According to the U.S. S Administration (the "SBA") Regulations, the Company is required to be in compliance with the capital impairment rules, as defined by regulation 107.1830 of the SBA Regulations. The Company was notified by the SBA on April 30, 2003 that the Company was no longer in compliance with the SBA's capital impairment requirements and that the SBA had accelerated the maturity date of the Company's debentures. The aggregate principal, interest and fees due under the debentures totaled approximately $25.6 million as of April 30, 2003, including interest and fees due through the next semi-annual payment date. As a result of subsequent repayments by the Company, the aggregate principal, interest and fees due under the debentures totaled approximately $5.0 million as of March 31, 2005. The SBA has transferred Winfield Capital's account to liquidation status where any new investments and material expenses are subject to prior SBA approval. Based on discussions and meetings that the Company has had with the SBA to date, the SBA will not afford the Company the flexibility of a self-managed liquidation to repay its indebtedness. As a result, the Company anticipates that it will be required to repay all or substantially all of the principal and interest owing to the SBA on a schedule acceptable to the SBA.
On April 6, 2005, subsequent to the balance sheet date, the Company entered into a Forbearance Agreement with the SBA whereby the maturity date of the Company's remaining principal indebtedness to the SBA was extended until June 30, 2005, subject to a cure period of fifteen days. In connection with the Forbearance Agreement, the Company entered into a Stipulated Settlement and a Consent and Judgment whereby the SBA may pursue any remedies it deems appropriate under the law or the instruments evidencing the Company's indebtedness, including, without limitation, initiating proceedings for the appointment of the SBA or its designee as receiver to the extent that the Company defaults under its obligations pursuant to the Forbearance Agreement. If the SBA were to require the Company to immediately pay back the entire indebtedness including accrued interest, certain private security investments may need to be disposed of in a forced sale that may result in proceeds less than their carrying value at March 31, 2005. As such, this impairment could have a material adverse effect on the Company's financial position, results of operations and cash flows that raises substantial doubt about the Company's ability to continue as a going concern. The Company continues to explore various strategic alternatives, including a third party equity infusion, although there can be no assurance that it will be successful in its ability to consummate or implement these or any other strategic alternatives.
In addition, inasmuch as the Company's capital structure includes a large amount of debt securities, all of which are debentures issued to the SBA at fixed interest rates, unless and until the Company is able to invest all or substantially all of the proceeds from such debt securities at annualized interest or at other rates of return that substantially exceed annualized rates of interest the Company is required to pay the SBA under these debentures, the Company's operating results will be adversely affected which, in turn, may depress the market value of the Company's shares of common stock.
PART I
Item 1. Business
Winfield Capital Corp. (the "Registrant" or the "Company") was incorporated as a New York corporation in 1972. It is a s investment company ("SBIC") that was licensed by the U.S. S Administration (the "SBA") in 1972 under the S Investment Act of 1958, as amended (the "Small Business Investment Act"). The Company is a non-diversified investment company that has elected to be regulated as a Business Development Company ("BDC"), a type of closed-end investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"). The Company has elected to be taxed as a regulated investment company ("RIC") as defined under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Company's offices are located at 237 Mamaroneck Avenue, White Plains, New York 10605 and its telephone number is (914) 949-2600. The Company can also be reached via its Web site at http://www.winfieldcapital.com.
As a SBIC, the Company uses funds borrowed from the SBA, together with its own capital, to provide loans to, and to make equity investments in, unaffiliated business concerns that (i) do not have a net worth in excess of $18 million and do not have average net income after Federal income taxes for the two years preceding any date of determination of more than $6 million, or (ii) meet size standards set by the SBA that are measured by either annual receipts or number of employees, depending on the industry in which such concerns are primarily engaged ("Eligible Concerns"). The types and dollar amounts of the loans and other investments the Company may make are limited by the 1940 Act, the S 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 S Investment Act and the SBA Regulations. As a BDC, the Company is required to make available significant managerial assistance to its portfolio companies.
The Company has no independent investment adviser. The Company's loan and other investment decisions are made by its officers, in accordance with the Company's established investment policies and objectives, subject to oversight by its Board of Directors. Historically, the Company has relied on its officers to identify new financing opportunities. Following its initial public offering ("IPO") late in 1995, the Company expanded its marketing efforts and sought transaction referrals from venture capitalists, investment bankers, attorneys, accountants and commercial bankers. The Company has sought to enter into either straight loan or equity transactions with portfolio companies or debt transactions having equity components ("debt securities"). In connection with the latter, the Company has sought and will continue to seek security interests in and liens on the assets of the borrower. To the extent it deems necessary, the Company also seeks to obtain personal guaranties from the principals of its borrowers and security interests in certain of the assets of such principals.
Selected Recent Developments ----------------------------
According to the SBA Regulations, the Company is required to be in compliance with the capital impairment rules, as defined by regulation 107.1830 of the SBA Regulations. The Company was notified by the SBA on April 30, 2003 that the Company was no longer in compliance with the SBA's capital impairment requirements and that the SBA had accelerated the maturity date of the Company's debentures. The aggregate principal, interest and fees due under the debentures totaled approximately $25.6 million as of April 30, 2003, including interest and fees due through the next semi-annual payment date. As a result of subsequent repayments by the Company, the aggregate principal, interest and fees due under the debentures totaled approximately $5.0 million as of March 31, 2005. The SBA has transferred Winfield Capital's account to liquidation status where any new investments and material expenses are subject to prior SBA approval. Based on discussions and meetings that the Company has had with the SBA to date, the SBA will not afford the Company the flexibility of a self-managed liquidation to repay its indebtedness. As a result, the Company anticipates that it will be required to repay all or substantially all of the principal and interest owing to the SBA on a schedule acceptable to the SBA.
On April 6, 2005, subsequent to the balance sheet date, the Company entered into a Forbearance Agreement with the SBA whereby the maturity date of the Company's remaining principal indebtedness to the SBA was extended until June 30, 2005, subject to a cure period of fifteen days. In connection with the Forbearance Agreement, the Company entered into a Stipulated Settlement and a Consent and Judgment whereby the SBA may pursue any remedies it deems appropriate under the law or the instruments evidencing the Company's indebtedness, including, without limitation, initiating proceedings for the appointment of the SBA or its designee as receiver to the extent that the Company defaults under its obligations pursuant to the Forbearance Agreement. If the SBA were to require the Company to immediately pay back the entire indebtedness including accrued interest, certain private
security investments may need to be disposed of in a forced sale that may result in proceeds less than their carrying value at March 31, 2005. As such, this impairment could have a material adverse effect on the Company's financial position, results of operations and cash flows that raises substantial doubt about the Company's ability to continue as a going concern. The Company continues to explore various strategic alternatives, including a third party equity infusion, although there can be no assurance that it will be successful in its ability to consummate or implement these or any other strategic alternatives.
Characteristics of the Company's Investments --------------------------------------------
The Company invests in all kinds and classes of securities issued by portfolio companies, including, but not limited to, notes and bonds; straight, senior, subordinated, convertible and interest-paying debentures; preferred stock; common stock; and options and warrants to purchase the foregoing. The Company does not have a policy that limits the amount that it may invest in any kind or class of security, except that it intends to primarily invest its assets in straight loans or debt securities.
When the Company's investments are structured as loans, they typically are evidenced by promissory notes or equivalent instruments with a specified maturity or due upon demand, and often are accompanied by warrants to acquire equity interests in the borrower for nominal consideration. The loans are usually collateralized by assets of the borrower, which security interests frequently are senior to any other secured debt financing the borrower may have in place. When appropriate, a personal guaranty of a borrower's major stockholder or stockholders is sought, which may also be collateralized by such stockholders' personal assets. The Company's loans typically have a fixed rate of interest subject to the maximum rate allowed by the SBA (see "SBA Regulation" below), although lower rates may be negotiated depending on the creditworthiness of the borrowers and other relevant factors. Typically (although there may be exceptions), such loans require periodic payments of principal and interest that fully amortize the loan at maturity, and mature in five years or less. In addition, the Company intends to pursue "bridge loan" opportunities (e.g., typically with maturity dates not more than one year) as and to the extent permitted by the SBA Regulations. Management believes that, although there can be no assurance, the performance of its investment portfolio could be enhanced by increasing the Company's equity investments, relative to its loan portfolio. Accordingly, the Company's management intends to continue seeking more financing opportunities with equity participation and more investments with equity components than previously were sought by the Company. There can be no assurance that the Company will find such opportunities on terms favorable to the Company, if at all.
Investments that the Company holds in its portfolio companies may be "restricted securities," as that term is defined under Rule 144 of the Securities Act of 1933, as amended (the "1933 Act"). These securities may not be sold freely in the absence of registration under the 1933 Act. As a result, its ability to sell or otherwise transfer the securities it holds in its portfolio will be limited. The capital stock it receives from portfolio companies is expected to be acquired primarily in private transactions negotiated directly with the portfolio company or an affiliate. The Company's management will continue to be principally responsible for conducting negotiations with respect to its investments in portfolio companies. The Company may acquire securities of public companies in connection with mergers of its portfolio companies with such public companies. The Company may invest a portion of its other assets in the publicly traded securities of public companies. Such investments, and other investments that are not "qualifying assets," may not exceed 30% of the value of the Company's total assets at the time of any such investment.
Investment Objectives and Strategies ------------------------------------
The Company seeks both current income and long-term growth in the value of its assets. The Company's investments are made, and are intended to continue to be made, with the intention of having any loan repaid within five years and any equity investment liquidated within 5 to 10 years. Situations may arise, however, where the Company may hold an equity interest for a longer or shorter period of time.
Prior to May 2, 1995, when there was a change in management of the Company, the Company's investments were made primarily in very small local retail and service businesses. Today, the Company focuses on investments in privately held "Eligible Concerns" in industries that management considers growing industries, including, but not limited to technology and other "new economy" businesses, computer hardware/software, and consumer products manufacturers and distributors. There can be no assurance that the Company will continue to be able to locate investments in such businesses on favorable terms. If the Company is unable to identify such investments, it would seek to reevaluate its overall investment strategies. Although the Company is headquartered and incorporated in the Northeast, it considers investments throughout the country provided they are otherwise consistent with the Company's loan and other investment selection criteria. Generally, the Company's existing
portfolio companies are expansion stage businesses, although some are start-up and development stage companies, including some with negative net worth and net operating losses. Under applicable SBA Regulations, the Company may not invest more than 20% of its "Private Capital" in any single company without prior SBA approval. Under the S Investment Act and the SBA Regulations, "Private Capital" is defined as the total of paid-in capital, other than capital obtained from Federal sources (such as the SBA), and paid-in surplus. In most instances, the Company participates in loans and other investments with other investors. Accordingly, the Company has been able to become involved in transactions larger than would otherwise be possible under the investment limit of 20% of its own Private Capital.
Selection of Loan and Other Investment Opportunities ----------------------------------------------------
Given the Company's objective to emphasize equity investments, the Company uses the following criteria in selecting investment opportunities:
Potentially Profitable Operations. The Company attempts to identify companies that are profitable or that it believes will become profitable in the future.
Development Stage Companies. The Company attempts to identify and invest in development stage companies, (i.e., companies with a product or service that is beyond the testing stage). The Company generally seeks to avoid so-called "seed capital" and start-up companies.
Experienced Management Team. The Company seeks to invest in portfolio companies that have experienced management with a substantial ownership interest and a demonstrated ability, or the potential, to accomplish the objectives set forth in such companies' business plan.
Liquidation Value of Assets. Although the Company is not an "asset-based" lender, the value of assets securing its loans is an important consideration in its loan decisions. Emphasis is placed on balance sheet assets such as inventory, plant, property and equipment.
Growth. The Company requires that prospective borrowers have sufficient cash flow to service their debt along with having in management's determination a good chance of achieving substantial annual growth.
Exit Strategy. Another investment consideration is whether there is an opportunity to liquidate the investment in a potential portfolio company in the future. Such opportunity generally would allow the Company to realize a gain on its equity interests that have appreciated in value, if at all, through public offerings, sales of the portfolio company, mergers with other companies or repurchases by the portfolio company of the Company's equity interests. In this connection, the Company often seeks to obtain registration rights ("demand" and "piggyback") as a condition to its equity investments.
The foregoing criteria are general guidelines rather than fixed requirements and the Company may consider such other criteria as investment opportunities arise.
Certain Non-Compliance by Portfolio Companies ---------------------------------------------
Although the Company's agreements with its portfolio companies require them to furnish the Company with periodic and/or annual financial statements and to include financial and other covenants by its borrowers in its loan agreements, certain of its portfolio companies may fail to supply the financial statements or to otherwise comply with the covenants required of them. The Company deals with these failures on a case-by-case basis, and the exercise by the Company of appropriate remedies are often influenced by the payment records of such companies.
The aggregate face amount of the Company's outstanding loans and the value of other portfolio investments was $14,991,167 as of March 31, 2005 with loans and notes receivable comprising approximately 27.1% (50.2% of which were performing in accordance with their terms and 49.8% were non-performing) and equity interests approximately 72.9%.
There was unrealized appreciation on loans and investments of $4,215,326 for the year ended March 31, 2005 (principally related to the sale of shares in five publicly held portfolio companies and three loan write-offs which resulted in the reversal of unrealized depreciation together with the increased fair value of investments in two privately held portfolio companies, partially offset by the sale of shares in one publicly held portfolio company which resulted in the reversal of unrealized appreciation). There was unrealized appreciation on loans and investments of $1,262,680 for the year ended March 31, 2004 (principally reflecting the increased market price of investments in four publicly traded portfolio companies and the increased fair value of an investment in one privately held portfolio company, partially offset by the decreased fair value of investments in two privately held portfolio companies).
Write-Offs ----------
During the past three fiscal years, the Company has written-off loans and investments and disposed of, at a loss, assets acquired in liquidation in the aggregate amount of $5,955,565 as described in the following table:
SBA Funding -----------
The S Investment Act and the regulations thereunder provide for the purchase by the SBA of subordinated debentures issued by SBICs and the guaranty by the SBA of debentures issued by SBICs to third parties. A SBIC can issue such debentures in a principal amount up to either 200% or 300% of its Private Capital, depending upon various factors.
The SBA offers eligible SBICs the opportunity to sell "participating securities" (i.e., either preferred stock or debentures having interest payable only to the extent of earnings) to the SBA or to entities that receive SBA guaranties in an amount up to 200% of the SBIC's Private Capital. Although the Company has the minimum amount of Private Capital necessary to be eligible for the SBA's participating securities program (i.e., $10,000,000), the issuance of any future Company debentures may disqualify the Company from participating in the program under the provisions of the SBA Regulations and the 1940 Act. In addition, the Company believes that, to date, only partnerships have been allowed to issue participating securities and that corporations may not be allowed to issue participating securities.
SBA Regulation --------------
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 S Investment Act, an independently owned and operated business concern that does not have a net worth in excess of $18 million and does not have average net income after Federal income taxes for the preceding two years of more than $6 million, or meets size standards prescribed by the SBA relating either to annual receipts or number of employees, depending on the industry in which such business primarily operates, is eligible to receive financial assistance from a SBIC (hereinafter referred to as an "Eligible Concern"). The SBA Regulations also define a "Smaller Concern" as a concern with a net worth of $6 million or less and average annual net profits after taxes of $2 million or less, or depending on the industry in which the business operates, meets criteria based on the number of its employees or its annual receipts. Commencing with its fiscal year ended March 31, 1996, the Company was required by the SBA Regulations to earmark at least 10% of its financing to Smaller Concerns and in each subsequent fiscal year to earmark at least 20% of its financing to Smaller Concerns.
SBA Regulations place certain limitations on the terms of loans made by SBICs. The maximum maturity of these loans may not exceed 20 years. A borrower from a SBIC cannot be required during the first five years to repay, on a cumulative basis, more principal than an amount calculated on a straight-line, five-year amortization schedule. On straight loans (without equity components) a SBIC can charge an interest rate of up to 19% and on loans with equity components an annualized interest rate of up to 14%. Notwithstanding the above restrictions, a SBIC can charge a borrower more by first computing a base rate using either the SBA debenture rate currently in effect, plus an applicable charge permitted by the SBA, or a base rate using the weighted average cost of the SBIC's borrowings from the SBA
and qualified third party lenders such as banks. On loans with equity components, a SBIC may charge interest equal to 6% above the base rate used and, in the case of a straight loan, 11% above the base rate used.
SBICs may invest directly in the equity of their portfolio companies. However, they may not become a general partner of a non-incorporated entity or otherwise become jointly or severally liable for the general obligations of a non-incorporated entity. A SBIC may acquire options or warrants in its portfolio companies. Such options and warrants may also have redemption provisions, subject to certain restrictions. As a result of a recent change in the SBA Regulations, SBICs are now permitted to control a portfolio company. "Control" for this purpose is defined as the ownership (or control) of a 50% interest in the outstanding voting securities of a portfolio company if it is held by fewer than 50 shareholders, or if there are 50 or more shareholders, a 20% to 25% interest (depending on the holdings of other shareholders of the portfolio company).
With certain limited exceptions, SBICs may not invest overseas, in real estate or in passive businesses, that is, businesses that are not regular and continuous.
Regulation as a Business Development Company --------------------------------------------
The Company is a closed-end, non-diversified investment company that has elected to be regulated as a BDC under the 1940 Act and, as such, is subject to regulation under that Act. Among other things, the 1940 Act contains prohibitions and restrictions relating to transactions between the Company and its affiliates, principal underwriters and affiliates of those affiliates or underwriters and requires that a majority of the Company's directors be persons other than "interested persons," as defined in the 1940 Act. In addition, the 1940 Act prohibits the Company from changing the nature of its business so as to cease to be, or to withdraw its election as, a BDC unless so authorized by the vote of the holders of a majority of its outstanding voting securities.
A BDC is permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock having rights as to voting, liquidation and dividends which are senior to the Company's common stock (collectively, "Senior Securities," as defined in the 1940 Act) if the asset coverage, as defined in the 1940 Act, of any Senior Security is at least 200% immediately after each such issuance and certain other conditions are met. On the other hand, because the Company is a SBIC, the only asset coverage requirement applicable to it that would give the holders of its Senior Securities constituting indebtedness, including the Debentures, the right to elect a majority of the Board of Directors, if on the last business day of each of 12 consecutive calendar months, the Company failed to maintain at least 100% asset coverage. Also, while Senior Securities constituting preferred stock are outstanding (other than preferred stock issued to or guaranteed by the SBA), provision must be made to prohibit any distributions to shareholders or the repurchase of such securities or shares unless the applicable asset coverage ratios are met at the time of the distribution or repurchase. The Company may also borrow amounts from banks evidenced by notes not to be publicly distributed or for temporary purposes if the borrowing does not exceed 5% of the value of its total assets. A loan is presumed to be for temporary purposes if it is repaid within sixty days and is not extended or renewed.
Under the 1940 Act, a BDC may not acquire any asset, other than assets of the type listed in Section 55(a) of the 1940 Act ("Qualifying Assets") unless, when the acquisition is made, such Qualifying Assets represent at least 70% of its total assets. The principal categories of Qualifying Assets relevant to the business of the Company are the following:
(1) Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer is an eligible portfolio company. An "eligible portfolio company" is defined, in pertinent part, in the 1940 Act as any issuer which:
(a) is organized under the laws of, and has its principal place of business in, the United States;
(b) is not an investment company other than another SBIC that is wholly owned by the Company; and
(c) does not have any class of securities with respect to which margin credit may be extended by a member of a national securities exchange, broker or dealer.
(2) Securities of any eligible portfolio company that is controlled by the BDC.
(3) Securities received in exchange for or distributed on or with respect to securities described in items (1) or (2) above, or pursuant to the exercise of options, warrants or rights relating to such securities.
(4) Cash, cash items, government securities, or high quality debt securities maturing in one year or less from the time of investment.
In addition, a BDC must have been organized (and have its principal place of business) in the United States for the purpose of making investments in the types of securities described in items (1) or (2) above and, in order to count the securities as Qualifying Assets for the purpose of the 70% test, the BDC must either control the issuer of the securities or make available to the issuer of the securities significant managerial assistance. Making available significant managerial assistance means, among other things, any arrangement whereby a BDC, through its directors, officers or employees, offers to provide, and, if accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company; or in the case of a SBIC (such as the Company), making loans to a portfolio company.
Fundamental and Other Investment Policies -----------------------------------------
The Company's investment objectives are to achieve a high level of current income from interest and long-term growth through equity interests in its portfolio companies.
Fundamental Policies --------------------
In making investments and managing its portfolio, the Company will adhere to the following fundamental policies, which may not be changed without the approval of the holders of 50% or more of the Company's outstanding voting securities, or the holders of 67% or more of the Company's outstanding voting securities present at a meeting of security holders at which holders of 50% or more of such securities are present in person or by proxy:
1. The Company will conduct its business so as to retain its status as a SBIC and as a BDC, and to qualify as a RIC as defined under the Code. In order to retain its status as a SBIC, the Company must limit its investments to Eligible Concerns and meet the minimum financing obligations applicable to Smaller Concerns (see "SBA Regulation").
2. The Company will not borrow money except through the issuance of its subordinated debentures, other debentures ranking on an equal basis with its subordinated debentures, the SBA Debentures and through one or more bank lines of credit.
3. The Company may issue preferred stock with such terms as the Board of Directors may determine, subject to the requirements of the 1940 Act and the S Investment Act.
4. The Company will not (i) act as an underwriter of securities (except to the extent it may be deemed to be an "underwriter" as defined in the 1933 Act of securities purchased by it in private transactions), (ii) purchase or sell real estate or interests in real estate or real estate investment trusts (except that the Company may acquire real estate which collateralizes its loans or guaranties of its loans upon defaults of such loans and may dispose of such real estate as and when market conditions permit), (iii) sell securities short, (iv) purchase securities on margin (except to the extent that the registrant may be deemed to have done so as a result of its acquisition of securities in connection with loans made to portfolio companies which are funded with borrowed money), or (v) purchase or sell commodities or commodity contracts, including futures contracts (except where necessary in working out distressed loans or investments).
5. The Company may write or buy put or call options in connection with loans to, and other investments in, portfolio companies, or rights to require the issuer of such securities to repurchase such loans and other investments under certain circumstances.
6. The Company has no policy with respect to concentration of investments in a particular company, industry or groups of industries, except that it will not loan money to, or invest in, any company if such loan or investment exceeds 20% of the Company's Private Capital, without SBA approval.
7. The Company may make straight loans and loans with equity components to the extent permitted under the S 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 S Investment Act and the SBA Regulations, by the Company's Board of Directors without shareholder approval:
1. Except for subsidiaries organized by the Company to hold assets acquired in foreclosures of defaulted loans, the Company will not acquire (i) 50% or more of the outstanding voting securities of any issuer held by fewer than 50 shareholders, (ii) 25% or more of the outstanding voting securities of any issuer having 50 or more shareholders, or (iii) 20% or more of the outstanding voting securities of any issuer having 50 or more shareholders if, as a result of such acquisition, the Company would hold a number of voting securities equal to or greater than the largest other holding of such securities.
2. The Company will not invest in companies for the purpose of controlling management of such companies.
3. The Company will not invest in finance companies, foreign companies, passive businesses or real estate companies, except as permitted by the SBA.
4. The Company has no policy with respect to portfolio turnover. Moreover, because borrowers have certain prepayment rights pursuant to SBA Regulations, the Company cannot control or predict the frequency of portfolio turnover.
5. Pending the investment of its funds in Eligible Concerns (including Smaller Concerns) or as otherwise permitted by the SBA, the Company may invest its funds in direct obligations of, or obligations guaranteed as to principal and interest by, the United States which mature in 15 months or less, repurchase agreements with Federally insured institutions with respect to such obligations which mature in seven days or less, or certificates of deposit issued by a qualified Federally insured institution which mature in one year or less, or will be deposited in a qualified Federally insured institution in accounts which may be subject to withdrawal restrictions not to exceed one year.
In order to retain its status as a BDC, the Company may not acquire assets (other than non-investment assets necessary and appropriate to its operations as a BDC) if, after giving effect to such acquisition, the value of its Qualifying Assets is less than 70% of the value of its total assets. See "Regulation as a BDC". In order to qualify as a RIC, the Company is required, among other things, to diversify its holdings as required under the Code. As a result of the sale of certain portfolio investments in order to repay its indebtedness to the SBA, the Company's remaining portfolio of investments has become less diversified and therefore, the Company did not qualify as a RIC for the fiscal year ended March 31, 2005. Accordingly, the Company will be taxed as a regular "C" corporation for Federal income tax purposes for the fiscal year ended March 31, 2005.
Competition -----------
Many entities, including banks, lending companies (including other SBICs), venture capital funds and other sources of capital, compete for loan originations and investments similar to those made by the Company. The Company's competition is not limited to entities that operate in the same geographical area as the Company, as many of the Company's competitors operate throughout the United States. Furthermore, competition for loan origination has increased as the financial resources of the banking community have grown over the last few years. Many of the Company's competitors have far greater financial and personnel resources than the Company. In addition, many other SBICs use professional investment advisors to seek and evaluate potential investments. The Company does not have an independent investment advisor nor does it intend to retain one.
Forward-Looking Statements --------------------------
This report and accompanying notes to the financial statements may contain forward-looking statements. For this purpose, any statements contained in this report and accompanying notes to the financial statements that are not
statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such as "may," "will," "expect," "could," "would," "should," "believe," "anticipate," "estimate," "continue," "provided," or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, and actual results may differ materially depending on a variety of factors.
Personnel ---------
As of May 23, 2005, the Company had two full-time employees (Messrs. Paul A. Perlin, Chief Executive Officer and R. Scot Perlin, Chief Financial Officer). In addition to its salaried employees, the Company has from time to time engaged the services of independent consultants as and when needed. The Company considers its relations with employees to be satisfactory.
I
