656,254 ============ ============ The accompanying notes are an integral part of these condensed financial statements. -6- WINFIELD CAPITAL CORP. CONDENSED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these condensed financial statements. -7- WINFIELD CAPITAL CORP. NOTES TO CONDENSED FINANCIAL STATEMENTS Note 1 - Interim Financial Statements The interim financial statements of Winfield Capital Corp. (the "Company") have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and disclosures necessary for a presentation of the Company's financial position, results of operations and cash flows in conformity with generally accepted accounting principles in the United States of America. In the opinion of management, these financial statements reflect all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the Company's financial position, results of operations and cash flows for such periods. The results of operations for any interim period are not necessarily indicative of the results for the full year. These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2003. Note 2 - Earnings (Loss) per Common Share: The computation of basic and diluted income (loss) per common share is as follows: Six Months Ended September 30, -------------------------- 2003 2002 ----------- ----------- Net income (loss) available for common stock equivalent shares deemed to have a dilutive effect $ 452,945 ($3,369,960) =========== =========== Income (loss) per common share Basic $ 0.08 ($ 0.63) =========== =========== Diluted $ 0.08 ($ 0.63) =========== =========== Shares used in computation: Basic: Weighted average common shares 5,346,084 5,346,084 =========== =========== Diluted: Weighted average common shares 5,346,084 5,346,084 Common stock equivalents A A ----------- ----------- 5,346,084 5,346,084 =========== =========== (A) For the six months ended September 30, 2003 and September 30, 2002 the effect of exercising the outstanding stock options would have been anti-dilutive and therefore, the use of common stock equivalent shares was not considered. -8- WINFIELD CAPITAL CORP. NOTES TO CONDENSED FINANCIAL STATEMENTS Note 2 - Earnings (Loss) per Common Share: (Cont'd) The computation of basic and diluted income (loss) per common share is as follows: Three Months Ended September 30, -------------------------- 2003 2002 ----------- ----------- Net income (loss) available for common stock equivalent shares deemed to have a dilutive effect $ 276,187 ($1,461,831) =========== =========== Income (loss) per common share Basic $ 0.05 ($ 0.27) =========== =========== Diluted $ 0.05 ($ 0.27) =========== =========== Shares used in computation: Basic: Weighted average common shares 5,346,084 5,346,084 =========== =========== Diluted: Weighted average common shares 5,346,084 5,346,084 Common stock equivalents B B ----------- ----------- 5,346,084 5,346,084 =========== =========== (B) For the three months ended September 30, 2003 and September 30, 2002 the effect of exercising the outstanding stock options would have been anti-dilutive and therefore, the use of common stock equivalent shares was not considered. Note 3 - Income Taxes In accordance with Subchapter M of the Internal Revenue Code, no provision for income taxes is necessary with respect to net investment income and/or net realized short- term capital gains since the Company has elected to distribute not less than 90% of such income and/or gains to shareholders. However, to the extent the Company elects to either retain net realized long-term capital gains or net realized short-term capital gains, the Company will pay all applicable Federal income taxes on behalf of its shareholders. -9- WINFIELD CAPITAL CORP. NOTES TO CONDENSED FINANCIAL STATEMENTS Note - 4 Commitments and Contingencies On April 30, 2003, the SBA notified the Company that it is no longer in compliance with the SBA's capital impairment rules, as defined by regulation 107.1830 of the SBA Regulations. Based on this non-compliance, the SBA has accelerated the maturity date of the Company's debentures to a single demand note including accrued interest. Interest payments are no longer due on a semiannual basis, but interest continues to accrue. In addition, the SBA has transferred the Company to the SBA's Office of Liquidation where any new investments and material expenses are subject to prior SBA approval. The SBA has the right to institute proceedings for the appointment of the SBA or its designee as receiver. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management has submitted a plan to the SBA providing for the liquidation of the Company over a three-year period; however, to date, the SBA has not indicated whether it will approve of the proposed plan. In addition, the Company continues to pursue alternatives to cure its impairment under the SBA regulations such as raising additional financing. The financial statements do not include any adjustments relating to the recoverability of the carrying amount of the recorded assets or the amount of liabilities that might result from the outcome of these uncertainties. The Company cannot be certain that additional equity financing will be available when required or, if available, that it can secure it on terms satisfactory to the Company. As such, no assurance can be made that the Company will be successful in its ability to consummate or implement these or any other strategic alternatives. Note - 5 The Nasdaq Stock Market, Inc. On April 11, 2003, the Company received notice from the Nasdaq Stock Market, Inc. that effective April 15, 2003 the Company's securities were delisted from the Nasdaq Smallcap Market. The Company's securities are quoted on the OTC Bulletin Board effective April 15, 2003 with the assigned symbol "WCAP". -10- WINFIELD CAPITAL CORP. NOTES TO CONDENSED FINANCIAL STATEMENTS Note - 6 Stock-Based Employee Compensation Plan At September 30, 2003, the Company had one stock-based employee compensation plan. The Company accounts for the plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of the grant. For the six months and three months ended September 30, 2003 and 2002, there would be no effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation, as no options were granted nor vested during those periods. On April 22, 2003, the FASB determined that stock-based compensation should be recognized as a cost in the financial statements and that such cost be measured according to the fair value of the stock options. The FASB has not as yet determined the methodology for calculating fair value and plans to issue an exposure draft letter this year that could become effective in 2004. The Company will continue to monitor communications on this subject from the FASB in order to determine the impact on the Company's financial statements. -11- Item 2. WINFIELD CAPITAL CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Six Months Ended September 30, 2003 and September 30, 2002 Investment Income Investment income increased by $459,873 to $751,751 for the six month period ended September 30, 2003 from $291,878 for the same period ended September 30, 2002. This primarily reflected an increase in interest from small business concerns of $669,011 as a result of the Company's increased investments in loans. Interest from idle funds decreased $208,936 during this period as a result of a decrease in interest rates and a decrease in idle funds that were invested and other income decreased $202. Interest Expense Interest expense decreased by $23,760 to $921,089 for the six months ended September 30, 2003 from $944,849 for the same period ended September 30, 2002. This decrease resulted from a repayment of a debenture to the U.S. Small Business Administration. Operating Expenses The Company's operating expenses decreased from $804,421 for the six months ended September 30, 2002 to $651,876 for the six months ended September 30, 2003. Payroll and payroll-related expenses decreased by $135,447 due to the resignation of an executive officer effective December 31, 2002, professional fees increased by $33,818 and amortization of debenture costs decreased by $39,107. There were miscellaneous net decreases of $11,809. Realized Loss on Disposition of Investments The Company realized a $35,877 loss on the sales of its entire positions in four portfolio companies and a portion of its position in another portfolio company through the second quarter of fiscal 2004. Through the second quarter of fiscal 2003, the Company realized a $45,512 loss on the sale of its entire equity position in one portfolio company. -12- WINFIELD CAPITAL CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Changes in Unrealized Depreciation of Investments There was a decrease in unrealized depreciation of investments of $1,310,036 (or $1,317,415 excluding short-term marketable securities) for the six months ended September 30, 2003, compared to an increase in unrealized depreciation of $1,867,056 (or $1,801,194 excluding short-term marketable securities) for the six months ended September 30, 2002, principally related to the increase in fair value of two portfolio securities in the first quarter of fiscal 2004 and the decline in market price of publicly traded portfolio securities in the second quarter of fiscal 2003. Results of Operations Three Months Ended September 30, 2003 and September 30, 2002 Investment Income Investment income increased by $230,457 to $382,624 for the three month period ended September 30, 2003 from $152,167 for the same period ended September 30, 2002. This primarily reflected an increase in interest from small business concerns of $342,777 as a result of the Company's increased investments in loans. Interest from idle funds decreased $111,718 during this period as a result of a decrease in interest rates and a decrease in idle funds that were invested and other income decreased $602. Interest Expense Interest expense decreased by $23,760 to $482,134 for the three months ended September 30, 2003 from $505,894 for the same period ended September 30, 2002. This decrease resulted from a repayment of a debenture to the U.S. Small Business Administration. Operating Expenses The Company's operating expenses decreased from $431,934 for the three months ended September 30, 2002 to $321,578 for the three months ended September 30, 2003. Payroll and payroll-related expenses decreased by $72,316 due to the resignation of an executive officer effective December 31, 2002, professional fees increased by $16,753, insurance expense decreased by $12,029 and stockholder relations costs decreased by $15,268. There were miscellaneous net decreases of $27,496. -13- WINFIELD CAPITAL CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Realized Loss on Disposition of Investments The Company realized a $126,914 loss on the sales of its entire positions in three portfolio companies and a portion of its position in another portfolio company in the second quarter of fiscal 2004. In the second quarter of fiscal 2003, the Company realized an additional $89 loss on the sale of its entire equity position in one portfolio company. Changes in Unrealized Depreciation of Investments There was a decrease in unrealized depreciation of investments of $824,189 (or $832,352 excluding short-term marketable securities) for the three months ended September 30, 2003, compared to an increase in unrealized depreciation of $676,081 for the three months ended September 30, 2002, principally related to the increase in fair value of two portfolio securities in the second quarter of fiscal 2004 and the decline in market price and fair value of portfolio securities in the second quarter of fiscal 2003. Liquidity and Capital Resources At September 30, 2003, the Company held cash and short-term marketable securities totaling $5,149,024. -14- WINFIELD CAPITAL CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS According to the SBA Regulations, the Company is required to be in compliance with the capital impairment rules, as defined by regulation 107.1830 of the SBA Regulations. The Company has been notified by the SBA that the Company is no longer in compliance with the SBA's capital impairment requirements and that the SBA has accelerated the maturity date of Winfield Capital's debentures. The aggregate principal, interest and fees due under the debentures totaled approximately $22.3 million as of September 30, 2003, including interest and fees due through the next semi-annual payment date. The Company repaid $3,300,000 of the amounts due under the debentures in August 2003. The SBA has transferred Winfield Capital's account to liquidation status where any new investments and material expenses are subject to prior SBA approval. Although it has not done so as of the date of this filing, and may not do so, the SBA has the right to institute proceedings for the appointment of the SBA or its designee as receiver. If the SBA were to require the Company to immediately pay back the entire indebtedness including accrued interest, certain private security investments may need to be disposed of in a forced sale which may result in proceeds less than their carrying value at September 30, 2003. As such, this impairment could have a material adverse effect on the Company's financial position, results of operations and cash flows which raises substantial doubt about the Company's ability to continue as a going concern. Management has submitted a plan to the SBA providing for the liquidation of the Company over a three-year period; however, to date, the SBA has not indicated whether it will approve of the proposed plan. The Company continues to explore various strategic alternatives, including a third party equity infusion, although there can be no assurance that it will be successful in its ability to consummate or implement these or any other strategic alternatives. Forward-Looking Statements This report and accompanying notes to the financial statements may contain forward-looking statements. For this purpose, any statements contained in this report and accompanying notes to the financial statements that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such as "may," "will," "could," "would," "should", "expect," "believe," "anticipate," "estimate," "continue," "provided," or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, and actual results may differ materially depending on a variety of factors. -15- WINFIELD CAPITAL CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reporting on Disposition of Investments From time to time, in the ordinary course of business, the Company may liquidate all or a portion of its portfolio investments. In this regard, the Company may sell a portion of a single investment or sell portions of various investments it has made. The Company's policy is to publicly report the results of such transactions in its Form 10-K and Form 10-Q Reports filed with the Securities and Exchange Commission under the Securities Exchange Act and as otherwise required by applicable regulations and laws. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company's earnings and cash flows are subject to fluctuations due to changes in interest rates primarily from its investment of available cash balances in bank money market funds with portfolios of investment grade corporate and U.S. government securities, in individual bank certificates of deposit and U.S. treasuries. Under its current policies, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes. A portion of the Company's investment portfolio consists of fixed-rate debt securities. Since these debt securities usually have relatively high fixed rates of interest, minor changes in market yields of publicly-traded debt securities have little or no effect on the values of debt securities in the Company's portfolio and no effect on interest income. On the other hand, significant changes in the market yields of publicly-traded debt securities may have a material effect on the values of debt securities in the Company's portfolio. The Company's investments in debt securities are generally held to maturity and their fair values are determined on the basis of the terms of the debt security and the financial condition of the issuer. As of September 30, 2003, the Company had no publicly-traded debt securities in its portfolio. -16- WINFIELD CAPITAL CORP. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK CONTINUED & CONTROLS AND PROCEDURES A portion of the Company's investment portfolio consists of debt and equity securities of private companies. The Company anticipates little or no effect on the value of these investments from modest changes in public market equity valuations. Should significant changes in market valuations of comparable publicly-owned companies occur, there may be a corresponding effect on valuations of private companies, which would affect the value and the amount and timing of proceeds eventually realized from these investments. A portion of the Company's investment portfolio also consists of restricted common stocks and warrants to purchase common stocks of publicly-owned companies. The fair values of these restricted securities are influenced by the nature of applicable resale restrictions, the underlying earnings and financial condition of the issuer, and the market valuations of comparable publicly-owned companies. A portion of the Company's investment portfolio also consists of unrestricted, freely marketable common stocks of publicly-owned companies. These freely traded marketable investments are directly exposed to equity price fluctuations, in that a change in an issuer's public market equity price would result in an identical change in the fair value of the Company's investment in such security. The Company may utilize put and call option contracts to attempt to minimize the market risk of its investments in publicly-owned companies. As of September 30, 2003, the Company had no option contracts outstanding as part of its portfolio. Item 4. Controls and Procedures a. Evaluation of Disclosure Controls and Procedures Based on their evaluation of the Company's disclosure controls and procedures conducted within 90 days of the date of filing this report on Form 10-Q, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-15(e)and 15d-15(e) promulgated under the Securities Exchange Act of 1934) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities Exchange Commission rules and forms. -17- WINFIELD CAPITAL CORP. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK CONTINUED & CONTROLS AND PROCEDURES b. Changes in Internal Controls There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. There were no deficiencies or material weaknesses, and therefore, there were no corrective actions taken. PART II - OTHER INFORMATION Item 1. Legal Proceedings None. Item 2. Changes in Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders On September 9, 2003, the Company held its annual meeting of shareholders in New York, New York. The holders of 5,055,426 shares of Common Stock were present or represented by proxy and, accordingly, a quorum was present. The following matters were voted upon and received the votes set forth. 1. All of the following persons nominated were elected as directors and received the number of votes set opposite their respective names. VOTES FOR VOTES WITHHELD Joel I. Barad 4,917,408 138,018 Barry J. Gordon 4,917.408 138,018 David Greenberg 4,913,108 142,316 Bruce A. Kaufman 4,913,708 141,718 Paul A. Perlin 4,913,193 142,233 R. Scot Perlin 4,912,693 142,733 Allen L. Weingarten 4,915,696 139,730 -18- WINFIELD CAPITAL CORP. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK CONTINUED & CONTROLS AND PROCEDURES Item 4. Submission of Matters to a Vote of Security Holders (Cont'd) 2. The Company's proposal to ratify the appointment of PricewaterhouseCoopers LLP as the Company's independent accounts for the fiscal year ending March 31, 2004 received 5,020,711 votes FOR and 34,715 votes AGAINST, with 0 ABSTENTIONS. Item 5. Other Information None. -19- WINFIELD CAPITAL CORP. PART II - OTHER INFORMATION Item 6. - Exhibits and Reports on Form 8-K a. Exhibit Index The following Exhibits are filed as part of this Quarterly Report on Form 10-Q. Exhibit No. Description ----------- ----------- 31.1 and 31.2 Section 302 Certifica- tions 32.1 and 32.2 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. b. Reports on Form 8-K On October 18, 2003 a Form 8-K was filed by the Company in connection with a change in the Company's certifying accountant. PricewaterhouseCoopers LLP resigned as the independent public accountants of the Company on October 8, 2003. On October 14, 2003 with the approval of the Company's Board of Directors, the Company engaged the accounting firm of Lazar Levine & Felix LLP as its independent public accountants beginning with the fiscal year ending March 31, 2004 and to review the Company's interim financial statements beginning with the fiscal quarter ended September 30, 2003. Pursuant to the requirements 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. (Registrant) By:/s/ R. Scot Perlin ---------------------------- R. Scot Perlin Chief Financial Officer Dated: November 13, 2003 -20-

WINFIELD CAPITAL CORP 10-Q