10-K 1 winfield_k.txt FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2005 Commission File Number 33-94322 WINFIELD CAPITAL CORP. (Exact name of registrant as specified in its charter) New York 13-2704241 (State or other jurisdiction (IRS employer of incorporation or organization) identification no.) 237 Mamaroneck Avenue, White Plains, New York 10605 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (914) 949-2600 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of each class Common Stock, par value $.01 per share Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X]. Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of May 18, 2005 was approximately $779,068. The number of outstanding shares of the Registrant's common stock as of May 18, 2005 was 5,346,084 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive proxy statement to be filed not later than 120 days after March 31, 2005, are incorporated into Part III of this Report. ================================================================================ RISKS Pursuant to Section 64(b) of the Investment Company Act of 1940, we are required to advise you annually that Winfield Capital Corp. (the "Company") is engaged in a high risk business. Loans to and other investments in small business concerns are extremely speculative. Most of such concerns are privately held. Even if a public market for the securities of such concerns exists, the loans and other securities purchased by the Company are often restricted from sale or other transfer for specified and significant periods of time. Thus, such loans and other investments have little, if any, liquidity, and the Company and you, as its shareholders, must bear significantly larger risks, including possible losses on such investments, than otherwise would be the case with traditional investment companies. According to the U.S. Small Business 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 small business investment company ("SBIC") that was licensed by the U.S. Small Business Administration (the "SBA") in 1972 under the Small Business Investment Act of 1958, as amended (the "Small Business Investment Act"). The Company is a non-diversified investment company that has elected to be regulated as a Business Development Company ("BDC"), a type of closed-end investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"). The Company has elected to be taxed as a regulated investment company ("RIC") 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 Small Business Investment Act and the regulations of the SBA (the "SBA Regulations"). The SBA is authorized to examine the operations of the Company and the Company's ability to obtain funds from the SBA is also governed by the Small Business Investment Act and the SBA Regulations. As a BDC, the Company is required to make available significant managerial assistance to its portfolio companies. The Company has no independent investment 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 2 portfolio companies are expansion stage businesses, although some are start-up and development stage companies, including some with negative net worth and net operating losses. Under applicable SBA Regulations, the Company may not invest more than 20% of its "Private Capital" in any single company without prior SBA approval. Under the Small Business Investment Act and the SBA Regulations, "Private Capital" is defined as the total of paid-in capital, other than capital obtained from Federal sources (such as the SBA), and paid-in surplus. In most instances, the Company participates in loans and other investments with other investors. Accordingly, the Company has been able to become involved in transactions larger than would otherwise be possible under the investment limit of 20% of its own Private Capital. Selection of Loan and Other Investment Opportunities ---------------------------------------------------- Given the Company's objective to emphasize equity investments, the Company uses the following criteria in selecting investment opportunities: Potentially Profitable Operations. The Company attempts to identify companies that are profitable or that it believes will become profitable in the future. Development Stage Companies. The Company attempts to identify and invest in development stage companies, (i.e., companies with a product or service that is beyond the testing stage). The Company generally seeks to avoid so-called "seed capital" and start-up companies. Experienced Management Team. The Company seeks to invest in portfolio companies that have experienced management with a substantial ownership interest and a demonstrated ability, or the potential, to accomplish the objectives set forth in such companies' business plan. Liquidation Value of Assets. Although the Company is not an "asset-based" lender, the value of assets securing its loans is an important consideration in its loan decisions. Emphasis is placed on balance sheet assets such as inventory, plant, property and equipment. Growth. The Company requires that prospective borrowers have sufficient cash flow to service their debt along with having in management's determination a good chance of achieving substantial annual growth. Exit Strategy. Another investment consideration is whether there is an opportunity to liquidate the investment in a potential portfolio company in the future. Such opportunity generally would allow the Company to realize a gain on its equity interests that have appreciated in value, if at all, through public offerings, sales of the portfolio company, mergers with other companies or repurchases by the portfolio company of the Company's equity interests. In this connection, the Company often seeks to obtain registration rights ("demand" and "piggyback") as a condition to its equity investments. The foregoing criteria are general guidelines rather than fixed requirements and the Company may consider such other criteria as investment opportunities arise. Certain Non-Compliance by Portfolio Companies --------------------------------------------- Although the Company's agreements with its portfolio companies require them to furnish the Company with periodic and/or annual financial statements and to include financial and other covenants by its borrowers in its loan agreements, certain of its portfolio companies may fail to supply the financial statements or to otherwise comply with the covenants required of them. The Company deals with these failures on a case-by-case basis, and the exercise by the Company of appropriate remedies are often influenced by the payment records of such companies. The aggregate face amount of the Company's outstanding loans and the value of other portfolio investments was $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%. 3 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 Small Business Investment Act and the regulations thereunder provide for the purchase by the SBA of subordinated debentures issued by SBICs and the guaranty by the SBA of debentures issued by SBICs to third parties. A SBIC can issue such debentures in a principal amount up to either 200% or 300% of its Private Capital, depending upon various factors. The SBA offers eligible SBICs the opportunity to sell "participating securities" (i.e., either preferred stock or debentures having interest payable only to the extent of earnings) to the SBA or to entities that receive SBA guaranties in an amount up to 200% of the SBIC's Private Capital. Although the Company has the minimum amount of Private Capital necessary to be eligible for the SBA's participating securities program (i.e., $10,000,000), the issuance of any future Company debentures may disqualify the Company from participating in the program under the provisions of the SBA Regulations and the 1940 Act. In addition, the Company believes that, to date, only partnerships have been allowed to issue participating securities and that corporations may not be allowed to issue participating securities. SBA Regulation -------------- SBICs, such as the Company, are licensed by the SBA as part of a program designed to stimulate the flow of private debt and/or equity capital to "Eligible Concerns" and "Smaller Concerns." Under current SBA Regulations and the Small Business Investment Act, an independently owned and operated business concern that does not have a net worth in excess of $18 million and does not have average net income after Federal income taxes for the preceding two years of more than $6 million, or meets size standards prescribed by the SBA relating either to annual receipts or number of employees, depending on the industry in which such business primarily operates, is eligible to receive financial assistance from a SBIC (hereinafter referred to as an "Eligible Concern"). The SBA Regulations also define a "Smaller Concern" as a concern with a net worth of $6 million or less and average annual net profits after taxes of $2 million or less, or depending on the industry in which the business operates, meets criteria based on the number of its employees or its annual receipts. Commencing with its fiscal year ended March 31, 1996, the Company was required by the SBA Regulations to earmark at least 10% of its financing to Smaller Concerns and in each subsequent fiscal year to earmark at least 20% of its financing to Smaller Concerns. SBA Regulations place certain limitations on the terms of loans made by SBICs. The maximum maturity of these loans may not exceed 20 years. A borrower from a SBIC cannot be required during the first five years to repay, on a cumulative basis, more principal than an amount calculated on a straight-line, five-year amortization schedule. On straight loans (without equity components) a SBIC can charge an interest rate of up to 19% and on loans with equity components an annualized interest rate of up to 14%. Notwithstanding the above restrictions, a SBIC can charge a borrower more by first computing a base rate using either the SBA debenture rate currently in effect, plus an applicable charge permitted by the SBA, or a base rate using the weighted average cost of the SBIC's borrowings from the SBA 4 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. 5 (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 Small Business Investment Act. 4. The Company will not (i) act as an underwriter of securities (except to the extent it may be deemed to be an "underwriter" as defined in the 1933 Act of securities purchased by it in private transactions), (ii) purchase or sell real estate or interests in real estate or real estate investment trusts (except that the Company may acquire real estate which collateralizes its loans or guaranties of its loans upon defaults of such loans and may dispose of such real estate as and when market conditions permit), (iii) sell securities short, (iv) purchase securities on margin (except to the extent that the registrant may be deemed to have done so as a result of its acquisition of securities in connection with loans made to portfolio companies which are funded with borrowed money), or (v) purchase or sell commodities or commodity contracts, including futures contracts (except where necessary in working out distressed loans or investments). 5. The Company may write or buy put or call options in connection with loans to, and other investments in, portfolio companies, or rights to require the issuer of such securities to repurchase such loans and other investments under certain circumstances. 6. The Company has no policy with respect to concentration of investments in a particular company, industry or groups of industries, except that it will not loan money to, or invest in, any company if such loan or investment exceeds 20% of the Company's Private Capital, without SBA approval. 6 7. The Company may make straight loans and loans with equity components to the extent permitted under the Small Business Investment Act and the 1940 Act. Other Investment Policies ------------------------- The Company's investment policies described below are not fundamental policies, and may be changed, subject to the Small Business Investment Act and the SBA Regulations, by the Company's Board of Directors without shareholder approval: 1. Except for subsidiaries organized by the Company to hold assets acquired in foreclosures of defaulted loans, the Company will not acquire (i) 50% or more of the outstanding voting securities of any issuer held by fewer than 50 shareholders, (ii) 25% or more of the outstanding voting securities of any issuer having 50 or more shareholders, or (iii) 20% or more of the outstanding voting securities of any issuer having 50 or more shareholders if, as a result of such acquisition, the Company would hold a number of voting securities equal to or greater than the largest other holding of such securities. 2. The Company will not invest in companies for the purpose of controlling management of such companies. 3. The Company will not invest in finance companies, foreign companies, passive businesses or real estate companies, except as permitted by the SBA. 4. The Company has no policy with respect to portfolio turnover. Moreover, because borrowers have certain prepayment rights pursuant to SBA Regulations, the Company cannot control or predict the frequency of portfolio turnover. 5. Pending the investment of its funds in Eligible Concerns (including Smaller Concerns) or as otherwise permitted by the SBA, the Company may invest its funds in direct obligations of, or obligations guaranteed as to principal and interest by, the United States which mature in 15 months or less, repurchase agreements with Federally insured institutions with respect to such obligations which mature in seven days or less, or certificates of deposit issued by a qualified Federally insured institution which mature in one year or less, or will be deposited in a qualified Federally insured institution in accounts which may be subject to withdrawal restrictions not to exceed one year. In order to retain its status as a BDC, the Company may not acquire assets (other than non-investment assets necessary and appropriate to its operations as a BDC) if, after giving effect to such acquisition, the value of its Qualifying Assets is less than 70% of the value of its total assets. See "Regulation as a BDC". In order to qualify as a RIC, the Company is required, among other things, to diversify its holdings as required under the 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 7 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. Item 2. Properties The Company operates its executive offices where it maintains its investment and business records from rented quarters, consisting of approximately 2,000 square feet, located in a four-story office building under a lease expiring on February 29, 2008. The lease is cancelable at the Company's option on 90 days prior written notice. Management considers that such quarters will be adequate for the near term for the conduct of the Company's business. Item 3. Legal Proceedings From time to time in the ordinary course of business, the Company initiates legal proceedings against borrowers in default and, where warranted, their guarantors to seek payment of loan obligations and to take possession of collateral. In the latter instances, these proceedings are sometimes followed by court-authorized liquidations. All such proceedings require outside counsel with attendant professional fees and expenses. The Company has never been named as a defendant in any material litigation. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. 8 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters On April 15, 2003, the Registrant's common stock began trading on the OTCBB under the symbol WCAP. From September 26, 2002 until April 15, 2003, the Registrant's common stock was listed on the Nasdaq SmallCap Market. Previously, the Registrant's common stock was listed on the Nasdaq National Market. The reported high and low bid quotations for the Registrant's common stock as reported by Nasdaq from April 1, 2003 to April 14, 2003 and as reported on the OTCBB from April 15, 2003 until May 18, 2005 were as follows: Common Stock ------------ High Low ---- --- April 1 - June 30, 2003 ......................... $ 0.51 $ 0.15 July 1 - September 30, 2003 ....................... 0.30 0.15 October 1 - December 31, 2003...................... 0.35 0.18 January 1 - March 31, 2004 ........................ 0.45 0.17 April 1 - June 30, 2004 ........................... 1.65 0.41 July 1 - September 30, 2004 ....................... 0.65 0.22 October 1 - December 31, 2004 ..................... 0.60 0.21 January 1 - March 31, 2005......................... 0.32 0.18 April 1 - May 18, 2005 ............................ $ 0.22 $ 0.13 -------------------------------------------------------------------------------- The foregoing quotations reflect inter-dealer prices, without retail markup, markdown or commission, and do not necessarily represent actual transactions. As of August 8, 2004, the last record date, the Company estimated that its shares of common stock were held by approximately 3,719 beneficial holders. Item 6. Selected Financial Data See Summary of Financial Information for the years ended March 31, 2005, 2004, 2003, 2002 and 2001 on the following page: 9 WINFIELD CAPITAL CORP. SUMMARY OF FINANCIAL INFORMATION

10 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Years Ended March 31, 2005, 2004, and 2003 ------------------------------------------ Critical Accounting Policies ---------------------------- The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires the application of accounting policies that often involve a significant degree of judgment. Management, on an on-going basis, reviews estimates and assumptions. If management determines, as a result of its consideration of facts and circumstances, that modifications of its assumptions and estimates are appropriate, results of operations and financial position as reported in the financial statements may change significantly. The following sections discuss accounting policies applied in preparing the Company's financial statements that management believes are most dependent on the application of estimates and assumptions. Valuation of Investments Securities that are traded on a securities exchange or the Nasdaq National Market, which are not restricted investments, are valued at the security's last sales price on the last trading day of the period. Securities traded over-the-counter are valued at the closing price on the valuation date. A valuation discount is applied if the number of securities held is substantial in relation to the average daily trading volume. The Company's investments in restricted securities of public companies are valued at the closing price on the valuation date less a discount rate of 10% to 30%, which is determined by the Board of Directors of the Company (the "Board of Directors") based upon applicable factors such as resale restrictions, contractual agreement, size of position held and trading history of the portfolio company. In some cases, a discount of greater than 30% may be used based upon applicable factors including, but not limited to (by way of example): 1) whether the portfolio company will be financially solvent at the time such restricted securities become freely tradable, 2) whether the Company has knowledge of material non-public information about the portfolio company which it is not at liberty to disclose in connection with its sale of the securities of such portfolio company and 3) the risk that the portfolio company's securities might be delisted from an exchange or automated trading market with published trading reports. Loans and assets acquired in liquidation for which no public market exists are stated at "fair value" as determined in good faith by the Board of Directors. The carrying values of loans to small business concerns are based on the Board of Directors' evaluation of the financial condition of the borrowers and/or the underlying collateral. The values assigned are considered to be amounts which could be realized in the normal course of business which anticipates the Company holding the loans to maturity and realizing the face value of the loans. The carrying value of loans normally corresponds to cost less amortized original issue discount, if any, unless adverse factors lead to a determination of value at a lower amount. In such instances, the Company records an increase in unrealized depreciation of investments to reduce the carrying value of such loans to a fair value, as determined by the Board of Directors. Investments in non-public companies securities (including equity investments, warrants and convertible instruments) are recorded at fair value as determined in good faith by the Board of Directors, after consideration of all pertinent information, including factors such as significant equity financing by sophisticated, unrelated new investors, history of cash flows from operations, the market for comparable publicly traded companies (discounted for illiquidity) and other pertinent factors. The values assigned to these securities are based upon available information and do not necessarily represent amounts which might ultimately be realized, since such amounts depend on future circumstances and cannot reasonably be determined until the individual positions are liquidated. Certain of the Company's loans are delinquent as to the required principal and/or interest due under the respective loan agreements. Loans are generally considered to be in default when they become 180 days past due pursuant to SBA regulations. However, on a case by case basis, management will consider, based on available information, the appropriateness of the continued accrual of interest and the carrying value of the loan. 11 Option Contracts - Derivatives The Company adopted Statement of Financial Accounting Standards No. 133 as amended by Statements No. 137 and No. 138, Accounting for Derivative Instruments and Hedging Activities, (referred to hereafter as "SFAS 133"), on January 1, 2001. At that time, the Company did not have any derivatives. SFAS 133 requires that an entity recognize all derivative instruments in the balance sheet and measure those financial instruments at fair value. All changes in the fair market value of financial instruments are included as changes in the unrealized appreciation or depreciation of investments in the Statement of Operations. Income Taxes Effective April 1, 1996, the Company has elected to be taxed as a RIC under the Code. If the Company, as a RIC, satisfies certain requirements relating to the source of its income, the diversification of its assets and the distribution of its net income, the Company is taxed as a pass-through entity that acts as a partial conduit of income to its shareholders. In order to maintain its RIC status, the Company must in general: 1.) derive at least 90% of its gross income from dividends, interest and gains from the sale or disposition of securities, 2.) meet investment diversification requirements defined by the Code, and 3.) distribute to shareholders 90% of its net income (other than long-term capital gains). 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. The Company may periodically make reclassifications among certain of its capital accounts as a result of timing and characterization of certain income and capital gains distributions determined annually in accordance with Federal tax regulation. The reclassifications may result in a reduction of capital. All reclassifications have been reflected on the statements of changes in shareholders' equity. Investment Income ----------------- Investment income decreased by $766,626, or a decrease of 49.4%, to $784,321 for the year ended March 31, 2005 from $1,550,947 for the year ended March 31, 2004. This reflected principally a decrease in interest from small business concerns of $737,207 as a result of the Company's sale of a loan investment and the prepayment of another loan investment. Interest from temporarily invested funds decreased by $20,117 as a result of a decrease in invested idle funds as well as a decrease in interest rates. Other income decreased by $9,302. Investment income increased by $821,050, or an increase of 112.5%, to $1,550,947 for the year ended March 31, 2004 from $729,897 for the year ended March 31, 2003. This reflected principally an increase in interest from small business concerns of $1,031,061 as a result of the Company's increased investments in loans in the last two quarters of fiscal 2003. Interest from temporarily invested funds decreased by $209,209 as a result of a decrease in invested idle funds as well as a decrease in interest rates. Other income decreased by $802. Interest Expense ---------------- Interest expense decreased by $603,815, or a decrease of 36.3%, to $1,061,594 (net of an interest expense increase of $96,392 due to a cumulative recalculation of the Company's past repayments of debentures by the SBA) for the year ended March 31, 2005 from $1,665,409 for the year ended March 31, 2004. This decrease resulted from repayments of $14,545,110 of debentures to the SBA. Interest expense decreased $213,074, or a decrease of 11.3% from $1,878,483 for the year ended March 31, 2003 to $1,665,409 for the year ended March 31, 2004, also as a result of repayments of $5,113,340 of debentures to the SBA. Operating Expenses ------------------ The Company's operating expenses decreased by $103,263, or a decrease of 8.6%, to $1,099,491 for the year ended March 31, 2005 from $1,202,754 for the year ended March 31, 2004. Payroll and payroll-related expenses decreased by $51,430 due to the termination of a clerical employee, insurance expense decreased by $53,087, directors fees decreased by $46,500, shareholder relations and other financial expenses decreased by $10,170 and accounting 12 fees decreased by $21,899 while legal expense increased by $82,855 due to negotiations with the SBA in connection with the Company's capital impairment. There were other miscellaneous decreases that totaled $3,032. The Company's operating expenses decreased by $1,004,948 to $1,202,754 for the year ended March 31, 2004 from $2,207,702 for the year ended March 31, 2003. Amortization expense decreased by $574,428 primarily due to the acceleration of the maturity of the SBA debentures that resulted in fully expensing the related debenture fees in the year ended March 31, 2003. Payroll and payroll-related expenses decreased by $217,536 due to the resignation of an executive officer effective December 31, 2002 and the termination of a secretary effective December 31, 2003. Professional fees decreased by $66,756, shareholder relations and other financial expenses decreased by $48,623, insurance expense decreased by $37,009 and directors fees decreased by $23,725. There were other miscellaneous decreases that totaled $36,871. Realized Gains or Losses on Equity Investments ---------------------------------------------- The Company realizes gains or losses on its investments or rights to acquire investments upon the disposition or write-offs thereof. The realized capital loss for the year ended March 31, 2005 of $3,809,397 reflected loan and equity write-offs of $5,760,643 together with long-term capital losses on the sale of equity securities of $1,910,470, partially offset by long-term capital gains on the sale of equity securities of $3,409,186 and a gain of $452,530 on the disposition of a loan. The realized capital gain for the year ended March 31, 2004 of $1,191,185 reflected long-term capital gains on the sale of four equity securities of $1,437,675 and a gain of $107,396 on the disposition of two loans, partially offset by a long-term capital loss of $340,965 on the sale of one equity security and a write-off on an asset acquired in liquidation of $24,707, partially offset by two recoveries totaling $11,786. The realized capital gain for the year ended March 31, 2003 of $16,407 reflected a long-term capital gain on an equity security of $208,287, a short-term capital gain on an equity security of $50,680, partially offset by a write-off of $182,001 on a debt security, long-term net capital losses on assets acquired in liquidation of $45,168 and short-term losses on the repositioning of temporarily invested funds of $15,391. Unrealized Appreciation or Depreciation of Loans and Investments ---------------------------------------------------------------- As an investment company, the Company is required to evaluate its investment portfolio periodically to determine the fair value of the portfolio and, accordingly, does not maintain an allowance for loan losses similar to commercial banks. Any change in the fair value of loans and other investments is reflected in unrealized appreciation or depreciation of loans and investments. There was unrealized 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) compared with an unrealized depreciation on loans and investments of $2,654,690 (or, $2,692,012, excluding an unrealized appreciation on short-term marketable securities) for the year ended March 31, 2003 (principally reflecting the decreased market price of investments in nine publicly traded portfolio companies, partially offset by the increased market price of one publicly traded portfolio company and the decreased fair value of investments in five privately held portfolio companies, partially offset by the increased fair value of investments in five privately held portfolio companies). Option Contracts - Derivatives ------------------------------ Pursuant to a letter received from the SBA in October 2000 granting permission to use hedging activities to protect its security positions, the Company, beginning in January 2001, utilized put and call option contracts to minimize market risks of its investments in publicly held companies. The Company adopted SFAS 133 on January 1, 2001. SFAS 133 requires that an entity recognize all derivative instruments in the balance sheet and measure those financial instruments at fair value. All changes in the fair market value of financial instruments are included as changes in the unrealized appreciation or depreciation of investments in the Statement of Operations. As of March 31, 2005 and March 31, 2004, the Company had no option contracts outstanding as part of its portfolio. 13 Liquidity and Capital Resources ------------------------------- At March 31, 2005, the Company held cash and cash equivalents totaling $323,177. 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. Debentures Payable to the U.S. Small Business Administration ------------------------------------------------------------ Debentures payable to the SBA at March 31, 2005, with interest payable semi-annually, consisted of the following: Amount Original Due Date Interest Rate (per annum) ----------- ----------------- ------------------------ $ 750,000 9/1/2005 6.875% 600,000 9/1/2005 6.875% 3,641,550 3/1/2011 6.353% ----------- $ 4,991,550 Under the terms of the debentures, the Company may not repurchase or retire any of its capital stock, make any distributions to its shareholders other than dividends out of retained earnings pursuant to SBA regulations or increase officers' salaries without the prior written approval of the SBA. Commitments and Contingencies The Company has an operating lease on its office facility that expires on February 29, 2008. The following are the future minimum rental commitments on the lease: Payments Due By Period Less Than More than Total 1 Year 1-3 Years 4-5 Years 5 Years ---------- ---------- ---------- --------- --------- Operating lease $ 147,285 $ 47,421 $ 99,864 $ - $ - ========== ========== ========== ========= ========= 14 Item 7A. Quantitative and Qualitative Disclosures about Market Risk The Company's earnings and cash flows are subject to fluctuations due to changes in interest rates primarily from its investment of available cash balances in bank money market funds with portfolios of investment grade corporate and U.S. government securities, in individual bank certificates of deposit and U.S. treasuries. Under its current policies, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes. A portion of the Company's investment portfolio consists of fixed-rate debt securities. Since these debt securities usually have relatively high fixed rates of interest, minor changes in market yields of publicly traded debt securities have little or no effect on the values of debt securities in the Company's portfolio and no effect on interest income. On the other hand, significant changes in the market yields of publicly traded debt securities may have a material effect on the values of debt securities in the Company's portfolio. The Company's investments in debt securities are generally held to maturity and their fair values are determined on the basis of the terms of the debt security and the financial condition of the issuer. As of March 31, 2005, the Company had no publicly traded debt securities in its portfolio. A portion of the Company's investment portfolio consists of debt and equity securities of private companies. The Company anticipates little or no effect on the value of these investments from modest changes in public market equity valuations. Should significant changes in market valuations of comparable publicly owned companies occur, there may a be corresponding effect on valuations of private companies, which would affect the value, amount and timing of proceeds eventually realized from these investments. A portion of the Company's investment portfolio also consists of restricted common stocks and warrants to purchase common stocks of publicly owned companies. The fair values of these restricted securities are influenced by the nature of applicable resale restrictions, the underlying earnings and financial condition of the issuer and the market valuations of comparable publicly owned companies. A portion of the Company's investment portfolio also consists of unrestricted, freely marketable common stocks of publicly owned companies. These freely marketable securities are directly exposed to equity price fluctuations, in that a change in an issuer's public market equity price would result in an identical change in the fair value of the Company's investment in such security. The Company may utilize, if they are available, put and call option contracts to attempt to minimize the market risk of its investments in publicly owned companies. As of March 31, 2005, the Company had no option contracts outstanding as part of its portfolio. Item 8. Financial Statements and Supplementary Data

Item 9. Changes in and Disagreements with Auditors on Accounting and Financial Disclosure On October 18, 2003, a Form 8-K was filed by the Company in connection with a change in the Company's certifying auditors. PricewaterhouseCoopers LLP resigned as the independent auditors of the Company on October 8, 2003. On October 14, 2003, with approval of the Company's Board of Directors, the Company engaged the accounting firm of Lazar Levine & Felix LLP as its independent auditors 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. 15 Item 9A. Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures ------------------------------------------------ As of the end of the period covered by this Annual Report on Form 10-K, we evaluated, under the supervision of our chief executive officer and chief financial officer, the effectiveness of the design and operation of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934, Rules 13a-15(e) and 15d-15(e)). Based on that evaluation, our management, including our chief executive officer and chief financial officer, has concluded that as of the date of the evaluation our disclosure controls and procedures are effective to ensure that all material information required to be filed in this report has been made known to them. (b) Changes in Internal Controls over Financial Reporting ----------------------------------------------------- There have been no changes in our internal controls over financial reporting that occurred during the fourth quarter of the fiscal year ended March 31, 2005 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. PART III Item 10. Directors and Executive Officers of the Registrant Incorporated by reference to the Registrant's definitive proxy statement to be filed not later than 120 days after March 31, 2005. Item 11. Executive Compensation Incorporated by reference to the Registrant's definitive proxy statement to be filed not later than 120 days after March 31, 2005. Item 12. Security Ownership of Certain Beneficial Owners and Management Incorporated by reference to the Registrant's definitive proxy statement to be filed not later than 120 days after March 31, 2005. Item 13. Certain Relationships and Related Transactions Incorporated by reference to the Registrant's definitive proxy statement to be filed not later than 120 days after March 31, 2005. Item 14. Principal Accountant Fees and Services Incorporated by reference to the Registrant's definitive proxy statement to be filed not later than 120 days after March 31, 2005. PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) Financial Statements: See item 8 of Part II hereof. 16 (b) No reports on Form 8-K were filed during the fourth quarter of the Registrant's fiscal year ended March 31, 2005. The Registrant filed a report on Form 8-K on April 8, 2005, incorporated by reference to Exhibit 99.1 of the Registrant's Form 10-K for the fiscal year ended March 31, 2005 in SEC File No. 33-94322. (c) Exhibits: 3(A). Certificate of Incorporation, as amended, incorporated by reference to Exhibit 1(A) to the Registrant's registration statement in SEC File No. 33-94322. 3(B). Certificate of Amendment of Certificate of Incorporation, incorporated by reference to Exhibit 1(B) to the Registrant's registration statement in SEC File No. 33-94322. 3(C). By-laws, as amended, incorporated by reference to Exhibit 2 to the Registrant's registration statement in SEC File No. 33-94322. 4(B). Form of Debenture, incorporated by reference to Exhibit 3(C) to the Registrant's registration statement in SEC File No. 33-94322. 4(C). Agency Agreement for the Debentures, incorporated by reference to Exhibit 3(D) to the Registrant's registration statement in SEC File No. 33-94322. 10(A) Indemnification Agreement, incorporated by reference to Exhibit 4 to the Registrant's registration statement in SEC File No. 33-94322. 10(B). Stock Option Plan, incorporated by reference to Exhibit 5 to the Registrant's registration statement in SEC File No. 33-94322. 10(C). Registrant's License from SBA, incorporated by reference to Exhibit 6 to the Registrant's registration statement in SEC File No. 33-94322. 10(E)(2). Stock Option Agreement with Paul A. Perlin, incorporated by reference to Exhibit 8(B) to the Registrant's registration statement in SEC File No. 33-94322. 10(I). Employment Agreement with Paul A. Perlin, dated April 4, 2001 as of November 1, 2000, incorporated by reference to Exhibit 10(I) to the Registrant's Form 10-K for the fiscal year ended March 31, 2001 in SEC File No. 33-94322. 10(J). Employment Agreement with David Greenberg, dated April 4, 2001 as of November 1, 2000, incorporated by reference to Exhibit 10(J) to the Registrant's Form 10-K for the fiscal year ended March 31, 2001 in SEC File No. 33-94322. 10(K). Employment Agreement with Paul A. Perlin, dated November 15, 2002 as of November 1, 2002, incorporated by reference to Exhibit 10(K) to the Registrant's Form 10-K for the fiscal year ended March 31, 2003 in SEC File No. 33-94322. 10(L). Forbearance Agreement with the SBA, dated April 6, 2005, incorporated by reference to Exhibit 10(L) to the Registrant's Form 10-K for the fiscal year ended March 31, 2005 in SEC File No. 33-94322. 11. Statement of Computation of Earnings (Loss) Per Share, incorporated herein by reference to the Notes to the Financial Statements included in this report. 31.1 Certification of Paul A. Perlin, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of R. Scot Perlin, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 17 32.1 Certification of Paul A. Perlin, Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of R. Scot Perlin, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (d) Financial Statement Schedules: The schedules specified under Regulation S-X are either included in this Form 10-K, not applicable or are immaterial to the Company's financial statements for each of the three years in the period ended March 31, 2005. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WINFIELD CAPITAL CORP. Dated: May 23, 2005 By: /s/ PAUL A. PERLIN ----------------------------- Paul A. Perlin Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Dated: May 23, 2005 By: /s/ PAUL A. PERLIN ----------------------------- Paul A. Perlin Chairman of the Board & Chief Executive Officer (Principal Executive Officer) & Director Dated: May 23, 2005 By: /s/ R. SCOT PERLIN ----------------------------- R. Scot Perlin Chief Financial Officer (Principal Financial & Accounting Officer) & Director Dated: May 23, 2005 By: /s/ JOEL I. BARAD ----------------------------- Joel I. Barad Director Dated: May 23, 2005 By: /s/ BARRY J. GORDON ----------------------------- Barry J. Gordon Director Dated: May 23, 2005 By: /s/ DAVID GREENBERG ----------------------------- David Greenberg Director Dated: May 23, 2005 By: /s/ ALLEN L. WEINGARTEN ----------------------------- Allen L. Weingarten Director 18 WINFIELD CAPITAL CORP. MARCH 31, 2005 AND 2004 CONTENTS Page ---- Report of Independent Registered Public Accounting Firm - Current F-1 Report of Independent Registered Public Accounting Firm - Predecessor F-2 Balance Sheets F-3 (At March 31, 2005 and 2004) Statements of Operations (For each of the three years in the period ended March 31, 2005) F-4 Statements of Changes in Shareholders' Equity F-5 (For each of the three years in the period ended March 31, 2005) Statements of Cash Flows F-6 (For each of the three years in the period ended March 31, 2005) Financial Highlights F-7 Per Share Operating Performance (For the years ended March 31, 2005 and 2004) Ratios/Supplemental Data (For the years ended March 31, 2005 and 2004) Notes to Financial Statements F-8 - F-17 Schedules of Portfolio of Investments F-18 - F-23 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To The Board of Directors and Shareholders of Winfield Capital Corp. (A Small Business Investment Company licensed by the U.S. Small Business Administration ("SBA")) White Plains, NY We have audited the accompanying balance sheets of Winfield Capital Corp. as of March 31, 2005 and March 31, 2004 and the related statements of operations, changes in shareholders' equity and cash flows for each of the two years then ended. Our audits also included the financial statement schedules listed in the accompanying index of this Form 10-K. These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements and schedules are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedules. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Winfield Capital Corp. at March 31, 2005 and March 31, 2004 and the results of their operations and their cash flows for each of the two years then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and its debentures payable to the SBA are currently due as a result of an impairment under SBA regulations. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plan in regard to these matters is also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ LAZAR LEVINE & FELIX LLP ---------------------------- Lazar Levine & Felix LLP New York, NY May 13, 2005 F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Winfield Capital Corp. (A Small Business Investment Company licensed by the U.S. Small Business Administration ("SBA")): In our opinion, the statements of income, shareholders' equity and cash flows for the year ended March 31, 2003 of Winfield Capital Corp. present fairly, in all material respects, the results of operations and cash flows of Winfield Capital Corp. in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and its debentures payable to the SBA are currently due as a result of an impairment under SBA regulations. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ PRICEWATERHOUSECOOPERS LLP ------------------------------ PricewaterhouseCoopers LLP New York, NY June 13, 2003 F-2 WINFIELD CAPITAL CORP. BALANCE SHEETS

The accompanying notes are an integral part of the financial statements. F-3 WINFIELD CAPITAL CORP. STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of the financial statements. F-4 WINFIELD CAPITAL CORP. STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

The accompanying notes are an integral part of the financial statements. F-5 WINFIELD CAPITAL CORP. STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of the financial statements. F-6 WINFIELD CAPITAL CORP. FINANCIAL HIGHLIGHTS Years Ended March 31, --------------------- 2005 2004 ----------- ----------- Per Share Operating Performance Shareholders' equity, beginning of period $ .49 $ .28 ----------- ----------- Investment loss - net (0.26) (0.25) Net realized and unrealized gain on investments 0.08 0.46 ----------- ----------- Total from investment operations (0.18) 0.21 ----------- ----------- Dividends paid - - ----------- ----------- Shareholders' equity, end of year $ .31 $ .49 =========== =========== Per share market value, end of year $ .22 $ .42 =========== =========== Shares outstanding, end of year 5,346,084 5,346,084 =========== =========== Ratios/Supplemental Data Shareholders' equity, end of period $ 1,656,909 $ 2,627,744 Ratio of investment expenses to average shareholders' equity 100.87% 139.27% Ratio of investment loss - net to average shareholders' equity 64.26% 63.96% F-7 WINFIELD CAPITAL CORP. NOTES TO FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 2005, 2004 AND 2003 1. Organization Winfield Capital Corp. (the "Registrant" or the "Company") was incorporated in 1972. The Company is a small business investment company ("SBIC") that was licensed by the U.S. Small Business Administration (the "SBA") in 1972 under the Small Business Investment Act of 1958, as amended (the "Small Business Investment Act"). The Company is a non-diversified investment company that has elected to be regulated as a business development company ("Business Development Company"), a type of closed-end investment company under the Investment Company Act of 1940, as amended (the "1940 Act"). Beginning April 1, 1996, the Company elected to be taxed as a regulated investment company (RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Company uses funds borrowed from the SBA, together with its own capital, to provide loans to, and make equity investments in, independently owned and operated business concerns that, in accordance with SBA Regulations, (i) do not have a net worth in excess of $18 million and do not have average net income after Federal income taxes for the preceding two years of more than $6 million, or (ii) meet size standards set by the SBA that are measured by either annual receipts or number of employees, depending on the industry in which such concerns are primarily engaged ("Eligible Concerns"). The Company invests in all kinds and classes of securities of portfolio companies, including, but not limited to, notes and bonds; straight, senior, subordinated, convertible and interest-paying debentures; preferred stock; common stock; and options and warrants to purchase the foregoing. The Company's investments are made, with the intention of having loans repaid within five years and equity investments liquidated within 5 to 10 years. Situations may arise, however, where the Company may hold an equity interest for a shorter or longer period. 2. Basis of Presentation 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 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. F-8 WINFIELD CAPITAL CORP. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 31, 2005, 2004 AND 2003 3. Summary of Significant Accounting Policies Valuation of Investments Securities that are traded on a securities exchange or the Nasdaq National Market, which are not restricted investments, are valued at the security's last sales price on the last trading day of the period. Securities traded over-the-counter are valued at the closing price for the valuation date. The Company's investments in restricted securities of public companies are valued at the closing price on the valuation date less a discount rate of 10% to 30%, which is determined by the Board of Directors of the Company (the "Board of Directors") based upon applicable factors such as resale restrictions, contractual agreement and trading history of the portfolio company. In some cases, a discount of greater than 30% may be used based upon applicable factors including, but not limited to: 1) whether the portfolio company will be financially solvent at the time such restricted securities become freely tradable, 2) whether the Company has knowledge of material non-public information about the portfolio company which it is not at liberty to disclose in connection with its sale of the securities of such portfolio company and 3) the risk that the portfolio company's securities might be delisted from an exchange or automated trading market with published trading reports. Investments in restricted securities, which have been subjected to a discount as determined by the Board of Directors amounted to $298,345 and $423,514 as of March 31, 2005 and 2004, respectively. Loans and assets acquired in liquidation for which no public market exists are stated at "fair value" as determined in good faith by the Board of Directors. The carrying values of loans to small business concerns are based on the Board of Directors' evaluation of the financial condition of the borrowers and/or the underlying collateral. The values assigned are considered to be amounts which could be realized in the normal course of business, which anticipates the Company holding the loans to maturity and realizing the face value of the loans. The carrying value of loans normally corresponds to cost less amortized original issue discount, if any, unless adverse factors lead to a determination of value at a lower amount. In such instances, the Company records an increase in unrealized depreciation of investments to reduce the carrying value of such loans to a value, as determined by the Board of Directors. Investments in non-public companies (including equity investments, warrants and convertible instruments) are recorded at fair value as determined in good faith by the Board of Directors, after consideration of all pertinent information, including factors such as significant equity financing by sophisticated, unrelated new investors, history of cash flows from operations, the market for comparable publicly traded companies (discounted for illiquidity) and other pertinent factors. The values assigned to these securities are based upon available information and do not necessarily represent amounts which might ultimately be realized, since such amounts depend on future circumstances and cannot reasonably be determined until the individual positions are liquidated. Certain of the Company's loans are delinquent as to the required principal and/or interest due under the respective loan agreements. Loans are generally considered to be in default when they become 180 days past due pursuant to SBA regulations. However, on a case by case basis, management will consider, based on available information, the appropriateness of the continued accrual of interest and the carrying value of the loan. F-9 WINFIELD CAPITAL CORP. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 31, 2005, 2004 AND 2003 At March 31, 2005 and 2004, the investment portfolio included investments totaling $5,993,030 and $12,223,604, respectively, whose fair values had been estimated by the Board of Directors in the absence of readily ascertainable market values. Because of the inherent uncertainty of the valuations, the values may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material. At March 31, 2005 and 2004, all investments were in small business concerns located in the United States of America. Realized and Unrealized Gain or Loss Realized gains or losses are recorded upon disposition of investments and calculated as the difference between the proceeds from such dispositions and the cost basis determined using the specific identification method. The cost of investments that in the Board of Directors' judgment have become permanently impaired, in whole or in part, are written off, and such amounts are reported as realized losses. For the fiscal years ended March 31, 2005, 2004 and 2003, net realized losses from write-offs after recoveries totaled $5,760,643, $12,921 and $182,001, respectively. All other changes in the valuation of portfolio investments are included as changes in the unrealized appreciation or depreciation of investments in the statement of operations. At March 31, 2005 and 2004, the aggregate gross unrealized depreciation of investments was $9,830,786 and $16,799,648, respectively, and the aggregate gross unrealized appreciation of investments was $1,130,994, and $3,884,530, respectively, resulting in a net unrealized depreciation of $8,699,792 and $12,915,118, respectively. Description of Loan Terms The Company's loans to small business concerns range up to approximately $5,400,000 in size, typically have a maturity of five years or less, and, in many cases, are convertible into common stock or are accompanied by warrants to purchase common stock of the borrower at a nominal exercise price, subject in most cases to certain conditions. The loans bear interest at rates ranging from 6.0% to 19.0%, per annum. Interest is payable in monthly, quarterly, or semi-annual installments with principal payments payable either over the term of the loan or at maturity. These loans are generally collateralized by the assets of the borrower, certain of which are subject to prior liens, and/or guarantees. The Company seeks to maximize the difference, or "spread," between the rate at which it borrows funds from the SBA and the rate at which it lends these funds to small business concerns. Interest rates are subject to a cap determined by the SBA. The Company also participates in syndicated loans. Option Contracts - Derivatives The Company adopted Statement of Financial Accounting Standards No. 133 as amended by Statements No. 137 and No. 138, Accounting for Derivative Instruments and Hedging Activities, (referred to hereafter as "SFAS 133"), on January 1, 2001. At that time, the Company did not have any derivatives. SFAS 133 requires that an entity recognize all derivative instruments in the balance sheet and measure those financial instruments at fair value. All changes in the fair market value of financial instruments are included as changes in the unrealized appreciation or depreciation of investments in the statements of operations. F-10 WINFIELD CAPITAL CORP. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 31, 2005, 2004 AND 2003 Assets Acquired in Liquidation Assets acquired in liquidation ("Liquidations") include those loan balances for which collateral in real estate and other assets have been obtained by the Company and which have been or are in the process of being liquidated. These Liquidations are carried at a value as determined in good faith by the Board of Directors based upon amounts that the Company expects to realize upon disposition of the collateral, on a discounted basis, after reasonable selling expenses. The Company capitalizes expenditures related to Liquidations subsequent to foreclosure on the collateral, and accrued interest receivable as of the date of such foreclosure, if the Board of Directors expects such amounts to be recovered by the Company. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash and cash equivalents. The carrying amount reported in the balance sheet for cash and cash equivalents approximates fair value. Short-term Marketable Securities Short-term marketable securities are carried at fair value. Interest income earned on short-term marketable securities for the fiscal years ended March 31, 2005, 2004 and 2003, was $0, $14,589 and $238,484, respectively. Deferred Debenture Costs SBA debenture costs were amortized over ten years, which represented the terms of the SBA debentures. There is no remaining balance of debt issuance costs as it was accelerated at March 31, 2003 due to the SBA's acceleration of the indebtedness. See Note 2. Revenue Recognition Interest income is recognized as it is earned on short-term marketable securities and debt investments. Dividend income from equity investments is recognized as of the ex-dividend date. Deferred Income Loan origination fees paid to the Company are deferred and amortized over the terms of the respective loans. Upon prepayment of loans, any unamortized portion of the loan origination fees is recognized. Furniture and Equipment Furniture and equipment are carried at cost. The Company depreciates furniture and office equipment over an estimated useful life of 10 years using the straight-line method except for computer equipment that is depreciated under an accelerated method over five years. Income Taxes Effective April 1, 1996, the Company has elected to be taxed as a RIC under the Code. If the Company, as a RIC, satisfies certain requirements relating to the source of its income, the diversification of its assets and the distribution of its net income, the Company is taxed as a pass-through entity that acts as a partial conduit of income to its shareholders. In order to maintain its RIC status, the Company must in general: 1) derive at least 90% of its gross income from dividends, interest and gains from the sale or disposition of securities, 2) meet investment diversification requirements defined by the Code and 3) distribute to shareholders 90% of its net income (other than long-term capital gains). 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 F-11 WINFIELD CAPITAL CORP. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 31, 2005, 2004 AND 2003 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. The Company may periodically make reclassifications among certain of its capital accounts as a result of timing and characterization of certain income and capital gains distributions determined annually in accordance with Federal tax regulation. The reclassifications may result in a reduction of capital. All reclassifications have been reflected on the statements of changes in shareholders' equity. Stock Options The Company accounts for stock-based compensation relating to its stock option plan using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations ("APB No. 25"). Under APB No. 25, compensation cost is measured as the excess, if any, of the quoted market price of the Company's shares at the date of grant over the exercise price of the option granted. No compensation cost has been recognized in connection with the Company's stock option plans. The Company provides additional pro forma disclosures as required under Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation" (see Note 7). Had the Company measured compensation expense under SFAS No. 123, there would be no material impact to the net decrease in shareholders' equity resulting from operations or the per share net increase (decrease) in shareholders' equity resulting from operations for the years ended March 31, 2005, 2004 and 2003. The following table illustrates the effect on net income (loss) and earnings (loss) per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.

The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for expected volatility, risk-free interest rate and expected lives. Per Share Data Under SFAS No. 128 "Earnings Per Share", net increase (decrease) in shareholders' equity per share is computed by dividing net increase (decrease) in shareholders' equity resulting from operations by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock. Risks and Uncertainties The Company is engaged in a high-risk business. Loans and other investments to small business concerns are extremely speculative. Most of such small business concerns are privately held. Even if a public market for the F-12 WINFIELD CAPITAL CORP. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 31, 2005, 2004 AND 2003 securities of such concerns exists, the loans and other securities purchased by the Company are often restricted against sale or other transfer for specified periods of time. Thus, such loans and other investments have little, if any, liquidity, and the Company must bear significantly larger risks, including possible losses on such investments, than would be the case with traditional investment companies. The market value of public securities may fluctuate significantly in response to factors that are beyond the Company's control. In addition, see Note 2 with regard to certain uncertainties. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting period. The most significant estimates relate to the valuation of investments. Actual results could differ from those estimates. Recent Accounting Pronouncements Affecting The Company During April 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards (`SFAS") 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." The statement requires that contracts with comparable characteristics be accounted for similarly and clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS 149 is effective for contracts entered into or modified after June 30, 2003, except in certain circumstances, and for hedging relationships designated after June 30, 2003. This new standard does not currently have any impact on the Company's operating results and financial position. In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment." This statement is a revision to SFAS No. 123, supersedes APB No. 25, "Accounting for Stock Issued to Employees," and amends SFAS No. 95, "Statement of Cash Flows." This statement will require the Company to expense the cost of employee services received in exchange for an award of equity instruments. This statement also provides guidance on valuing and expensing these awards, as well as disclosure requirements, and is effective for the first interim reporting period that begins after June 15, 2006. SFAS No. 123R permits public companies to choose between the following two adoption methods: 1. A "modified prospective" method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123R for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123R that remain unvested on the effective date, or 2. A "modified retrospective" method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures for either (a) all prior periods presented or (b) all prior periods of the year of adoption. As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using the APB No. 25 intrinsic value method and recognizes no compensation cost for employee stock options. The impact of the adoption of SFAS No. 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, valuation of employee stock options under SFAS No. 123R is similar to SFAS No. 123, with minor exceptions. For information about what the Company's reported results F-13 WINFIELD CAPITAL CORP. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 31, 2005, 2004 AND 2003 of operations and earnings per share would have been had it adopted SFAS No. 123, see discussion under the heading "Stock Options" in this note. The adoption of SFAS No. 123R's fair value method would have no effect on the Company's operating results and financial position since no options were granted in the fiscal year ended March 31, 2005. In December 2004, the FASB issued SFAS No. 153, "Exchanges for Non-monetary Assets," an Amendment of APB No. 29, "Accounting for Non-monetary Transactions." SFAS No. 153 requires exchanges of productive assets to be accounted for at fair value, rather that at carryover basis, unless (1) neither the asset received nor the asset surrendered has a fair value that is determinable within reasonable limits or (2) the transactions lack commercial substance. SFAS No. 153 is effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not expect the adoption of this standard to have a material effect on its financial position, results of operations or cash flows. 4. Fair Value of Financial Statements: Debentures payable to the U.S. Small Business Administration The carrying amount of the Company's debentures payable to the SBA approximates fair value. Option Contracts Beginning in January 2001, the Company utilized put and call option contracts to minimize market risks of its investments in publicly held companies. As of March 31, 2005, the Company had no option contracts outstanding as part of its portfolio. 5. Debentures Payable to the U.S. Small Business Administration: Debentures payable to the SBA at March 31, 2005, with interest payable semi-annually, consisted of the following: Original Interest Rate Amount Due Date (per annum) ------ -------- ----------- $ 750,000 9/1/2005 6.875% 600,000 9/1/2005 6.875% 3,641,550 3/1/2011 6.353% ----------- $ 4,991,550 =========== Under the terms of the debentures, the Company may not repurchase or retire any of its capital stock, make any distributions to its shareholders other than dividends out of retained earnings pursuant to SBA regulations or increase officers' salaries without the prior written approval of the SBA. 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 F-14 WINFIELD CAPITAL CORP. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 31, 2005, 2004 AND 2003 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 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. 6. Commitments and Contingencies: The Company has an operating lease on its office facility that expires on February 29, 2008. Rent expense was $46,647, $46,647, and $46,150 for the years ended March 31, 2005, 2004 and 2003, respectively. The following are the minimum rental commitments for the next three fiscal years: Fiscal Year Ending March 31, ------------------ --------- 2006 $ 47,421 2007 51,220 2008 48,644 --------- $ 147,285 ========= 7. Stock Option Plan: In October 1995, which was subsequently amended by the shareholder vote in September 1997, the Company adopted the 1995 stock option plan (the "Plan") under which 1,250,000 shares of common stock were reserved for issuance pursuant to options granted under the Plan. Under the Plan, options intended to qualify as "incentive stock options" under Section 422 of the code ("Qualified Options"), options not intended to qualify as qualified options, stock appreciation rights ("SARs") and shares of Restricted Common Stock may be granted or issued. Qualified Options granted to Eligible Employees (as defined in the Plan) will be exercisable at a price equal to the fair market value of the shares at the time the Qualified Option is granted, or, if no such market value is determinable, at the current net asset value of such shares, except for options granted to any employee who owns 10% or more of the outstanding stock of the Company ("10% shareholder"), for which the exercise price may not be less than 110% of the current fair market value of the common stock. If the aggregate fair market value (determined at the time the Qualified Option is granted) of the shares exercisable for the first time by any grantee during any calendar year exceeds $100,000, such excess shares may not be treated as a Qualified Option. No Qualified Option may be exercised more than 10 years after the date on which it is granted. In the case of an option granted to a 10% shareholder, such period may not exceed five years. Options not intended to qualify as qualified options may be granted to Eligible Employees under the Plan and shall have such exercise prices and such other terms and conditions as the Compensation Committee of the Company (the "Committee") may determine in its discretion, subject to the requirements of the 1940 Act. F-15 WINFIELD CAPITAL CORP. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 31, 2005, 2004 AND 2003 The Plan is administered by the Board of Directors. The Board of Directors determines who is eligible to participate in the Plan and the number of shares, if any, on which options are to be granted, the SARs, if any, to be granted with respect to such options and the shares of restricted Common Stock, if any, to be issued, to eligible parties. Options granted under the Plan will not be transferable, other than by the laws of descent and distribution, and during the grantee's life may be exercised only by such grantee. All rights to exercise options will expire upon termination for cause of the holder's employment or directorship. The Plan also provides that shares of restricted Common Stock may be granted to eligible employees on such terms and in such amounts as the Committee determines. Such shares of Common Stock will be issued under a written agreement, which will contain restrictions on transfers thereof as may be required by law and as the Committee may determine in its discretion. The Plan will terminate when there have been granted shares of Common Stock and options on the total number of shares authorized by the Plan or by action of the Board of Directors, but in no event later than June 12, 2005. The authorized number of shares may be increased, and the Plan's date of termination may be extended, only by shareholder action. Stock option activity for the past three years has been as follows:

The following table summarizes information about the stock options outstanding as of March 31, 2005:

F-16 WINFIELD CAPITAL CORP. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 31, 2005, 2004 AND 2003 8. Concentration of Credit and Market Risk: Financial instruments that potentially subject the Company to concentrations of credit risk consisted of cash and cash equivalents of $323,177 and $5,473,063 at March 31, 2005 and 2004, respectively. Cash is invested with banks in amounts, which, at times, exceed insurable limits. As of March 31, 2005, 99% of the Company's total investment value was held in five equity securities and one note: Accent Optical Technologies, Inc., Bigfoot Interactive, Inc., Comdial Corporation, Conversion Services International, Inc. (a/k/a/ Evoke Software Corporation), myGeek.com, Inc. and Petroleum Place, Inc. As of March 31, 2004, 93% of the Company's total investment value was held in three equity securities and three notes: Accent Optical Technologies, Inc., J.L. French Automotive Castings, Inc., Comdial Corporation, Open Solutions, Inc., Petroleum Place, Inc. and Engenia Software, Inc. 9. (Loss) Earnings Per Common Share:

(A) For the years ended March 31, 2005, 2004 and 2003, the effect of exercising the outstanding stock options would have been anti-dilutive and, therefore, the use of common stock equivalent shares was not considered. 10. Nasdaq Stock Market, Inc. ("Nasdaq") Letters and Delisting: On January 22, 2003, the Company received a determination of the staff (the "Staff Determination") of the Nasdaq Listing Qualifications Department (the "Staff") indicating that the Company failed to comply with the minimum bid price of its common stock requirement for continued listing set forth in Marketplace Rule 4450(a)(5) and that its securities were, therefore, subject to delisting from the Nasdaq SmallCap Market effective January 31, 2003. The Company was granted a hearing on March 6, 2003 before a Nasdaq Listing Qualification Panel (the "Panel") to review the Staff Determination. This hearing stayed the delisting of the Company's common stock pending the Panel's decision. On April 11, 2003, effective April 15, 2003, the Company received notice from Nasdaq that the Company's securities were delisted from the Nasdaq SmallCap Market. The Company's securities are quoted on the OTC Bulletin Board effective April 15, 2003 with the assigned symbol "WCAP". F-17 WINFIELD CAPITAL CORP. PORTFOLIO OF INVESTMENTS MARCH 31, 2005 Loans and Notes Receivable

---------- (a) Non-income producing or past due as to required principal and/or interest (b) Foreclosed upon (c) Declared Chapter 7 bankruptcy F-18 WINFIELD CAPITAL CORP. PORTFOLIO OF INVESTMENTS (CONTINUED) MARCH 31, 2004 Loans and Notes Receivable

---------- (a) Non-income producing or past due as to required principal and/or interest (b) Foreclosed upon (c) Declared Chapter 7 bankruptcy F-19 WINFIELD CAPITAL CORP. PORTFOLIO OF INVESTMENTS (CONTINUED) MARCH 31, 2005 Equity Interests

---------- (a) Publicly traded at March 31, 2005 (b) Delisted at March 31, 2005 F-20 WINFIELD CAPITAL CORP. PORTFOLIO OF INVESTMENTS (CONTINUED) MARCH 31, 2005 Equity Interests (Continued)

---------- (a) Publicly traded at March 31, 2005 (b) Delisted at March 31, 2005 F-21 WINFIELD CAPITAL CORP. PORTFOLIO OF INVESTMENTS (CONTINUED) MARCH 31, 2004 Equity Interests

---------- (a) Publicly traded at March 31, 2004 (b) Delisted at March 31, 2004 F-22 WINFIELD CAPITAL CORP. PORTFOLIO OF INVESTMENTS (CONTINUED) MARCH 31, 2004 Equity Interests (Continued)

---------- (a) Publicly traded at March 31, 2004 (b) Delisted at March 31, 2004 F-23

WINFIELD CAPITAL CORP 10-K