10-Q 1 form10q033106v3.txt WINSTED 10-Q 03.31.06 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2006. |_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to ________ COMMISSION FILE NUMBER: 000-32333 WINSTED HOLDINGS, INC. (Name of issuer in its charter) FLORIDA 65-0972865 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 CRESCENT COURT, SUITE 700 75201 DALLAS, TEXAS (Zip Code) (Address of principal executive offices) (214) 459-8245 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 |_| No |X| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X| State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of May 8, 2006, the issuer had 131,741,722 shares of its common stock issued and outstanding. Transitional Small Business Disclosure Format (check one): Yes |_| No|X| TABLE OF CONTENTS PART I - FINANCIAL INFORMATION............................................... 2 Item 1. Financial Statements........................................... 2 Item 2. Management's Discussion and Analysis or Plan of Operations.....13 Item 3. Quantitative and Qualitative Disclosure about Market Risk......15 Item 4. Controls and Procedures........................................16 PART II - OTHER INFORMATION..................................................16 Item 1. Legal Proceedings..............................................16 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds....16 Item 3. Defaults Upon Senior Securities................................17 Item 4. Submission of Matters to a Vote of Security Holders............17 SIGNATURES ..................................................................18 1 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. Winsted Holdings, Inc. Condensed Consolidated Balance Sheets

2 Winsted Holdings, Inc. Condensed Consolidated Statements of Operations

3 Winsted Holdings, Inc. Condensed Consolidated Statements of Cash Flows

4 WINSTED HOLDINGS, INC NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2006 (Unaudited) NOTE A - SUMMARY OF ACCOUNTING POLICIES General ------- The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q, and therefore, do not include all the information necessary for a fair presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America for a complete set of financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results from operations for the three-months ended March 31, 2006 are not necessarily indicative of the results that may be expected for the year ended December 31, 2006. The unaudited condensed consolidated financial statements should be read in conjunction with the December 31, 2005 financial statements and footnotes thereto included in the Company's Securities and Exchange Commission Form 10-K. Company Background and Basis of Presentation ------------------------------------------------- Winsted Holdings, Inc., formerly Indiginet, Inc. (the "Company"), was incorporated under the laws of the State of Florida on September 24, 1997. The Company was seeking to merge or acquire an interest in business opportunities. The condensed consolidated financial statements include the accounts of the Company. The investments in Medspa Solutions, Nu Image Medspa, and Gaeacare are not consolidated into the financial statements of Winsted, but are shown as investments at their fair market value. Intercompany transactions are not eliminated. At March 31, 2006, the fair market value of the Company's investments is $47,000. Under business development company accounting, all equity investments are carried at fair value with any adjustments recorded in the statement of operations. In accordance with Article 6 of Regulation S-X under the Securities Act of 1933 and Securities Exchange Act of 1934, the Company does not consolidate portfolio company investments, including those in which it has a controlling interest. On December 30, 2003, we entered into an Asset Purchase Agreement with C2C Exchange, Inc., a California corporation ("C2C") pursuant to which we purchased substantially all of the assets of C2C all of which were related to C2C's 5 business of website design, hosting and e-commerce. The total consideration paid by us in connection with the acquisition of C2C consisted of 5,000,000 shares of our unregistered, restricted Series A Preferred Stock. Also on December 30, 2003, we entered into an Asset Purchase Agreement with Universal Broadband Communications, Inc. ("UBC") pursuant to which we purchased certain assets of UBC all of which were related to UBC's business of voice and data services. The total consideration paid by us in connection with the acquisition of UBC consisted of 6,000,000 shares of our unregistered, restricted Series A Preferred Stock. On April 30, 2004, we acquired the assets of Site Doctors, ("Site Doctors"), all of which were related to Site Doctors' business of web design and hosting. We have since abandoned our plans to pursue internet-related business. Effective November 22, 2004, we became a "business development company" by filing a Form N-54 with the Securities and Exchange Commission and electing to be governed by sections 54 through 65 of the Investment Company Act of 1940. We will continue to be subject to the periodic reporting requirements of the 1934 Act and the proxy solicitation requirements of Section 14 of the 1934 Act. Our management personnel will continue to report trading in our stock. Effective December 6, 2004, we entered into a stock purchase agreement with Medspa Solutions, Inc., a Nevada corporation ("Medspa Solutions"), to purchase all of the issued and outstanding capital stock of Medspa Solutions. Medspa Solutions is in the business of providing consulting to owners of medical spa facilities. The total consideration paid by us for the shares of Medspa Solutions consisted of 10,000 shares (post reverse-split) of our common stock, no par value per share with a fair value of $3,400,000. The 10,000 shares of our common stock were automatically converted into 1,000,000 shares of our Series B preferred stock, no par value per share, upon the filing of the certificate of designation for the Series B preferred stock with the Secretary of State of Florida on January 12, 2005. As of March 31, 2006, the Company has purchased 2.3% of the issued and outstanding capital stock of Nu Image Medspa, Inc., a Nevada corporation ("Nu Image"). During the three months ended March 31, 2006, the Company purchased 297,650 Shares of stock of Nu Image for cash of $27,350. As of March 31, 2006, the Company has purchased a total of 2,859,500 shares of Nu Image for cash payments of $297,650 from the Company's chief executive officer, who continues to own the remaining 97.9% of Nu Image Medspa. Nu Image is in the business of franchising medical spa facilities, which provide skincare services. At December 31, 2005, the Company determined that the fair value of Nu Image was $0, and charged the amounts of $270,300 to operations during the year ended December 31, 2005. The Company has also made certain payments of operational expenses on behalf of Nu Image. These expenses consist primarily of rent expense, aggregate $47,000 at March 31, 2006. This amount is included in the Company's consolidated balance sheet at March 31, 2006 as investments and advances to affiliates - other affiliates. The Company offers consulting services to Nu Image Medspa, Inc. Contractually, these services are paid for in shares of common stock of Nu Image Medspa. At March 31, 2006, the Company determined that the fair value of Nu Image Medspa stock was $0, therefore the Company has recognized zero revenue from these consulting services. Winsted is seeking to merge or acquire an interest in additional business opportunities. Revenue Recognition ------------------- For revenue from product sales, the Company recognizes revenue in accordance with Staff Accounting Bulletin No. 104, REVENUE RECOGNITION ("SAB104"), which superseded Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS ("SAB101"). SAB 101 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the selling prices of the products delivered and the collectibility of those amounts. Provisions for discounts 6 and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company defers any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required. FEE INCOME Fee income includes fees for services rendered by the Company to portfolio companies and other third parties such as diligence, structuring, transaction services, management services, and other advisory services. Management and other advisory services fees are generally recognized as income as the services are rendered. The Company recorded no fee income from portfolio companies during the three months ended March 31, 2006 or 2005. Reverse Stock Splits ---------------------- The Board of Directors approved the following reserve splits of the Company's common stock: Effective Date Reverse split ratio -------------- ------------------- March 7, 2005 1 for 1,000 June 23, 2005 1 for 1,500 January 26, 2006 1 for 1,250 All stock amounts and per share amounts in these condensed consolidated financial statements and footnotes are presented on a post-split basis. Reclassification ---------------- Certain reclassifications have been made to conform to prior periods' data to the current presentation. These reclassifications had no effect on reported losses. Valuation of Investments ------------------------ Investments for which there is no ready market are initially valued at cost and, thereafter, at fair value based upon the financial condition and operating results of the issuer and other pertinent factors as determined in good faith by the Board of Directors. The financial condition and operating results have been derived utilizing both audited and unaudited data. In the absence of a ready market for an investment, numerous assumptions are inherent in the valuation process. Some or all of these assumptions may not materialize. Unanticipated events and circumstances may occur subsequent to the date of the valuation and values may change due to future events. Therefore, the actual amounts eventually realized from each investment may vary from the valuations shown and the differences may be material. The Company reports the unrealized gain or loss resulting from such valuation in the Consolidated Statements of Losses. Valuation of Investments: Value, as defined in Section 2(a)(41) of 1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value is as determined in good faith by the board of directors. Since there is typically no readily available market value for the Company's privately held investments, the Company values substantially all of its investments at fair value as determined in good faith by the board of directors pursuant to a valuation policy and a consistent valuation process. At March 31, 2006, the Company had 3 investments with an aggregate historical cost of $3,700,650. All of these investments were fully reserved at March 31, 2006, and the net value on the Company's balance sheet at March 31, 2006 is $0. The amount charged to operations during the three months ended March 31, 2006 was $27,690. Because of the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company's investments determined in good faith by the board of directors may differ significantly from the 7 values that would have been used had a ready market existed for the investments, and the differences could be material. There is no single standard for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment. The Company must determine the fair value of each individual investment on a quarterly basis. The Company records unrealized depreciation on investments when it believes that an investment has decreased in value, including where collection of a loan or realization of an equity security is doubtful. Conversely, the Company records unrealized appreciation if it believes that the underlying portfolio company has appreciated in value and, therefore, the Company's investment has also appreciated in value, where appropriate. As a business development company, the Company intends to invest primarily in illiquid securities including debt and equity securities of private companies. the Company's investments are generally subject to some restrictions on resale and generally have no established trading market. Because of the type of investments that the Company makes and the nature of its business, the Company's valuation process requires an analysis of various factors. The Company's fair value methodology includes the examination of, among other things, the underlying portfolio company performance, financial condition and market changing events that impact valuation. With respect to private debt and equity securities, each investment is valued using industry valuation benchmarks, and, where appropriate, the value is assigned a discount reflecting the illiquid nature of the investment and/or the Company's minority, non-control position. When an external event such as a purchase transaction, public offering, or subsequent equity sale occurs, the pricing indicated by the external event will be used to corroborate the Company's private debt or equity valuation. Investments in equity securities: Under business development company accounting, all equity investments are carried at fair value with any adjustments recorded in the statement of operations, combined with adjustments in the fair value of investments in loans, as investment gains (losses)--unrealized. In accordance with Article 6 of Regulation S-X under the Securities Act of 1933 and Securities Exchange Act of 1934, the Company does not consolidate portfolio company investments, including those in which it has a controlling interest. Stock Based Compensation -------------------------- On January 1, 2006 the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004) "Share-Based Payment" ("SFAS 123 (R) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases related to a Employee Stock Purchase Plan based on the estimated fair values. SFAS 123 (R) supersedes the Company's previous accounting under Accounting Principles Board Opinion No.25, "Accounting for Stock Issued to Employees" ("APB 25") for the periods beginning fiscal 2006. The Company adopted SFAS 123 (R) using the modified prospective transition method, which required the application of the accounting standard as of January 1, 2006. Winsted's Condensed Consolidated Financial Statements as of and for three months March 31, 2006 reflect the impact of SFAS 123(R). In accordance with the modified prospective transition method, the Company's Consolidated Financial Statements for the prior periods have not been restated to reflect, and do not include the impact of SFAS 123 (R). Stock based compensation expense recognized under SFAS 123 (R) for the three months ended March 31, 2006 was $0. Pro forma stock based compensation was $18,964 for the three months ended March 31, 2005. Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. A summary of option activity under the Plan as of March 31, 2006, and changes during the period then ended are presented below: 8 Weighted- Average Options Price Exercise ---------- ----------- Outstanding at December 31, 2005 -- $ -- Issued -- -- Exercised -- -- Forfeited or expired -- -- ---------- ---------- Outstanding at March 31, 2006 -- $ -- ========== ========== Non-vested at March 31, 2006 -- $ -- ========== ========== Exercisable at March 31, 2006 -- $ -- ========== ========== There are no employee options outstanding as of March 31, 2006. Aggregate intrinsic value of options outstanding and options exercisable at March 31, 2006 was $0. Aggregate intrinsic value represents the difference between the Company's closing stock price on the last trading day of the fiscal period, which was $0.47 as of March 31, 2006, and the exercise price multiplied by the number of options outstanding. Total intrinsic value of options exercised was $0 and $11,290 for the three months periods ended March 31, 2006 and 2005, respectively. As of March 31, 2006, total unrecognized stock-based compensation expense related to non-vested stock options was $0. The total fair value of options vested was $0 and $75,263 for the three-month periods ended March 31, 2006 and 2005, respectively. The modified transition method of SFAS 123 (R) requires the presentation of pro forma information for periods presented prior to the adoption of SFAS 123 (R) regarding net loss and net loss per share as if we had accounted for our stock plans under the fair value method of SFAS 123 (R). For pro forma purposes, the fair value of stock options was estimated using the Black-Scholes option valuation model and amortizing on a straight-line basis. The pro forma amounts are as follows: Three Months Ended March 31, 2005 -------------- Net loss - as reported $(639,582) Add: Stock-based employee compensation expense included in reported loss 11,290 Deduct: Total stock-based employee compensation expense determined under fair-value based method for all awards (18,964) --------- Net loss - pro forma $(647,255) ========= Basic & diluted loss per share - as reported $ (0.03) Basic & diluted loss per share - pro forma $ (0.03) NOTE B - RECEIVABLE FROM PORTFOLIO COMPANY On April 5, 2005, the Company entered into a consulting agreement with Medspa Solutions, a company which Winsted controls. Under the terms of this consulting agreement, Winsted receives a consulting fee of $50,000 per month payable in cash. Winsted recognizes consulting revenue as services are rendered in the contractual amount of $50,000 per month. Winsted recognized the amount of $300,000 as revenue from this agreement during the period April through 9 September 2005. The Company has received cash payments of a total of $240,500, and has reserved the amount of $27,440 as uncollectible. Winsted has not recognized any revenue from this agreement for the three months ended March 31, 2006. During the three months ended March 31, 2006, Winsted was paid the amount of $45,000 for this receivable, and at March 31, 2006 the balance of this receivable is $0. NOTE C - INVESTMENTS AND ADVANCES TO AFFILIATES Investments in equity securities: Under business development company accounting, all equity investments are carried at fair value with any adjustments recorded in the statement of operations, combined with adjustments in the fair value of investments in loans, as investment gains (losses)--unrealized. In accordance with Article 6 of Regulation S-X under the Securities Act of 1933 and Securities Exchange Act of 1934, the Company does not consolidate portfolio company investments, including those in which it has a controlling interest. CONTROLLED COMPANIES: Medspa Solutions, Inc. ---------------------- Effective December 6, 2004, the Company entered into a stock purchase agreement with Medspa Solutions, Inc., a Nevada corporation ("Medspa"), to purchase all of the issued and outstanding capital stock of Medspa for * restricted shares (post reverse-splits)of the Company's common stock with a fair value of $3,400,000. Medspa is in the business of skincare services, and is controlled by the Company's president and chief executive officer. At March 31, 2006 and 2005, the Company determined that the fair value of Medspa was $0. GaeaCare Syndicate Partners --------------------------- During the year ended December 31, 2005, the Company purchased 90% of the outstanding common stock of GaeaCare Syndicate Partners, Inc. ("GaeCare")for $3,000 cash. GaeaCare is a proactive environmental products and services corporation that intends to become a leading environmental cleanup, emergency response, and environmental remediation company by the use of new computer systems technology, sensor technology, communications technology, systems concepts and microbial environmental cleanup treatment. At March 31, 2006, the Company determined that the fair value of its investment in GaeaCare was $0. OTHER AFFILIATES: Nu Image Medspa --------------- As of March 31, 2006, the Company has purchased 2% of the issued and outstanding capital stock of Nu Image Medspa, Inc., a Nevada corporation ("Nu Image"). The Company has purchased a total of 2,849,500 shares of Nu Image for cash payments of $297,650 from the Company's chief executive officer, who continues to own the remaining 98% of Nu Image Medspa. Of this amount, the Company purchased 273,350 shared during the three months ended March 31, 2006 for cash payments of $27,350. At March 31, 2006, the Company determined that the Fair value of Nu Image was $0, and charged the amounts of $27,350 to operations during the three months ended March 31, 2006. The Company has also made certain payments of operational expenses on behalf of Nu Image. These expenses consist primarily of rent expense, aggregate $47,000 at March 31, 2006. This amount is included in the Company's consolidated balance sheet at March 31, 2006 as investments and advances to affiliates - other affiliates. Bareskin Medspa --------------- As of March 31, 2006, the Company has made a cash advance in the amount of $27,440 to Bareskin Medspa, an entity in which Winsted has no equity interest. 10 Bareskin Medspa is controlled by the spouse of Winsted's President and Chief Executive Officer. At March 31, 2006, Winsted has fully reserved this cash advance. NOTE D - PROPERTY AND EQUIPMENT Property and equipment consisted of the following: March 31, December 31, 2006 2005 --------- --------- Furniture and fixtures $ 235,960 $ 235,960 Office equipment 94,543 94,543 Software 89,400 89,400 Leasehold improvements 3,519 879 --------- --------- 423,422 420,782 Less: accumulated depreciation (388,804) (373,025) --------- --------- Property and equipment $ 34,618 $ 47,757 ========= ========= For the three months ended March 31, 2006 and 2005, the Company recorded depreciation expense of $13,140 and $47,244, respectively. NOTE E - ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consisted of the following: March 31, December 31, 2006 2005 --------- --------- Accrued payroll taxes and penalties $ 313,500 $ 300,000 Trade accounts payable 262,602 151,521 Accrued interest 50,751 47,533 Accrued payroll and related costs -- 216 --------- --------- $ 626,853 $ 499,270 ========= ========= NOTE F - NOTES PAYABLE At March 31, 2006 and December 31, 2005, the Company has notes payable aggregating $160,931 with accrued interest of $50,750 and $47,533, respectively. These notes are in default and delinquent at March 31, 2006. NOTE G - CAPITAL STOCK Reverse Stock Split ------------------- On March 7, 2005, the Company effected a 1,000-for-1 reverse split of its common stock. The number of shares of common stock outstanding immediately prior to the reverse split was 1,036,311,456; the number of shares of common stock outstanding immediately after the reverse split was 1,036,311. The accompanying condensed consolidated financial statements reflect the effect of this stock split. On June 23, 2005, the Company effected a 1,500-for-1 reverse split of its common stock. The number of shares of common stock outstanding immediately prior to the reverse split was 1,631,456,888; the number of shares of common stock outstanding immediately after the reverse split was 1,088,064. The accompanying condensed consolidated financial statements reflect the effect of this stock split. On January 26, 2006, the company 1,250-for-1 reverse split of its common stock. The number of shares of common stock outstanding immediately prior to the reverse split was 3,010,663,242; the number of shares of common stock outstanding immediately after the reverse split was 2,408,957. The accompanying condensed consolidated financial statements reflect the effect of this stock split. 11 Common Stock ------------ On February 23, 2005, the Company amended the Articles of Incorporation to issue 5,500,000,000 shares, of which 5,000,000,000 shares shall be common shares at no par value per share, and 500,000,000 shares shall be preferred shares at no par value per share. During the three months ended March 31, 2005 the Company issued 1,400,000 shares (post reverse split) of common stock with a fair market value of $17,750 to consultants in exchange for services to be provided through August 2006. The Company has charged $3,590 of this amount to operations and $8,140 to deferred compensation during the three months ended March 31, 2006. Also during the three months ended March 31, 2006, the Company sold 14,090,000 shares of common stock (post reverse-split) for aggregate proceeds of $65,700. Also during the three months ended March 31, 2006, the Company issued 550,000 shares of its common stock (post reverse-split) in exchange for a note receivable in the amount of $100,000. The Company is obligated to issue 1,450,000 additional shares of common stock in exchange for this note receivable. The Company credited common stock issued in the amount of $27,500, and credited common stock subscribed in the amount of $72,500 on the Company's balance sheet at March 31, 2006. Also during the three months ended March 31, 2006, the Company issued 765 shares (post reverse-split) of its common stock due to rounding in the reverse-split process. All valuations of the above shares that were issued as consulting fees are based on the stock price at the date of issue, which did not differ materially from the value of the services that were rendered by the consultants under the contracts. Stock Subscribed and Subscription Receivable -------------------------------------------- In January 2006, the Company entered in to a transaction whereby the Company agreed to issue an aggregate of 2,000,000 shares of common stock to an investor in exchange for the investor's note in the amount of $100,000. This note bears interest at the rate of 5% per annum, and had an initial term of 60 day. In March 2006, the term of this note was extended an additional 6 months, to September 23, 2006. Upon issuance of the note, the Company charged the amount of $100,000 to common stock subscribed. During the three months ended March 31, 2006, the Company issued 550,000 shares to the note holder, or 27.5% of the total 2,000,000 shares subscribed under the note payable agreement. Accordingly, the company credited common stock in the amount of 27.5% of the amount of the original note, or $27,500, and removed this amount from common stock subscribed. At March 31, 2006, there remains a balance of $72,500 in common stock subscribed pursuant to this note, and the Company is obligated to issue an additional 1,450,000 shares. During the three months ended March 31, 2006, the note holder made principal payments in the amount of $5,000, and the principal balance on this note at March 31, 2006 is $95,000. Also during the three months ended March 31, 2006, the Company accrued interest income on this note in the amount of $909. This amount appears on the Company's balance sheet at December 31, 2006 as prepaids and other assets. NOTE H - RELATED PARTY TRANSACTIONS Chief Executive Officer ----------------------- On March 7, 2003, and as subsequently amended on August 14, 2003, the Company entered into a three-year employment agreement with its Chief Executive Officer. The agreement calls for the following: 2003 2004 2005 ------------ ------------ ----------- Base Salary $ 350,000 $ 400,000 $ 450,000 ============ =========== =========== Bonus $ 50,000 $ 50,000 $ 50,000 to $100,000 to $100,000 to $100,000 ============ =========== =========== Stock Options (post reverse-split) * * * ============ =========== ============ * less than one share, post reverse-split. On March 13, 2006, the Company entered into an amendment to this employment agreement with its Chief Executive Officer. This amendment extended the original agreement through February 2009 at the following salaries: From March 1, 2006 to February 28, 2007: $90,000 per year; From March 1, 2007 to February 29, 2008: $100,000 per year; From March 1, 2008 to February 28, 2009: $110,000 per year. From time to time, the Chief Executive Officer contributes funds to the Company for working capital purposes. During the three months ended March 31, 2006, the Chief Executive Officer received cash salary, net of cash paid back to the Company for working capital purposes, of $21,986 and $57,673, respectively. The Chief Executive also received a grant of preferred stock with a value of $3,400,000 during the three months ended March 31, 2005. 12 Deferred compensation to the Chief Executive Officer in the amount of $41,250 and $61,875 was also amortized to expense during the three months ended March 31, 2006 and 2005. respectively. Nu Image Medspa -------------- During the three months ended March 31, 2006, the Company invested an additional $27,350 in Nu Image Medspa, a company controlled by Winsted's Chief Executive Officer. NOTE I - SUBSEQUENT EVENTS In April and May 2006, the company issued 4,000,000 shares of common stock to consultants for services. Also in April and May 2006, the company sold 109,300,000 E-1 shares of common stock for an aggregate of $48,000 cash. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS. During the calendar year 2004, we were a telecommunications provider specializing in website design, web hosting and VOIP catering to small to medium size businesses. With prospects within the industry diminishing, management had elected for us to become a Business Development Company (a "BDC") in late 2004. Effective November 22, 2004, we became a "business development company" or "BDC" by filing a Form N-54 with the Securities and Exchange Commission and electing to be governed by Sections 54 through 65 of the Investment Company Act of 1940. We will continue to be subject to the periodic reporting requirements of the Exchange Act and the proxy solicitation requirements of Section 14 of the Exchange Act. Our management personnel will continue to report trading in our stock. With a name change that was effective in March of 2005, we became Winsted Holdings, Inc. Our current plan is to seek, investigate and, if such investigation warrants, acquire an interest in business opportunities presented to us by persons or firms who or which desire to seek the perceived advantages of a corporation which is registered under the Exchange Act. We do not restrict our search to any specific business, industry or geographical location and we may participate in a business venture of virtually any kind or nature. We may seek a business opportunity with entities which have recently commenced operations, or which wish to utilize the public marketplace in order to raise additional capital in order to expand into new products or markets, to develop a new product or service or for other corporate purposes. We may acquire assets and establish wholly owned subsidiaries in various businesses or acquire existing businesses as subsidiaries or as investments. We plan to operate as a franchisor of our network of Nu Image MedSpa facilities. We will collect an initial franchise fee from each franchisee and ongoing royalties from operational franchisees. We plan to sell franchise units primarily in California, Nevada, Texas, New York and Arizona. We also plan to expand to other states as the demand arises. We will market our franchise network primarily through franchised-based Internet marketing sites, Franchise Trade Magazines and Journals and Medical Journals and Magazines, as well as other mediums. We will provide initial assistance to our franchisees, which will include various franchisee training programs, operational support and consulting. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2005 13 REVENUE The Company had no revenue during the periods ended March 31, 2006 or 2005. SALES, GENERAL AND ADMINISTRATIVE EXPENSES Sales, general and administrative expenses were $344,238 for the three months ended March 31, 2006, a decrease of $244,902 or 42% compared to sales, general and administrative expense of $589,140 for the three months ended March 31, 2005. Sales, general and administrative expense consisted primarily of the following: Legal and accounting expense of $119,757; consulting expense of $80,205; officer salary of $73,236; and transfer agent fees of $7,500. DEPRECIATION AND AMORTIZATION Depreciation and amortization expense was $13,140 for the three months ended March 31, 2006, a decrease of $34,084 or 72% compared to $47,224 for the three months ended March 31, 2005. The reason for the decrease from the previous period is that certain of the Company's assets are now fully depreciated. IMPAIRMENT OF INVESTMENTS Impairment expense was $27,690 during the three months ended March 31, 2006, compared to $0 during the three months ended March 31, 2005. During the three months ended March 31, 2006, the Company increased its equity investment in Nu Image Medspa by $27,690, and immediately recognized an impairment of this investment. There was no such activity during the three months ended March 31, 2005. INTEREST INCOME (EXPENSE) Interest income (expense) was $(2,309) for the three months ended March 31, 2006, a decrease of $909 or 28% compared to $3,218 for the three months ended March 31, 2005. The reason for the decrease from the previous period is interest income earned on the note receivable executed during the current period. NET LOSS For the reasons above, the Company's net loss for the three months ended March 31, 2006 was $387,377, a decrease of $252,205 or 39% compared to a net loss of $639,582 for the three months ended March 31, 2005. LIQUIDITY AND CAPITAL RESOURCES Our independent certified public accountants have stated in their report included in our December 31, 2005 Form 10-K, that we have incurred operating losses and that we are dependent upon management's ability to develop profitable operations. These factors among others may raise substantial doubt about our ability to continue as a going concern We have experienced losses from operations as a result of our investment necessary to achieve our operating plan, which is long-range in nature. For the years ended December 31, 2005, 2004, and 2003, we incurred net losses from continuing operations of $3,538,300, $62,591,443, and $3,308,609, respectively. At December 31, 2005, we had a working capital deficit of ($620,430) and a stockholders' deficit of ($70,401,034). Our ability to continue as a going concern is contingent upon our ability to secure financing and attain profitable operations. THE CONSOLIDATED FINANCIAL STATEMENTS DO NOT INCLUDE ANY ADJUSTMENTS TO REFLECT THE POSSIBLE FUTURE EFFECTS ON THE RECOVERABILITY AND CLASSIFICATION OF ASSETS OR THE AMOUNTS AND CLASSIFICATION OF LIABILITIES THAT MAY RESULT FROM OUR POSSIBLE INABILITY TO CONTINUE AS A GOING CONCERN. 14 CRITICAL ACCOUNTING POLICIES The preparation of our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect our reported assets, liabilities, revenues, and expenses, and the disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Future events, however, may differ markedly from our current expectations and assumptions. While there are a number of significant accounting policies affecting our condensed consolidated financial statements, we believe the following critical accounting policy involve the most complex, difficult and subjective estimates and judgments. STOCK-BASED COMPENSATION On January 1, 2006 the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004) "Share-Based Payment" ("SFAS 123 (R) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases related to a Employee Stock Purchase Plan based on the estimated fair values. SFAS 123 (R) supersedes the Company's previous accounting under Accounting Principles Board Opinion No.25, "Accounting for Stock Issued to Employees" ("APB 25") for the periods beginning fiscal 2006. The Company adopted SFAS 123 (R) using the modified prospective transition method, which required the application of the accounting standard as of January 1, 2006. Medefile's Consolidated Financial Statements as of and for three months March 31, 2006 reflect the impact of SFAS(R). In accordance with the modified prospective transition method, the Company's Condensed Consolidated Financial Statements for the prior periods have not been restated to reflect, and do not include the impact of SFAS 123 (R). Stock based compensation expense recognized under SFAS 123 (R) for the three months ended March 31, 2006 was $562,622. Pro forma stock based compensation was $0 for the three months ended March 31, 2005. OFF-BALANCE SHEET ARRANGEMENT None. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. We believe that we do not have any material exposure to interest or commodity risks. We are exposed to certain economic and political changes in international markets where we compete, such as inflation rates, recession, foreign ownership restrictions, and trade policies and other external factors over which we have no control. Our financial results are quantified in U.S. dollars and a majority of our obligations and expenditures with respect to our operations are incurred in U.S. dollars. Although we do not believe we currently have any materially significant market risks relating to our operations resulting from foreign exchange rates, if we enter into financing or other business arrangements denominated in currency other than the U.S. dollars, variations in the exchange rate may give rise to foreign exchange gains or losses that may be significant. We currently have no material long-term debt obligations. We do not use financial instruments for trading purposes and we are not a party to any leverage derivatives. As discussed by our accountants in the audited financial statements included in Item 1 of our Annual Report on Form 10-K, our revenue is currently insufficient to cover its costs and expenses. We anticipate raising any necessary capital from outside investors coupled with bank or mezzanine lenders. As of the date of this report, we have not entered into any negotiations with any third parties to provide such capital. OUR INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS HAVE STATED IN THEIR REPORT INCLUDED IN OUR DECEMBER 31, 2005 FORM 10-K THAT WE HAVE INCURRED OPERATING LOSSES IN THE LAST TWO YEARS, AND THAT WE ARE DEPENDENT UPON MANAGEMENT'S ABILITY TO DEVELOP PROFITABLE OPERATIONS. THESE FACTORS AMONG OTHERS MAY RAISE SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN. 15 ITEM 4. CONTROLS AND PROCEDURES. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. EVALUATION OF DISCLOSURE AND CONTROLS AND PROCEDURES. As of the end of the period covered by this Quarterly report, we conducted an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) of the Exchange Act). Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. There was no change in our internal controls, which are included within disclosure controls and procedures, during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. None. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. During the three months ended March 31, 2006 the Company issued 1,400,000 shares (post reverse split) of common stock with a fair market value of $17,750 to consultants in exchange for services to be provided through August 2006. Also during the three months ended March 31, 2006, the Company sold 14,090,000 shares of common stock (post reverse-split) for aggregate proceeds of $65,700. Also during the three months ended March 31, 2006, the Company issued 550,000 shares of its common stock (post reverse-split) in exchange for a note receivable in the amount of $100,000. The Company is obligated to issue 1,450,000 additional shares of common stock in exchange for this note receivable. The Company credited common stock issued in the amount of $27,500, and credited common stock subscribed in the amount of $72,500 on the Company's balance sheet at March 31, 2006. Also during the three months ended March 31, 2006, the Company issued 765 shares (post reverse-split) of its common stock due to rounding in the reverse-split process. The use of the proceeds from the sale of our securities and issuance of notes were for general working capital needs and the repayment of debt. The shares were issued in reliance upon an exemption from registration pursuant to Section 4(2) of the Securities Act or Rule 506 of Regulation D promulgated under the Securities Act. All of the investors took their securities for investment purposes without a view to distribution and had access to information concerning us and our business prospects, as required by the Securities Act. In addition, there was no general solicitation or advertising for the purchase of our shares. Our securities were sold only to accredited investors or sophisticated investors, as defined in the Securities Act with whom we had a direct personal preexisting relationship, and after a 16 thorough discussion. Finally, our stock transfer agent has been instructed not to transfer any of such shares, unless such shares are registered for resale or there is an exemption with respect to their transfer. All purchasers were provided with access to our filings with the SEC, including the following: o Winsted's annual report to stockholders for the most recent fiscal year, the definitive proxy statement filed in connection with that annual report, and, if requested by the purchaser in writing, a copy of Winsted's most recent Form 10-K under the Exchange Act. o The information contained in an annual report on Form 10-K under the Exchange Act. o The information contained in any reports or documents required to be filed by Winsted under Sections 13(a), 14(a), 14(c), and 15(d) of the Exchange Act since the distribution or filing of the reports specified above. o A brief description of the securities being offered, the use of the proceeds from the offering, and any material changes in Winsted's affairs that are not disclosed in the documents furnished. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. EXHIBIT NO. IDENTIFICATION OF EXHIBIT ----------- -------------------------------------------------------------- 31.1** Certification of Mark Ellis, Chief Executive Officer of Winsted Holdings, Inc., pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.302 of the Sarbanes-Oxley Act of 2002. 31.2** Certification of Mark Ellis, Chief Financial Officer of Winsted Holdings, Inc., pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.302 of the Sarbanes-Oxley Act of 2002. 32.1** Certification of Mark Ellis, Chief Executive Officer of Winsted Holdings, Inc., pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002. 32.2** Certification of Mark Ellis, Chief Financial Officer of Winsted Holdings, Inc., pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002. ---------- * Previously Filed ** Filed Herewith (b) Reports on Form 8-K. None. 17 SIGNATURES In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Winsted Holdings, Inc. Dated: June 7, 2006. By /s/ Mark Ellis ------------------------------------------------- Mark Ellis, Chief Executive Officer and Chief Financial Officer 18

Winsted Holdings, Inc. 10-Q