Item 1A. Risk Factors
You should not invest in our securities unless you can afford to lose your investment in its entirety. The Company is subject to various risks that may materially harm our business, financial condition and results of operations. Should any of the following factors materialize, the trading price of the Company's securities could materially decline and you could lose all or part of your investment.
The Company has a limited operating history
Although the Board of Directors and the Executive Officers of the Company consist of individuals with executive level experience in the finance and operations of public and private companies, they have no operating history as a business development company. In addition, the Company does not intend to engage an independent investment advisor.
The Company has a history of failed attempts to launch a business development company
The Company first elected to act as a Business Development Company during September 2004. Since that date, the Company has been unable to execute a BDC business model, principally due to a lack of consistent, qualified executive management, lack of capital, lack of bona fide clients and inability to adhere to the strict prerequisites of operating pursuant to the Investment Company Act of 1940. The Company has taken certain steps to implement this business model. These steps include certain provisions the Company has made including long-term agreements with our CEO and COO; providing sufficient seed capital to initiate our plan, populating our board with qualified, dis-interested directors; acquiring a large portfolio of publicly-traded securities to enhance our financial condition and contracting with our first round of private companies which engage VitalTrust for management and finance. However, operating as a business development company carries risks and uncertainties which may go beyond the risks and uncertainties of a typical start-up enterprise. Should the Company be unable to execute the business development company model, the trading price of its securities may suffer and the price you pay for your shares purchased in the open market may decline severely or could lose their value entirely.
The Company will need to raise additional capital to finance its BDC business model
The Company intends to finance and manage qualified US corporations. For the first six months, the Company will invest in its Portfolio Companies and will not receive repayment. Scheduled repayment or the sale of assets is not expected to occur until beginning the seventh month of 2007. The Company's model envisions requiring approximately $500,000 per month to meet our corporate overhead and obligations we make to our Portfolio Companies. At a minimum, the Company will therefore need to raise a total of $3,000,000 to fund our anticipated needs through the first six months of 2007. Following that period, the Company will continue to require additional capital depending upon the rate of return and repayment achieved by our Portfolio Companies. If the Company isn't successful in raising financing, VitalTrust will be unable to execute its business model and the shares you purchase in the open market may decline severely or could lose their value entirely.
Gains and losses in our Portfolio Securities and Portfolio Companies are in part beyond the control of our officers or directors
As a business development company, we intend to (i) buy and sell short and long-term investments in qualified US corporations (our Portfolio Securities) and (ii) to acquire meaningful positions and take proactive executive roles with a series of small, private US corporations (our Portfolio Companies). Our return to shareholders is forecast to come from capital gains on our Portfolio Securities and through dividend, earnings and fees earned through our engagement by Portfolio Companies. However, our Portfolio Securities are comprised of restricted and free-trading shares held in various US corporations of which we have only a passive, investor relationship. As such, the operation of these companies and our ability to monitor and have an impact on their respective operations is very limited. In regards to our Portfolio Companies, we intend to assume executive and director roles with each of our Portfolio Companies and a condition to our providing finance will be the vetting of their respective business and operations. However, in each case, each of our Portfolio Companies may have existing management in place to include a Chief Executive Officer and a Chief Financial Officer. As such, while we will have significant involvement in planning, we may have limited involvement in the execution of each business plan. As a result, in the case of both our Portfolio Securities and Portfolio Companies, we could have a meaningful loss in value for reasons which would be beyond our control and in certain cases, beyond our ability to anticipate.
The Company's investments and fees may not be sufficient to cover the costs of our operations
The Company intends to make investments in qualified companies that will provide the greatest overall return on its investments and expertise. However, certain of those investments may fail, in which case the Company will not receive any return on its investment. In addition, the Company's investments may not generate income, either in the immediate future, or at all. As a result, the Company may have to sell additional stock or borrow money to cover operating expenses. The effect of such actions could cause the Company's stock price to decline or, if the Company is not successful in raising additional capital, the Company could cease to continue as a going concern.
The Company's Common Stock may be affected by limited trading volume and may fluctuate significantly; The Company's Common Stock trades through the over-the-counter bulletin board quotation service which may make it more difficult for investors to resell their shares
A limited public market for the Company's common stock will continue and there can be no assurance that an active trading market will develop or if developed, can be maintained. Further, the Company's common stock trades on the bulletin board. Many broker-dealers decline to trade in the Company's securities because of this trading venue and low price given the market for such securities is typically limited and subject to volatile swings in its price. These factors may reduce the potential market for the Company's common stock by reducing the number of potential investors.
Because there is generally no established market for which to value its investments, the Company’s Board of Directors’ determination of the value of our investments may differ materially from the values that a ready market or third party would attribute to these investments.
Under the 1940 Act the Company is required to carry its portfolio investments at market value, or, if there is no readily available market value, at fair value as determined by the Board or through an independent appraisal. The Company is not permitted to maintain a general reserve for anticipated loan losses. Instead, the Company is required by the 1940 Act to specifically value each individual investment and to record any unrealized appreciation/depreciation for any asset that has increased/decreased in value. As, there is typically no public market for the loans and equity securities of the companies in which it invests, the Company’s Board will determine the fair value of these loans and equity securities pursuant to its valuation policy. These determinations of fair value may be subjective, in part. Accordingly, these values may differ materially from the values that would be determined by an independent party or placed on the portfolio if a market existed for its loans and equity securities.
Investing in Private Companies Involves a High Degree of Risk.
The Company’s portfolio consists primarily of investments in private companies. Investments in private businesses involve a high degree of business and financial risk, which can result in substantial losses and accordingly, should be considered speculative. Generally, there is no publicly available information about the companies in which the Company invests, and the Company relies significantly on the due diligence of its employees and agents to obtain information in connection with its investment decisions. If the Company is unable to uncover all material information about these companies, it may not make a fully informed investment decision and the Company may lose money on its investments.
In addition, some smaller businesses have narrower product lines and market shares than their competition, and may be more vulnerable to customer preferences, market conditions or economic downturns, which may adversely affect the return on, or the recovery of, the Company’s investment in such business.
The Lack of Liquidity of the Company’s Privately Held Investments may Adversely Affect Our Business.
Substantially all future investments of the Company will be subject to restrictions on resale, including in some instances, legal restrictions, or will otherwise be less liquid than publicly traded securities. The illiquidity of our investments may make it difficult for us to quickly obtain cash equal to the value at which we record our investments if the need arises. This could cause us to miss important business opportunities. In addition, if we are required to quickly liquidate all or a portion of our portfolio, we may realize significantly less than the value at which we have previously recorded our investments.
If the Industry Sectors in which the Company’s Portfolio is concentrated experience adverse economic or business conditions, the Company’s Operating Results may be negatively impacted.
The Company’s customer base will be in diversified industries. These customers can experience adverse business conditions or risks related to their industries. Accordingly, if the Company’s customers suffer due to these adverse business conditions or risks or due to economic slowdowns or downturns in these industry sectors the Company will be more vulnerable to losses in its portfolio and its operating results may be negatively impacted.
Some of these companies may be unable to obtain financing from public capital markets or from traditional credit sources, such as commercial banks. Accordingly, advances made to these types of companies may entail a higher degree of risk than advances made to others who are able to utilize traditional credit sources. These conditions may also make it difficult for the Company to obtain repayment of its loans.
Economic downturns or recessions may impair the Investment Companies’ ability to repay loans and could harm operating results.
Many of the companies in which the Company will make investments may be susceptible to economic slowdowns or recessions. An economic slowdown may affect the ability of a company to engage in a liquidity event. The Company’s non-performing assets are likely to increase and the value of its portfolio is likely to decrease during these periods. These conditions could lead to financial losses in the investment portfolio and a decrease in the Company’s its revenues, net income and assets.
The Company’s business of making private equity investments and positioning them for liquidity events also may be affected by current and future market conditions. The absence of an active senior leading environment may slow the amount of private equity investment activity generally. As a result, the pace of the Company’s investment activity may slow. In addition, significant changes in the capital markets could have an effect on the valuations of private companies and on the potential for liquidity events involving such companies. This could affect the amount and timing of gains realized on its investments.
The Company’s borrowers may default on their payments, which may have an effect on financial performance.
Some of the companies in which we invest may be unable to obtain financing from public capital markets or from traditional credit sources, such as commercial banks. Accordingly, advances made to these types of customers may entail a higher degree of risk than advances made to customers who are able to utilize traditional credit sources. These conditions may also make it difficult for the Company to obtain repayment of its loans. Numerous factors may affect a borrower’s ability to repay its loan; including the failure to meet its business plan, a downturn in its industry, or negative economic conditions. Deterioration in a borrower’s financial condition and prospects may be accompanied by deterioration in any related collateral.
If the Company fails to manage its growth, its financial results could be adversely affected.
The Company’s growth may place a significant strain on its management systems and resources. The Company must continue to refine and expand its marketing capabilities, its management of the investing process, access to financing resources and technology. As the Company grows, it must continue to hire, train, supervise and manage new employees. The Company may not develop sufficient lending and administrative personnel and management and operating systems to manage its expansion effectively. Failure to manage the Company’s future growth could have a material adverse effect on the Company’s business, financial condition and results of operation.
The Company’s private finance investments may not produce current returns or capital gains.
The Company’s private finance investments will be structured as debt securities with a relatively high fixed rate of interest and with equity features such as conversion rights, warrants or other options. As a result, the Company’s private finance investments will be structured to generate interest income from inception of the investment and may also produce a realized gain from an accompanying equity feature. The Company cannot be sure that its portfolio will generate a current return or capital gain.
The Company operates in a competitive market for investment opportunities
The Company competes for investments with a large number of private equity funds and mezzanine funds, investment banks and other equity and non-equity based investment funds, and other sources of financing, including traditional financial services companies such as commercial banks. Some of its competitors have greater resources than the Company. Increased competition would make it more difficult for the Company to purchase or originate investments at attractive prices. The Company cannot assure that these competitive pressures will not have a material adverse effect on its business, financial condition and results of operations. As a result of this competition, sometimes the Company may be precluded from making otherwise attractive investments.
Investing in the Company’s stock is highly speculative and an investor could lose some or all of the amount invested
The value of the Company’s common stock may decline and may be affected by numerous market conditions, which could result in the loss of some or the entire amount invested in its shares. The securities markets frequently experience extreme price and volume fluctuations, which affect market prices for securities of companies generally, and very small capitalization companies in particular. The price of its common stock may be higher or lower than the price you pay for your shares, depending on many factors, some of which are beyond the Company’s control and may not be directly related to operating performance. These factors include the following:
·
Price and volume fluctuations in the overall stock market from time to time; which are often unrelated to the operating performance of particular companies;
·
Significant volatility in the market price and trading volume of securities of business development companies or other financial service companies; which is not necessarily related to the operating performance of these companies;
·
Changes in the regulatory policies or tax guidance with respect to business development companies;
·
Actual or anticipated changes in the Company’s earnings or fluctuations in its operating results or changes in the experience of securities analysts;
·
Loss of business development company (BDC) status;
·
Changes in the value of our portfolio of investments;
·
Operating performance of comparable companies;
Fluctuations in the trading prices of the Company’s shares may adversely affect the liquidity of the trading market of these shares and, if the Company seeks to raise capital through future equity financings, its ability to raise such equity capital may be limited.
The Company‘s business depends on key personnel
The Company depends on the continued service of its executive officers. If the Company were to lose any of these officers, such a loss could result in inefficiencies in the Company’s operations and the loss of business opportunities. The Company does not maintain any key man life insurance on any of its officers or employees.
The Company’s Business Plan is dependent upon external financing which may expose the Company to risks associated with leverage
The Company will require a substantial amount of cash to operate and grow. The Company may acquire additional capital from the following sources:
·
Senior Securities. The Company intends to issue debt securities, other evidences and preferred stock, up to the maximum amount permitted by the 1940 Act. The 1940 Act currently permits VitalTrust, as a business development company, to issue debt securities and preferred stock, which is referred to collectively as senior securities, in amounts such that the asset coverage, as defined in the 1940 Act, is at least 200% after each issuance of senior securities. As a result of issuing senior securities, the Company will be exposed to the risks associated with leverage. Although borrowing money for investments increases the potential for gain, it also increases the risk of a loss. A decrease in the value of the Company’s investments will have a greater impact on the value of its common stock to the extent that it has borrowed money to make investments. There is a possibility that the costs of borrowing could exceed the income received on the investments made with such borrowed funds. In addition, the ability to pay dividends or incur additional indebtedness would be restricted if asset coverage is not at least twice that of indebtedness. If the value of assets declines, the Company might be unable to satisfy that test. If this happens, there may be a requirement to liquidate a portion of the loan portfolio and repay a portion of the indebtedness at a time when a sale may be disadvantageous. Furthermore, any amounts used to service indebtedness will not be available for distributions to stockholders.
·
Common Stock. Because the Company is limited in its ability to issue debt for the reasons given above, the Company is dependent on the issuance of equity as a financing source. If the Company raises additional funds by issuing more common stock or debt securities convertible into or exchangeable for its common stock, the ownership percentage of stockholders at the time of the issuance would decrease and they may experience dilution. In addition, any convertible or exchangeable securities that may be issued in the future may have rights, preferences and privileges more favorable than those of the common stock.
·
Securitization. In addition to issuing securities to raise capital as described above, the Company anticipates that in the future it will securitize loans to generate cash for funding new investments. An inability to successfully securitize the Company’s loan portfolio could limit the Company’s ability to grow the business, fully execute its business strategy and impact profitability. Moreover, successful securitization of the loan portfolio might expose the Company to losses as the loans in which the Company does not plan to sell interests will be those that are riskier and more apt to generate losses.
Shares of Closed-End Investment Companies frequently trade at a discount from net asset value.
Shares of closed-end investment companies frequently trade at a discount from net asset value. This characteristic of shares of closed-end investment companies is separate and distinct from the risk that the Company’s net asset value per share will decline.
Changes in the law or regulations that govern the Company could have a material impact on its operations
The Company is regulated by the 1940 Act and the rules and regulations promulgated there under. In addition, changes in the laws or regulations that govern business development companies may significantly affect its business. Any changes in the law or regulations that govern its business could have a material impact on operations. The Company is subject to federal, state and local laws and regulations and is subject to judicial and administrative decisions that affect its operations. If these laws, regulations or decisions change, or if the Company expands its business into jurisdictions that have adopted more stringent requirements than those in which it currently conducts business, the Company may incur significant expenses in order to comply or might restrict operations.
Item 2.
Item 2. Properties
The Company's offices are provided by our Chief Operating Officer. The offices are located at 2701 North Rocky Point Drive, suite 325, Tampa, Florida 33607. The Company believes its office space is suitable for its needs for the foreseeable future.
Item 3.
Item 3. Legal Proceedings
The Company previously reported that on March 22, 2005, a civil suit was filed in Orange County Circuit Court, Orlando, Florida against the former CEO of the Company, Walter H. Roder, II. The Company also previously reported that counterclaims were filed by Mr. Roder and related entities alleging non-payment of purported obligations which the Company believed to be without merit. On March 5-6, 2007, the Orange County Circuit Court declined to grant reconsideration of a summary judgment, and also entered a separate final judgment, against the Company in the aggregate amount of $1,307,685. The Court also found Roder entitled to recover post-judgment interest and attorney’s fees and costs, with the amount of attorney’s fees and costs not being determined yet. The Company appealed to the Fifth District Court of Appeal in Daytona Beach, Florida on March 7, 2007, and the appellate court entered a March 22, 2007 Order of Referral to Mediation. The Company contends that the Trial Court erred in entering summary judgment in favor of Roder despite the existence of legal and factual issues that demonstrated the sued-upon indebtedness no longer resided with the Company. The Company’s management and its litigation attorneys believe that good grounds to appeal do in fact exist and that there is a significant likelihood of obtaining a reversal of the Trial Court’s Summary Judgment. It is not possible to predict the outcome of the appeal with any degree of certainty, and it is not likely that a decision will be reached by the Appellate Court until 2008.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted for a vote of security holders during the fourth quarter of the year ended December 31, 2006.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity and Related Stockholders Matters and Issuer Purchases of Equity Securities
VitalTrust common stock, par value, $.001 per share (“Common Stock”) is traded on the Over the-Counter Electronic Bulletin Board (“OTC”) under the symbol “VTBD” The following table sets forth, for the period indicated, the range of high and low closing prices reported by the OTC. Such quotations represent prices between dealers and may not include markups, markdowns, or commissions and may not necessarily represent actual transactions.
(1) Prices quoted reflect a 1,250:1 reverse stock split and are not reflective of actual trading prices.
As of December 31, 2006 the authorized capital of the company is 80,000,000 shares of common voting stock with a par value $.001 per share. The Company also has authorized three classes of Preferred Stock: (1) Class A- 10,000,000 shares of convertible preferred with a par value of $.001 per share; (2) Class B- 10,000,000 shares of preferred stock with a par value of $.001; and (3) Class C- 10,000,000 shares of preferred stock with a par value of $.001. During March, 2007, the Company has proposed to further amend its 30,000,000 shares of Preferred Stock to designate a single Class A Preferred Stock with terms and rights such that we can conclude the acquisition of the portfolio of securities.
Holders
As of December 31, 2006, the Company’s, there were 41,447,209 shares of common stock issued and outstanding, held by approximately 99 shareholders.
As of December 31, 2006, the Company’s, there were 0 shares of Class A Preferred stock issued and outstanding, held by approximately 0 shareholders.
As of December 31, 2006, the Company’s, there were 0 shares of Class B Preferred stock issued and outstanding, held by approximately 0 shareholders.
As of December 31, 2006, the Company’s, there were 0 shares of Class C Preferred stock issued and outstanding, held by approximately 0 shareholders.
Dividends
During the past two years, the Company has not paid any dividends on its common or preferred stock.
We have not paid any cash dividends on our common stock and do not anticipate declaring or paying any cash dividends in the foreseeable future.
Equity Compensation Plan Information
The following table summarizes the equity compensation plans under which our securities may be issued as of December 31, 2006.
Recent Sales of Unregistered Securities
Between December 2005 and February 2007, the Company issued an aggregate of 27,625,000 shares in exchange for 100% of the outstanding shares of Entellectual Solutions Property Group, Inc. As a part of the transaction, our largest shareholder received 12,691,635 restricted shares and our Chairman and Chief Executive Officer received 2,350,235 restricted shares.
Purchase of Equity Securities by the Issuer
None.
Item 6.
Item 6. Selected Financial Data
The selected financial data should be read in conjunction with the Company’s “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Financial Statements and notes thereto. The Company experienced a 1250 to 1 reverse stock split in 2005 and a 40 to 1 reverse stock split in 2004. The Per Share data listed below for 2003 and 2002 has been adjusted to reflect these reverse splits and has a significantly distortive effect. This section is to be amended once we've received a draft of the financial statements.
The Company did not begin operations until September 6, 2002.
The following table sets forth certain quarterly financial information for each of the fiscal quarters during the years ending December 31, 2006 and 2005. This information was derived from the Company’s unaudited financial statements. Results for any quarter are not necessarily indicative of results for the full year.
Item 7.
Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations
The following information should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this Form 10-K.
Since 2004, we have sought to execute a Business Development business model. During the first quarter of 2007, we have taken a number of steps to reorient the Company as a Business Development Company and to provide for our activities. While we believe the following highlights position our enterprise to engage in business development activities, there are a number of risks and uncertainties which are detailed in the section marked "risk factors."
About VitalTrust Business Development Corporation
VitalTrust Business Development Corporation ("VitalTrust", the "Company", "we" "us" or "our") is a closed-end, non-diversified management company registered under the Investment Company Act of 1940. VitalTrust was formed in 2002 as a Nevada corporation and was previously known as Kairos Holdings, Inc.; ACS Holdings, Inc. and Maxxzone.com, Inc. The Company has been under new management since January 2007 and we have reconstituted our Board of Directors on March 2, 2007.
VitalTrust intends to make long-term debt and equity investments in companies with perceived growth potential in various industry sectors. Investment opportunities will be identified for the Company by the management team. Investment proposals may, however, come to the Company from many sources, and may include unsolicited proposals from the public and from referrals from banks, lawyers, accountants and other members of the financial community.
To implement our business, on March 3, 2007 during a Special Meeting of the Board of Directors, the Company:
i.
Reaffirmed the prerequisites for dis-interested directors and reaffirmed the Company's election as a Business Development Company
ii.
Approved the engagement of Sichenzia Ross Friedman Ferrence LLP as the VitalTrust Counsel of Record and Rotenberg Meril Solomon Bertiger & Guttilla, P.C. as the Company's Independent Accountant;
iii.
Populated our Board with three persons who met the criteria as dis-interested directors and two individuals who will serve as our two remaining directors such that our Board consists of five individuals, a majority of which are dis-interested persons;
iv.
Created our Investment, Compensation, Governance and Nominating Committees, all of which will be populated with our dis-interested directors;
v.
Adopted a policy which forbids the use of an S-8 Registration for any purpose and strictly limits the issuance of any shares connected with a Regulation E offering to qualified investors for cash.
vi.
Engaged our Chief Executive Officer and our Chief Operating Officer for a period of two years.
Important Policies Which Affect our Business and Which Require Shareholder Approval
It is our intention to invest in small private companies and certain public companies. All of our expenditures will be approved by a majority of our dis-interested directors. We do not intend to focus our activities on any one industry.
The following are policies which will require a majority vote of our outstanding voting securities:
1.
Any change to our Bylaws;
2.
An election to terminate our status as a Business Development Company;
3.
Any proposal submitted to our Investment Committee must contain a detailed, practical exit strategy to include recouping our investment plus interest or gains. A written copy of this exit strategy is to become a part of our official corporate records;
4.
Any proposal submitted to our Investment Committee must contain a detailed coverage description including any assets pledged against our investment. If there is no tangible coverage for a given investment, the description will include a specific analysis as to why no coverage was practical. A written copy of this coverage strategy is to become a part of our official corporate records;
5.
The Chief Executive Officer is to submit our operating budget on a quarterly basis in advance to our Investment Committee for approval to include the source and use of funds. A written copy of this quarterly budget is to become a part of our official corporate records;
6.
For financial reporting purposes, all valuations of private Portfolio Companies must be prepared by an independent firm recognized as qualified to issue such valuations;
7.
For financial reporting purposes, all valuations of publicly-traded Portfolio Companies or Portfolio Securities will be valued by calculating the closing bid price for each such security on the last day of each quarter times the number of shares held;
8.
It is our policy to invest in (i) small, US corporations without regard to industry; (ii) securities of US corporations. Regarding private corporations, (a) we will only invest directly into operations and will not use our funds to repay debt or purchase equity from third parties; (b) We will invest only when we are also engaged for marketing/sales and/or executive/financial consulting, and; (c) we will only invest when we can take at least one seat on the Board of Directors. Regarding public companies, we may invest in stocks priced below $1.00 provided our purchase is directly from the issuer and our capital is used for operating purposes and not to repay debt or purchase equity from third parties. All our investments will be approved by our Investment Committee.
9.
At any time when the Company's securities trade at a rate of $1.00 per share or higher, and the Company's assets provide sufficient coverage, the Company intends to place 10,000,000 of its shares into an escrow status which can be used to provide guarantees to certain client companies.
In order to provide for the VitalTrust initial Portfolio of Securities:
As a BDC, our financing activities are contingent upon the Company's overall net asset value. The net asset value is generally calculated by subtracting liabilities from assets. In order to create an asset base that would allow us to proceed with our business model, we have proposed the acquisition of a portfolio of securities valued in excess of $130,000,000.
In a separate Special Meeting of Directors, our dis-interested directors approved a proposed transaction wherein the Company would exchange a Preferred Stock with limited redemption rights for a portfolio of securities with a market value in excess of $130,000,000. On March 2, 2007, we executed an agreement wherein we are to create a preferred stock with certain rights which we would thereafter exchange for the portfolio of securities. Our counsel is preparing the required state filings necessary to create the preferred stock. We anticipate a final closing on the portfolio of securities will occur prior to April 30, 2007.
In order to provide management services for our Portfolio of Companies
The primary purpose of a BDC is to mature small, US corporations. In order to provide for our first round of qualified privately-held portfolio companies, we have reached agreement with three US corporations and we have formed a fourth US corporation.
We reached management agreements with qualified US corporations including PatienTree, Inc. a facilitator of medical communications technologies and procedures; Inteligy, Inc. a facilitator of telephone systems for small to medium sized corporations, and; Calgenex, Inc. a facilitator of products and systems to reduce the amount of calcium in the human body. Our management agreements require a high degree of hands-on involvement including finalizing their business plan, crafting a series of milestones to achieve the company's objectives and on-going meetings to evaluate the degree such milestones are achieved. While VitalTrust intends to provide finance to our client companies, funds will be distributed monthly following a review of on-going activities.
We formed Resource Command Incorporated, an entity designed to acquire up to a 49% interest in Service-Related Disabled Veteran Owned Small Businesses (SDVO). SDVOs are companies a majority of which (51%) must be owned by a disabled American veteran. VitalTrust intends to retain a minority position and provide finance and management to US disabled veterans primarily engaged in government contracting. The Company is currently in discussions with two SDVOs and intends to notify all Veteran affairs and Veteran hospitals to ensure that service men and women who qualify are made aware that Resource Command is designed to provide initial seed capital and extensive executive-level management to help launch their respective companies.
Regulation E Notification Filing for the sale of up to $1,000,000 of our common shares
The Company intends to issue and place into the market a $1,000,000 Notification offering pursuant to Regulation E. The Notification filing relates to the sale of our Common Stock equal to $1,000,000 at prices ranging from $0.20 to $1.00 per share at the discretion of the Board of Directors.
Critical Accounting Policies and Estimates
The Company prepared its financial statements in accordance with accounting principles generally accepted in the United States of America for investment companies. For a summary of all of its significant accounting policies, including the critical accounting policies, see Note A to the financial statements in Item 8.
The increasing complexity of the business environment and applicable authoritative accounting guidance requires the Company to closely monitor its accounting policies. The Company has identified three critical accounting policies that require significant judgment. The following summary of the Company’s critical accounting policies is intended to enhance your ability to assess its financial condition and results of operations and the potential volatility due to changes in estimates.
Valuation of Investments
For our privately-held portfolio companies, we will establish a valuation through engaging a third party firm qualified to issue valuations on privately-held corporations. Thereafter, on a quarterly basis, our management will determine the quarter-to-quarter changes in value and update the third-party appraisal annually.
Any changes in estimated fair value are recorded in the Statements of Operations as “Net unrealized appreciation (depreciation) on investments.”
Valuation of Equity Securities
Securities that are traded in the over-the-counter market or on a stock exchange will generally be valued at the prevailing bid price on the valuation date. However, restricted and unrestricted publicly traded securities may be valued at discounts from the public market value due to restrictions on sale, the size of its investment or market liquidity concerns.
Valuation of Loans and Debt Securities
As a general rule, the Company does not value its loans or debt securities above cost, but loans and debt securities will be subject to fair value write-downs when the asset is considered impaired.
Financial Condition
The Company’s total assets at December 31, 2006 decreased to $1,187,686 from $3,207,275 at December 31, 2005. The decrease in total assets can be attributed to the Company’s decrease in investments in portfolio company investments and the valuation of those investments.
The Company’s financial condition is dependent on the success of its portfolio holdings. Many of the businesses the Company invests in tend to be thinly capitalized and may lack experienced management. The following summarizes the Company’s investment portfolio as of December 31, 2006 and December 31, 2005, respectively, as a business development company.
Since BDC election, the Company has valued its equity and investment holdings in accordance with the established valuation policies (see “Valuation of Investments and Equity Holdings”) above.
Cash approximated less than 1% of net assets of the Company at December 31, 2006 and less than 1% of the net assets of the Company at December 31, 2005, respectively.
Results of Operations
The results of operations for the years ending December 31, 2006 and 2005 reflect the results as a business development company under the Investment Company Act of 1940. The results of operations prior to August 3, 2004 reflect the results of operations prior to operating as a business development company under the Investment Company Act of 1940. The principal differences between these two reporting periods relate to accounting for investments. See Note A to the financial statements. In addition, certain prior year items have been reclassified to conform to the current year presentation as a business development company.
For 2004, 2005 and 2006 the Company had minimal revenues and no consistent operations. For the majority of 2005 and virtually all of 2006, the Company had no meaningful operations and no employees. During 2005 and early 2006, the Company underwent a major restructuring. A comparative discussion of changes in revenues or expenses beyond the financial statements and notes which are included as exhibits to this Form 10K would not be meaningful.
Dividends and Interest
There were no dividends or interest income on investments for the years ended December 31, 2006, 2005, and 2004 respectively.
Management Fees
There was no Management fee income for the years ended December 31, 2006 and 2005, and 2004 respectively.
Operating Expenses
Total operating expenses for the years ended December 31, 2006, 2005 and 2004 were $928,393 $1,302,541 and $2,488,256 respectively. A significant component of total operating expenses was professional fees of $834,086, $1,291,101 and $1,674,451 for the three years ended December 31, 2006, 2005 and 2004, respectively. Professional fees decreased in 2006 primarily due to the termination of the consulting agreement with KMA and in 2005 primarily because of the completion of the Company's restructuring. A second component of total operating expenses is general and administrative expenses of $93,514, $10,640 and $806,202 for the three years ended December 31, 2006, 2005 and 2004, respectively. The increase in general and administrative expenses in 2006 is primarily attributable to increased travel expenses of management related to promoting the company and pursuing new business ventures and rent expense incurred for a Houston office location. The decrease in general and administrative expenses in 2005 is primarily due to the Company no longer reporting on a consolidated basis with American Card Services, Inc.
Liquidity and Capital Resources
At December 31, 2006 and 2005, the Company had $5,226 and $144 respectively in cash and cash equivalents.
The Company’s cash on hand and cash generated from operations may not be adequate to meet its cash needs at the current level of operations, including the next twelve months. The Company has been funding operations through cash received from the sale of our liquid securities and from proceeds of stock and debt financing. The Company expects to continue funding its operations in this manner until its operations can support its operating expenses. The Company generally funds new originations using cash on hand and equity financing and outside investments.
Going Concern
The accompanying financial statements assume the Company will continue as a going concern. As shown in the accompanying financial statements, the Company had net losses available to common stockholders of $4.277.558, $4,040,058 and $3,864,006 for the three years ended December 31, 2006, 2005 and 2004, respectively. As of December 31, 2005, the Company has had limited income. The future of the Company is dependent upon its ability to obtain financing and upon future profitable operations from the development of its business. Management has plans to seek additional capital through debt and/or equity financing. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification of liabilities that might be necessary in the event the Company cannot continue its existence.
Portfolio Company Investments
The following is a list of the companies in which the Company had an investment in and the cost and fair market value of such securities at December 31, 2006 and 2005:
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company’s investment activities contain elements of risk. The portion of the Company’s investment portfolio consisting of equity or equity-linked debt securities in private companies is subject to valuation risk. Because there is typically no public market for the equity and equity-linked debt securities in which it invests, the valuation of the equity interest in the portfolio is stated at “fair value” and determined in good faith by the Board of Directors on a quarterly basis in accordance with the Company’s investment valuation policy.
In the absence of a readily ascertainable market value, the estimated value of the Company’s portfolio may differ significantly from the value that would be placed on the portfolio if a ready market for the investments existed. Any changes in valuation are recorded in the Company’s Statement of Operations as “Net unrealized appreciation (depreciation) on investments”.
At times, a portion of the Company’s portfolio may include marketable securities traded in the over-the-counter market. In addition, there may be a portion of the Company’s portfolio for which no regular trading market exists. In order to realize the full value of a security, the market must trade in an orderly fashion or a willing purchaser must be available when a sale is to be made. Should an economic or other event occur that would not allow the markets to trade in an orderly fashion, the Company may not be able to realize the fair value of its marketable investments or other investments in a timely manner.
As of December 31, 2006 and 2005, the Company did not have any off-balance sheet investments or hedging investments.
Impact of Inflation
The Company does not believe that its business is materially affected by inflation, other than the impact inflation may have on the securities markets, the valuations of business enterprises and the relationship of such valuation to underlying earnings, all of which will influence the value of the Company’s investments.
Item 8.
Item 8. Financial Statements and Supplementary Data.
Financial Statements together with Footnotes are included as Exhibits to this Form 10K.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
As of the date of this Report, there have been no changes in or disagreements with the auditors on the accounting, reporting or financial disclosures contained in this report during the fiscal years ended December 31, 2006 and 2005, respectively.
Item 9A.
Item 9A. Control & Procedures
Evaluation of Disclosure Control and Procedures
The Company’s management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, reports that are filed or submitted under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in applicable SEC rules and forms were effective. The new controls designed by the principal executive officer and principal financial officer are effective in ensuring that reports that are filed or submitted under the Exchange Act are accurate and do not contain any material misstatements..
Changes in Internal Control Over Financial Reporting
There have been no significant changes in our internal control or in other factors that could significantly affect those controls subsequent to our evaluation, including corrective actions with regard to significant deficiencies and material weaknesses.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Compliance with Section 16(a) of the Exchange Act The following table sets forth the names, ages, and offices held with the Company by its directors and executive officers:
Name
Position
Director/Officer Since
Age
Charles Broes
Chief Executive Officer, Chairman of the Board of Directors
January
Mark Clancy
Chief Operating Officer, Interim Chief Financial Officer and Director
March
David Bryant
Director
October
June Nichols
Director
January
David Hood
Director
January
All directors hold office until the next annual meeting of stockholders and until their successors have been duly elected and qualified. There are no agreements with respect to the election of directors.
Any non-employee director of the Company is reimbursed for expenses incurred for attendance at meetings of the Board of Directors and any committee of the Board of Directors. The Executive Committee of the Board of Directors, to the extent permitted, exercises all of the power and authority of the Board of Directors in the management of the business and affairs of the Company between meetings of the Board of Directors. Each executive officer serves at the discretion of the Board of Directors.
The business experience of each of the persons listed above during the past five years is as follows:
Chief Executive Officer, Member Executive Committee and Chairman of the Board of Directors Charles Broes
Mr. Broes has served as of Chief Executive Officer, Chief Financial Officer and Chairman since June 2006. Mr. Broes, a business and healthcare professional with over years of experience in domestic and foreign markets, has served in positions including COB, CEO, COO, and CIO for both private and public companies. He started his career with AT&T at Pacific Telephone Yellow Pages in California where he was distinguished as the national top salesperson. Mr. Broes engineered health and fitness centers which he later sold to Mr. Ray Wilson the founder of Jack Lalane European Health Spas. Mr. Broes, working with Mr. Wilson, created a nationwide chain of centers that became a public company. Mr. Broes was engaged to perform corporate turn-around of Figure Magic Corporation, President & First Ladies Health Centers in Saint Louis, Missouri and two Jack Lalane Health Spas in Wichita, Kansas. Figure Magic Corporation was a public company operating 123 figure salons throughout Canada and eleven states. With the successful turn-around, the company was sold to Roblin Industries, a Fortune 500 Company. Mr. Broes later became the CEO of Professional Reducing Centers of America, an international chain of over 60 company and franchise-owned medical weight control centers. Mr. Broes founded Preventive Medical Services throughout Nevada and Medicus Pharmaceuticals, a nationwide manufacturing and distribution firm; Wellmark Corporation, which later became a subsidiary of Primark Corporation, a Fortune 1000 NYSE company; and co-founder of TMRCorp, now known as EliteCorp. His experiences include facilitating public companies, acquisitions, mergers, strategic alliances, and turn-arounds, as well as integrating national data communication networks, facilities management, and healthcare computer system technologies.
Chief Operating Officer, Member Executive Committee and Director Mark Clancy
Mr. Clancy has served as our Chief Operating Officer since March 3, 2007. Mr. Clancy has over 15 years experiences revolving around start-up, early stage and crisis management primarily for publicly traded companies. Since 2004, Mr. Clancy has served as the Chief Executive Officer and a Director of US Energy Initiatives Corporation. US Energy was a turnaround project which in 2006 reported a higher level of revenues than in the preceding seven years. US Energy is now engaged in contract with, among others, General Motors Corporation, the Government of Thailand, Weichai Motors, a division of Weichai Peterson. Since 2000, Mr. Clancy has participated in turn-around management for financially distressed companies. From November 1997 through April 2000, Mr. Clancy was co-founder, Director and Executive Vice President of publicly-traded EarthFirst Technologies, Inc. Mr. Clancy has been an advisor to the Chairman of the Board of EarthFirst since that company's sale in May 2000. From 1992 through 1997, Mr. Clancy served as the Chief Compliance Officer for a Largo, Florida based boutique investment banking firm. Mr. Clancy was honorably discharged after six years of service with the United States Marine Corps. Mr. Clancy was born in Massachusetts and has resided in Florida since 1982. While attending the University of South Florida with a concentration in ancient history, Mr. Clancy became a lifetime member of various academic honor societies including Phi Theta Kappa, Phi Alpha Theta and USF Arts and Sciences Honor Society.
Director June Nichols
Ms. Nichols has served as a director since July 2006. Ms. Nichols is currently a Principal and Officer of Mississippi Structures Corp., a joint venture consortium of companies with over 25 years of experience in various facets of construction. Ms. Nichols also sits on the Advisory Board for Global Environmental Energy Corp. who developed the Biosphere Process, a revolutionary waste-to-energy process. Prior to that Ms. Nichols was a Co-owner, Principal and Officer of HSW Group, Inc., a government relations corporate advisory firm, and President of Traditional Enterprise, a financial and business consulting service for international and domestic business projects. Ms. Nichols has had over ten years of Government Experience as a Special Assistant to the Regional Administrator and as Regional Administrator, Atlanta, GA. Her last appointment was Deputy Administrator for the U.S. Small Business Administration, Washington DC. Ms. Nichols also sat as an Advisory Committee Member for the Export-Import Bank of the United States, National Counsel of Woman Advisors to Congress and Civil Leader Representative for the United States Strategic Command. Ms. Nichols has been an active member of the Republican Party since 1983 and has received the Power One Award from Sen. Paul Covendale, Presidential Commendation from President Bush, Presidential Quality and Management Award and the SBA Administration Performance and Achievement Awards.
Director David Hood
Mr. Hood has served as a director since July 2006. Mr. Hood is a start-up specialist with over thirty years experience in the initiation and management of new enterprise in health care and other professional services, education and applied research, transportation and infrastructural development. He has developed both for-profit and not-for-profit delivery systems and has successfully deployed large private and government resources in fulfillment of ambitious economic development goals. Mr. Hood participated in the design and finance of large infrastructural development programs in Africa and assisted in the development of economic development projects in the South Pacific and the Caribbean. Mr. Hood was one of the founders of SADCC, the regional intergovernmental planning council which has deployed hundreds of millions of dollars for communication and transportation infrastructure in Southern Africa. Following his international work Mr. Hood participated in the initiation of various service enterprises in the United States, including founding an innovative and successful high-tech home medical care company, Protocare, Inc., which served patients in fifteen eastern states. In addition, Mr. Hood has provided both management and consulting services to other health care companies as a member of Transmillenial Resources Corporation, a Florida-based business management company; enterprises served have ranged from a medical packaging company to a recovery hospital and clinic. Mr. Hood is a magna cum laude graduate in economics from Gonzaga University and holds a juris doctor degree from Harvard Law School. As a young law professor, Mr. Hood helped establish clinical education as a standard feature of legal training in the United States, starting several such programs with foundation support and consulting to many law schools embarked on clinical training. He also served as the founding Dean of the University Of Hawaii School Of Law. Prior to entering law teaching Mr. Hood was active in the practice of trial and appellate law, representing individuals and businesses, and he has appeared in numerous state and federal courts, including the Supreme Court of the United States. Mr. Hood served in the United States Marine Corps in 1954-1957 and over the years he has contributed his membership and leadership to many professional and philanthropic organizations
Director David J. Bryant
Mr. Bryant has served as a director since October 2005 and since 1995 has served as the President of Dejay Development Corporation, a private financial consulting firm servicing both the public and private sectors in capital acquisitions and investment strategies. Mr. Bryant has over 40 years of entrepreneurial business experience ranging from application systems definition to capitalization of a public company. Between 1973 and 1993, Mr. Bryant served as President and founder of Diversa Management Corporation; CEO and founder of Bryant & Associates, Inc.; President and founder of Information Technology Management, and; President and co-founder of TriTech, Inc. Mr. Bryant holds a BS degree in Business Sciences from Columbia University in New York and an Executive MBA from Wharton School of Business.
Code of Ethics
At a Special Meeting of the Board of Directors held March 3, 2007, we adopted our Code of Ethics. We post our Code of Ethics through our internet web site at http://www.vital-trust.com.
Audit Committee
At a Special Meeting of the Board of Directors held March 3, 2007, we created our Audit Committee. Among the responsibilities of the audit committee shall be to engage our independent auditors on an annual basis, to review our quarterly financial statements and to take such other steps as deemed necessary and appropriate. The audit committee shall also adopt and approve a corporate charter. The present audit committee was created during a Special Meeting of the Board of Directors held on March 3, 2007. The Audit Committee shall consist of two members who will be installed during April 2007.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors and executive officers and persons who beneficially own more than ten percent of a registered class of the Company’s equity securities to file with the SEC initial reports of ownership and reports of change in ownership of common stock and other equity securities of the Company. Officers, directors and greater than ten percent stockholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. To the Company’s knowledge, the following persons have failed to file, on a timely basis, the identified reports required by Section 16(a) of the Exchange Act during the most recent fiscal year ended December 31, 2006:
As of the date of this report, the Company is unaware of any person or firm that has failed to file required ownership reports.
Item 11.
Item 11. Executive Compensation
Compensation Discussion and Analysis
We believe our success depends on the continued contributions of our named executive officers. Personal relationships are very important in our industry. Our named executive officers are primarily responsible for many of our critical relationships. The maintenance of these relationships is critical to ensuring our future success. Therefore, it is important to our success that we retain the services of these individuals and prevent them from competing with us should their employment with us terminate.
While we have not compensated our executive officers in 2005 and 2006, we intend to develop a compensation plan, our goal is to provide our named executive officers with salary and possibly incentives that are aligned with the performance of our business and intended to be competitive with similarly situated companies.
Committee Report on Executive Compensation
Since we do not have a compensation committee and no executive officers were compensated during 2005 and 2006, there was no discussion of any committee of the Company for the fiscal year ended December 31, 2006 regarding executive compensation.
None of the Company's executive officers were compensated during 2005 or 2006, other than as disclosed in Note J to the accompanying financial statements..
The Company had no outstanding grants or other plan-based awards as of 2005 and 2006.
There were no outstanding equity awards at the fiscal year end 2005 or
There were no options outstanding or exercised during 2005 or 2006.
There were no pension benefit plans during 2005 or 2006.
There was no non-qualified deferred compensation at fiscal year end 2005 or 2006.
Director Compensation
Employment Agreements
See Note J to the accompanying financial statements.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth certain information regarding the ownership of the Company’s common stock as of March 31, 2007 by: (i) each director and nominee for director, (ii) all executive officers and directors of the Company as a group; and (iii) all those known by the Company to be beneficial owners of more than five percent of its common stock.
Item 13.
Item 13. Certain Relationships and Related Transactions
Since the beginning of 2006, we have not entered into or been a participant in any transaction in which a related person had or will have a direct or indirect material interest in an amount that exceeds the lesser of $120,000 or 1% of the average of the company’s total assets for the last three completed fiscal years.
Item 14.
Item 14. Principal Accounting Fees and Services
On March 2, 2007, the Company engaged Rotenberg, Meril, Solomon, Bertiger, & Guttilla P.C. as its new principal independent accountant.
Audit Fees
Fees for audit services billed or to be billed by Rotenberg, Meril, Solomon, Bertiger, & Guttilla P.C. for services rendered during the year or for the audit in respect of that year totaled $80,557 in 2006 and $83,557 in 2005. The fees billed were for the annual audit of financial statements and reviews of the Company’s quarterly reports on Form 10-Q.
Audit-Related Fees
Fees for audit-related services billed by Rotenberg, Meril, Solomon, Bertiger, & Guttilla P.C. totaled $21,167 in 2006 and $2,700 in 2005.. Audit-related services principally include consultation on accounting issues related to investments portfolio companies, services relating to consents issued relating to registration statements and work in connection with restated financial statements.
Tax Fees
Fees for tax services were zero in 2006 and 2005
All Other Fees
Rotenberg, Meril, Solomon, Bertiger, & Guttilla P.C. did not provide any services not described above in 2006 and 2005.
Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
The audit committee pre-approves all audit and permissible non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services. The Audit Committee has adopted a policy for the pre-approval of services provided by the independent auditors
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules
Financial Statement Schedules
Report of Independent Registered Accounting Firm
Balance Sheet as of December 31, 2006 and 2005
Statement of Operations for the years ended December 31, 2006, 2005 and 2004
Statement of Cash Flows for the years ended December 31, 2006, 2005 and 2004
Statement of Changes in Stockholders’ Equity (Deficit) for the years ended December 31, 2006, 2005 and 2004
Schedule of Portfolio Company Investments for the years ended December 31 2006 and
Exhibits
31.1
Certification of chief executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of chief executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of chief financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
VITALTRUST BUSINESS DEVELOPMENT CORPORATION
Date: April 18, 2007
By: /s/ Charles Broes
Charles Broes
Chief Executive Officer (Principal Executive Officer)
Date: April 18, 2007
By: /s/ Mark Clancy
Mark Clancy
Interim Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
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.
Name
Position
Date
/s/ Charles Broes
Charles Broes
Chief Executive Officer (Principal Executive Officer) and Director
April 18, 2007
/s/ Mark Clancy
Mark Clancy
President, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) and Director
April 18, 2007
/s/ June Nichols
June Nichols
Director
April 18, 2007
/s/ David Bryant
David Bryant
Director
April 18, 2007
/s/ David Hood
David Hood
Director
April 18, 2007
REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM
To the Board of Directors and Stockholders of
VitalTrust Business Development Corporation
We have audited the accompanying consolidated balance sheets of VitalTrust Business Development Corporation (the "Company") as of December 31, 2006 and 2005, and the related consolidated statements of operations, changes in stockholders' equity (deficit), cash flows, and schedules of investments for the years then ended and the financial highlights for the years ended December 31, 2006 and 2005. These financial statements, schedules and financial highlights are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements, schedules and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. 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, schedules and financial highlights referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2006 and 2005 and the results of their operations and cash flows for the years then ended and the financial highlights for the years ended December 31, 2006 and 2005 in conformity with accounting principles generally accepted in the United States of America.
The financial statements, schedules and financial highlights referred to above have been prepared assuming that the Company will continue as a going concern. As discussed in Note A to the financial statements, the Company's recurring losses, negative cash flows from operations, and the uncertainty related to outstanding litigation discussed in Note D, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans concerning these matters are also described in Notes A and D. The accompanying financial statements do not include any adjustments that might result from the outcome of these uncertainties.
/s/ ROTENBERG MERIL SOLOMON BERTIGER & GUTTILLA, P.C.
April 11,
Saddle Brook, NJ
VITALTRUST BUSINESS DEVELOPMENT CORPORATION
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 2006 AND 2005
See Accompanying Notes to Financial Statements
VITALTRUST BUSINESS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
See Accompanying Notes to Financial Statements
VITALTRUST BUSINESS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
See Accompanying Notes to Financial Statements
VITALTRUST BUSINESS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
See Accompanying Notes to Financial Statements
VITALTRUST BUSINESS DEVELOPMENT CORPORATION
SCHEDULE OF PORTFOLIO COMPANY INVESTMENTS
FOR THE YEARS ENDED DECEMBER 31 2006 AND 2005
See Accompanying Notes to Financial Statements
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company Activities
VitalTrust Business Development Corporation (formerly known as Kairos Holdings Inc., ACS Holdings, Inc. and maxxZone.com, Inc) was incorporated in the state of Nevada in April, 2002.
On April 28, 2004 VitalTrust Business Development Corporation (“the Company”) agreed to acquire the assets, subject to certain liabilities of American Card Services, Inc (ACS) for 3,570,000,000 shares of the Company, representing approximately 85% of the Company's stock. The assets, liabilities, and operations acquired from ACS have been recorded on the books of the company, and ACS is deemed a wholly owned subsidiary of the Company. In connection with this acquisition, the original assets and liabilities of the Company, (those not acquired from ACS), were transferred to Global Capital Trust, a St. Kitts and Nevis Trust, and holder of 84,000,000 shares of company stock. This transfer effectuated the extinguishment of debt owed to Global Capital Trust and related entities by the Company. The acquisition of ACS and transfer to Global Capital Trust were completed on May 12, 2004, after the Company increased authorized shares to a total sufficient to effect the transaction.
Since the acquisition resulted in the shareholders of American Card Services, Inc. owning a majority of the Company’s outstanding shares, the business acquisition has been accounted for as a reverse acquisition, with VitalTrust Business Development Corporation being treated as the accounting subsidiary and American Card Services, Inc. being treated as the accounting parent. Accordingly, the net assets of ACS werecarried forward to Holdings at their historical carrying value. On August 3, 2004, the Company filed an election to adopt Business Development Company (“BDC”) status (see below). This BDC status classified ACS as a portfolio investment of VitalTrust Business Development Corporation.
On August 3, 2004 the Company’s shareholders consented to the proposal to allow the Company to adopt Business Development Company ("BDC") status under the Investment Company Act of 1940 ("1940 Act"). A BDC is a specialized type of Investment Company under the 1940 Act. A BDC may primarily be engaged in the business of furnishing capital and managerial expertise to companies that do not have ready access to capital through conventional financial channels; such companies are termed "eligible portfolio companies". The Company as a BDC, may invest in other securities, however such investments may not exceed 30% of the Company's total asset value at the time of such investment. The Company filed its BDC election with the SEC (Form N-54A) on August 3, 2004.
On November 15, 2004, the Chief Executive Officer, Walter H. Roder, II, tendered his resignation to the Board of Directors. The resignation was accepted by the Board of Directors on November 16, 2004. Mr. Roder, while he remains a shareholder, elected to relinquish day-to-day management to the current management. He has also elected to step down from the board so that new independent directors could be appointed consistent with the requirements and process of the Company's election to be governed as a business development company.
Once the new directors assumed office, a restructuring plan was put into place to adjust the Company’s capital structure and to move the Company into compliance with BDC regulations. On February 18, 2005 the Company restructured $1,818,101 of notes with creditors of both the Company and American Card Services, Inc. by entering into a Settlement and Release Agreement whereby the creditor’s notes would be converted into preferred equity. Terms of the agreement call for the issuance of preferred shares and warrants and revenue sharing of 25% of the net revenue of the Company. As referenced in Note K to the Financial Statements, the Company converted the preferred stock and warrants into common stock on September 20, 2005.
The Company completed the restructuring on August 31, 2005.
On May 17, 2005 in a Consent to Action by the Stockholders of the Company, the Board of Directors approved and authorized the Officers of the Corporation to effect a reverse split at a ratio of 1250 to 1 of the common stock of the company and to decrease the authorized common stock from 2.4 billion shares to 50 million shares. This Consent also authorized a reverse split of 1250 to 1 of the preferred stock of the company and to decrease the authorized preferred stock from 600 million shares to 30 million shares.
On March 15, 2006 in a Consent to Action by the Stockholders of the Company, the Board of Directors approved and authorized an increase of the common shares to 100 million from 50 million. The Board also amended and increased the preferred shares from three classes totaling 30 million shares to one class totaling million shares. The Company has not yet amended its Corporate Charter with the State of Nevada to reflect these changes.
On March 31, 2006, the Company purchased the remaining 20% of the stock of VitalTrust Solutions, Inc. (“Solutions”) (formerly known as Entellectual Solutions Property Group, Inc. or “ESPG”). The shareholders of ESPG obtained control of the Company as of the date of the transaction, effectively owning in excess of 65% of the Company’s common stock. Management has treated this transaction similar to a recapitalization and continues to present its historical financial statements and not those of ESPG. Management has determined that ESPG should be continue to be treated as a portfolio investment of the Company and not as the accounting acquirer, since the Company is not a public shell and reverse acquisition accounting is not appropriate under the circumstances. In addition, the Company accepted the resignations of Charles Giannetto, James E. Jenkins and David Eison as directors of the Company and David Eison and Mark Width as officers. Further, the Company announced the appointment of Charles Broes as CEO.
The Company plans to provide equity and long-term debt financing to small and medium--sized private and over the counter public companies in a variety of industries throughout the United States. The Company’s investment objective is to achieve long-term capital appreciation in the value of its investments and to provide current income primarily from interest, dividends and fees paid by its portfolio companies.
Consolidation
During 2005 the Company formed Kairos Consulting, Inc. (Consulting). This entity is a Florida Corporation that was created to provide managerial, financial, consulting and legal services to outside companies. This company is currently inactive. Kairos Consulting, Inc. is owned 100% by the Company. Also during 2005, the Company formed Red Fox Energy Corp. (Red Fox). This entity is an inactive company that will be used by the Company for investments in select energy companies, and is also 100% owned by the Company.
The consolidated financial statements include the accounts of Kairos Consulting, Inc. and Red Fox. All intercompany accounts and transactions have been eliminated in consolidation.
Going Concern
The accompanying financial statements assume the Company will continue as a going concern. As shown in the accompanying financial statements, the Company had net losses of $4,277.558, $4,040,058 and $3,864,006 for the years ended December 31, 2006, 2005 and 2004, respectively. During 2006, 2005 and 2004, the Company has had an insignificant amount of revenues and operating cash flow deficits. The future of the Company is dependent upon its ability to obtain financing and upon future profitable operations from the development of its business plan. Management has plans to seek additional capital through debt and/or equity financing. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification of liabilities that might be necessary in the event the Company cannot continue its existence.
Reclassification
All prior period common stock and applicable share and per share amounts have been retroactively adjusted to reflect the 40:1 reverse stock split on August 4, and the 1250:1 reverse stock split on May 17, 2005.
Certain balances in prior years have been reclassified to conform to the presentation adopted in the current year.
Income Recognition
The Company and its portfolio companies recognize revenue using the accrual method of accounting.
The Company’s policy is to accrue interest income on loans made to portfolio companies. The Company accrues the interest on such loans until the portfolio company has the necessary cash flow to repay such interest. If the Company’s analysis of the portfolio companies’ performance indicates that a portfolio company may not have the ability to pay the interest and principal on a loan, the Company will make an allowance provision on that entity and in effect cease recognizing interest income on that loan until all principal has been paid. However, the Company will make exceptions to this policy if the investment is well secured and in the process of collection.
For certain investment transactions the Company provides management services and plans to recognize an agreed upon fixed monthly fee in the future.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents
For the purpose of the Statement of Cash Flows, cash and cash equivalents includes time deposits with original maturities of three months or less.
Income Taxes
The Company complies with SFAS No. 109, “Accounting for Income Taxes,” which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for temporary differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
Following the changes in control of the Company in November 2004 and March 2006, the Company’s pre-change-in-control net operating loss carryforwards will be substantially limited, if not completely eliminated, due to a lack of continuity of business enterprise under Section 382 of the Tax Reform Act of 1986. No federal tax benefit has been recorded in the financial statements due to the uncertainty of future operations.
Net Income (Loss) Per Common Share
Net Income (Loss) per common share is computed using the weighted average of shares outstanding during the periods presented in accordance with Statement of Financial Accounting Standards No. 128, Earnings Per Share. Basic net income (loss) per common share excludes the effect of potentially dilutive securities and is computed by dividing net income or loss by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is adjusted for the effect of convertible securities, warrants and other potentially dilutive financial instruments only in the periods in which such effect would have been dilutive. The following securities were not included in the computation of diluted earnings (loss) per share because to do so would have an anti-dilutive effect for the periods presented:
Warrants outstanding as of December 31, 2004 were cancelled during 2005.
Segments
The Company operates as one segment as defined by Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information.
Fixed Assets
Fixed assets are stated at cost. The cost of equipment is charged against income over the estimated useful lives of the equipment, using the straight-line method of depreciation. Repairs and maintenance which are considered betterments and do not extend the useful life of equipment are charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the asset and accumulated depreciation is removed from the accounts and the resulting profit and loss are reflected in income.
Fair Value of Financial Instruments
The recorded amounts for financial instruments, including cash equivalents, prepaid expenses, notes receivable, other current assets, portfolio investments, accounts payable and accrued expenses, and all short-term debt approximate their market values as of December 31, 2006. The Company has no investments in derivative financial instruments.
Recently Issued Accounting Pronouncements
FASB Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment.” In December 2004, the FASB issued SFAS 123R, which requires that the cost of all share-based payments to employees, including stock option grants, be recognized in the financial statements based on their fair values. The standard applies to newly granted awards and previously granted awards that are not fully vested on the date of adoption. The Company adopted this standard on January 1, 2006 and has determined that there is no impact on these financial statements as no share-based payments have been issued to employees.
FASB Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3.” In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections - a replacement of APB Opinion No. and FASB Statement No. 3”, referred to as SFAS 154, which replaces APB Opinion No. 20, "Accounting Changes", and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements”, and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS 154 applies to all voluntary changes in accounting principles. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. It does not change the transition provisions of any existing accounting pronouncements, including those that are in a transition phase as of the effective date of SFAS 154.
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" (FIN 48) an interpretation of FASB Statement No. 109, "Accounting for Income Taxes" , which clarifies the accounting for uncertainty in income taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Interpretation requires that the Company recognize in the financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on de-recognition of a previously recognized tax position, classification, interest and penalties, accounting in interim periods and disclosures. The provisions of FIN 48 are effective beginning January 1, 2007 with the cumulative effect of the change in accounting principle recorded as an adjustment to the opening balance of retained earnings. The Company adopted this standard in June 2006 and has determined that there is no impact on these financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, ("SFAS 157"). SFAS 157, which applies whenever other standards require (or permit) fair value measurement, defines fair value and provides guidance for using fair value to measure assets and liabilities. SFAS 157 also requires expanded disclosures about the extent to which companies measure assets and liabilities at fair value, the information used in those measurements and the effect of fair value measurements on earnings. The Company will be required to adopt SFAS 157, which is effective for fiscal years beginning after November 15, 2007, no later than the quarter beginning January 1, 2008. The Company is currently in the process of evaluating SFAS 157, and has not yet determined the impact, if any; SFAS will have on its consolidated results of operations or financial position.
In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108 (“SAB 108”). SAB 108 addresses how the effects of prior year uncorrected misstatements should be considered when quantifying misstatements in current-year financial statements. SAB 108 requires registrants to quantify misstatements using both the balance sheet and income-statement approaches and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. SAB 108 does not change the SEC’s previous guidance in SAB No. 99, Materiality, on evaluating the materiality of misstatements. A registrant applying the new guidance for the first time that identifies material errors in existence at the beginning of the first fiscal year ending after November 15, 2006, may correct those errors through a one-time cumulative effect adjustment to beginning-of-year retained earnings. The cumulative effect alternative is available only if the application of the new guidance results in a conclusion that a material error exists as of the beginning of the first fiscal year ending after November 15, 2006, and those misstatements were determined to be immaterial based on a proper application of the registrant’s previous method for quantifying misstatements. The adjustment should not include amounts related to changes in accounting estimates. SAB is not expected to have a material impact on our financial position or results of operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits entities to choose to measure eligible financial instruments at fair value. The unrealized gains and losses on items for which the fair value option has been elected should be reported in earnings. The decision to elect the fair value options is determined on an instrument by instrument basis, it should be applied to an entire instrument, and it is irrevocable. Assets and liabilities measured at fair value pursuant to the fair value option should be reported separately in the balance sheet from those instruments measured using another measurement attributes. SFAS No. 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007. The Company is currently analyzing the potential impact of adoption of SFAS No. 159 to its consolidated financial statements
NOTE B - INVESTMENTS
Valuation of Related Management Company
As of December 31, 2006, the Company has entered into an agreement to dispose of its investment in KMA Capital Partners, Inc. (See Note J- Related Party Transactions). The Company has accordingly written down its investment in this entity to its expected net realizable value, which was $166,265 as of December 31, 2006. The original investment at cost was $450,000.
Valuation of Investments- Portfolio Companies
The most significant estimate inherent in the preparation of the Company's financial statements is the valuation of its investments in portfolio companies and the related unrealized appreciation or depreciation on those investments.
Upon conversion to a BDC, the Board of Directors states all portfolio company investments at fair value as determined under a good faith standard. The Company has investments in two controlled investment companies as of December 31, 2006.
1. American Card Services
American Card Services, Inc. (“ACS”) is a Delaware corporation which prior to November 2004 sought to capture a large portion of the rapidly emerging stored-value debit card market that provides unbanked ethnic customers with a viable alternative to cash and traditional money transfers. ACS has since changed its direction and is seeking out investments in financial services and real estate entities. The Company currently owns 100% of the stock of American Card Services, Inc. Based on Management's good faith estimate, the fair value of American Card Services, Inc. at December 31, 2006, 2005 and 2004 is deemed to be $0 and therefore, the Company has fully reserved against the investment's carrying cost of $2,874,358, $2,855,191 and $898,958, respectively.
American Card Services, Inc. owns 100% of ACS Transaction Processing, Inc. a Delaware Corporation, incorporated in August 2003. ACS Transaction Processing had no business activity through December 31, 2006.
American Card Services, Inc. owns 100% of ACS Sales, Inc. a Delaware Corporation incorporated in August 2003. ACS Sales, Inc. had no business activity through December 31, 2006.
2. VitalTrust Solutions, Inc. (f/k/a Entellectual Solutions Property Group, Inc. or “ESPG”)
VitalTrust Solutions, Inc. is a private Florida corporation based in Tampa, Florida that is focused on developing, acquiring, integrating and delivering vital technologies and solutions to the market. It currently owns 3 product lines: (1) Campus, an enterprise level application service provider (ASP) designed as a productivity enhancement system; (2) VitalTrust- a nationwide network of Community Healthcare Information Utilities for healthcare information archive and provider share technology; and (3) Health Centrics, a fully developed medical practice manager designed from the outset in the Application Service Provider model.
As of December 31, 2006 and 2005, the Company owned 100% and 80%, respectively of the outstanding common stock of VitalTrust Solutions, Inc. As of December 31, 2006 and 2005, the Company used a good faith estimate to value its investment in VitalTrust Solutions, Inc. at $1,000,000 and $2,516,250, respectively.
3. Dispositions of Investments.
On September 21, 2005 the Company acquired 30,000,000 common shares of NEX2U from KMA Capital Partners, Ltd. for 1,500,000 common shares of the Company. The cost of the investment was based on the quoted market price of NEX2U, Inc. of $.035 per share discounted 50% to $.0175 per share on that date, resulting in a cost basis of $525,000. As of December 31, 2005, the Company owned 44.4 % of the stock of NEX2U, Inc. On February 24, 2006, the Company sold those shares to KMA Capital Partners, Inc. for $535,000 resulting in a realized gain of $10,000.
NOTE C - STOCK ISSUED FOR SERVICES
For the years ended December 31, 2006, 2005 and 2004, the Company issued 223,236,1,977,238 and 211,946 shares, with a value of $70,438, $696,300 and $1,476,654, respectively, of common stock for professional services rendered. In addition, for the year ended December 31, 2005, 240,000 shares of preferred stock with a value of $120,000 were issued for professional services rendered. These preferred shares have since been converted on a 1 to 1 basis into common stock. The common and preferred shares issued in 2005 were issued to KMA Capital Partners, Ltd, a related party, for professional services as part of the reorganization of the Company. The common shares issued in 2004 were for professional services rendered. The value assigned to the above shares is based on the stock's traded market price on or about the date the shares were issued and are included in professional fees expense.
NOTE D -- COMMITMENTS AND CONTINGENCIES
Commitment
The Company leases offices from a related party under short-term (month to month) operating leases.
Rent expense for the years ending December 31, 2006, 2005 and 2004 was $38,576 , $7,406 and $9,035, respectively.
Contingencies
Roder Litigation
The Company previously reported that on March 22, 2005, a civil suit was filed in Orange County Circuit Court, Orlando, Florida against the former CEO of the Company, Walter H. Roder, II. The Company also previously reported that counterclaims were filed by Mr. Roder and related entities alleging non-payment of purported obligations which the Company believed to be without merit. On March 5-6, 2007, the Orange County Circuit Court declined to grant reconsideration of a summary judgment, and also entered a separate final judgment, against the Company in the aggregate amount of $1,307,685. The Court also found Roder to be entitled to recover post-judgment interest at 11 per year and attorney’s fees and costs, the amount of attorney’s fees and costs not being determined yet. The Company appealed to the Fifth District Court of Appeal in Daytona Beach, Florida on March 7, 2007, and the appellate court entered a March 22, 2007 Order of Referral to Mediation. The Company contends that the Trial Court erred in entering summary judgment in favor of Roder despite the existence of legal and factual issues that demonstrated the sued upon indebtedness no longer resided with the Company. The Company’s position relied upon prior sworn statements of Roder which the Company contends conflict with the affidavit that Roder filed in order to obtain summary judgment. The Company’s management and its litigation attorneys believe that good grounds to appeal do in fact exist and that there is a significant likelihood of obtaining a reversal of the Trial Court’s Summary Judgment. It is not possible to predict the outcome of the appeal with any degree of certainty, and it is not likely that a decision will be reached by the Appellate Court until 2008. Based on the foregoing, as of December 31, 2006 the Company has not accrued a loss in connection with this litigation in its financial statements. If an unfavorable appeals ruling were to occur, there exists the possibility of a material adverse impact on the financial position and results of operations of the period in which the ruling occurs, or future periods.. The Company has and will continue to incur legal fees in connection with this matter until the matter is resolved
Ability Holdings
In September 2005, the Company's wholly owned subsidiary, Kairos Consulting, Inc. entered into a consulting agreement with Ability Holdings, Inc. and received 1,250,000 shares of Ability Holdings, Inc.' common stock as partial payment for these services. The services were to be performed over a twelve month period beginning in September 2005, but Ability had the right to defer the start of those services for three months. The Company is currently in dispute with Ability Holdings, Inc and has not recorded any revenue with respect to this contract. In addition the Company has not recorded the value of the shares as an asset nor has it recorded a liability for the unearned revenue. The outcome of this dispute and the resolution of the share consideration received and services to be rendered are not currently determinable
Other Actions
From time to time the Company may be a party to various claims and legal proceedings in addition to those noted above. If management believes that a loss arising from these matters is probable and can reasonably be estimated, the Company records the amount of the loss, or the minimum estimated liability when the loss is estimated using a range, and no point within the range is more probable than another. As additional information becomes available; any potential liability related to any legal matters are assessed and the estimates are revised, if necessary. Based on currently available information, management believes that the ultimate outcome of any matters, individually and in the aggregate, will not have a material adverse effect on our financial position or overall trends in results of operations. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on the financial position and results of operations of the period in which the ruling occurs, or future periods.
NOTE E - CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially expose the Company to concentrations of credit risk, consist principally of cash. The Company maintains its cash accounts with financial institutions located in Florida. Federal Deposit Insurance Corporation (FDIC) guarantees the Company's deposits in financial institutions up to $100,000 per account. The Company had no deposits with financial institutions that exceeded the federally insured limit at December 31, 2006 or December 31, 2005. Historically, the Company has not experienced any losses on its deposits in excess of federally insured guarantees.
NOTE F - NOTES PAYABLE
Notes payable as of December 31, 2006 and 2005 consisted of the following:
Convertible Debentures
During the first and second quarters of 2005, the Company raised proceeds of $198,659 in a private placement of 8% convertible debentures (“the Short-Term Debentures”). $183,659 of the Short-term Debentures are convertible into shares of Common Stock of the Company at a conversion rate equal to 85% of the closing bid price of the Common Stock on the day of conversion or at the lowest price allowable as set by the Company in an effective registration statement or exemption notification as filed with the Securities and Exchange Commission. $15,000 of the Short-term Debentures has similar conversion terms except that the conversion price is equal to 50% of the Common Stock closing bid price. All of the Short-term Debentures and accrued interest thereon were converted into 713,600 shares of the Company’s Common Stock during the first and second quarters of 2005.
For financial reporting purposes, in accordance with FASB Emerging Issues Task Force Issue No. 98-5 (“EITF 98-5) “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,” the Company recorded a discount on the Short-term Debentures of $47,410 to reflect the beneficial conversion feature of the warrants. Accordingly, $47,410 of the proceeds from this financing has been credited to Additional Paid in Capital and because the debt is convertible at the date of issuance, the debt discount has been charged to expense on the date of issuance.
During the second and third quarters of 2005, the Company raised proceeds of $210,000 in a private placement of one year 8% convertible debentures (the “June 2005 Debentures”). The June 2005 Debentures are convertible into shares of Common Stock at a conversion price per share equal to 50% of the lowest closing ask price of the Common Stock on the day prior to conversion. None of the June Debentures have been converted as of December 31, 2005. The June 2005 Debentures are convertible as follows: 20% after 90 days of issuance, and then 20% every sixty days thereafter until the due date of each debenture. The Company has the right to redeem the June 2005 Debentures at a price equal to 200% of the face amount of the debentures, plus accrued interest. The June 2005 debentures are subordinated and junior in right to all accounts payable incurred in the ordinary course of business and/or bank debt of the Company.
For financial reporting purposes, in accordance with EITF No. 98-5, the Company recorded a discount of $210,000 on the June 2005 Debentures to reflect the beneficial conversion feature of the debentures. Accordingly, all of proceeds from this financing have been credited to Additional Paid in Capital. The discount is being allocated to each stated conversion date, and amortized to the date of earliest allowable conversion unless converted earlier.
The company has included accrued interest of $26,418 and $8,299 in the note balances for the years ended December 31, 2006 and 2005, respectively.
At December 31, 2006 and December 31, 2005, all of these notes were deemed short term. The terms of the convertible notes called for a conversion price equal to 50% of the quoted stock price on the date of conversion.
All of the convertible notes payable (debentures) outstanding at December 31, 2006 are currently in default. The Company has issued 420,000 shares of its common stock into a reserve escrow account to satisfy these debts. These shares are non-voting and are therefore not considered outstanding at December 31, 2006 and December 31, 2005.
Subsequent to December 31, 2006, the Company entered into Exchange Agreements with all of the debenture holders to exchange 2,100,000 shares of the Company's common stock in full satisfaction of the amounts payable to the debenture holders.
Unsecured Promissory Notes
During 2006 the Company received proceeds from notes payable totaling $137,500 from two individuals, with an interest rate of 7% per year, due in full with accrued interest on May 1, 2007. During 2006 $30,000 of the notes were repaid by the Company and the Company owes $107,500 plus accrued interest as of December 31, 2006. Subsequent to December 31, 2006, the Company entered into Exchange Agreements with these individuals to satisfy these debts with the payment of $6,000 representing interest with the balance of the note obligations being satisfied through the issuance of 1,130,000 shares of the Company's common stock.
NOTE G - STOCKHOLDERS EQUITY
As of December 31, 2006 the authorized capital of the company is 80,000,000 shares of common voting stock with a par value of $.001 per share and 10,000,000 shares of convertible preferred stock Class A with a par value of $.001 per share. The company has also authorized 10,000,000 shares of preferred Class B stock with a par value of $.001 per share and 10,000,000 shares of preferred Class C stock with a par value of $.001 per share. All terms, rights and preferences of the Class B and C preferred stock are determined by the Board of Directors at the time of issuance. No shares of convertible preferred stock Class A or preferred stock Classes B or C were issued or outstanding as of December 31, 2006 or December 31, 2005.
On March 15, 2006, the Board of Directors on behalf of the Company has authorized and approved the Company to increase the authorized common shares from 80,000,000 to 100,000,000 common shares. The Board also approved the consolidation of three classes of preferred shares from three classes to one, and has authorized the increase in shares from 30,000,000 to 50,000,000 preferred shares. As of the date of this report, the Company has not yet amended its corporate charter with the state of Nevada to reflect these changes, and accordingly, the accompanying balance sheet does not reflect these changes.
On August 12, 2004, the Board of Directors authorized a 40 - 1 reverse stock split of the Company's $.001 par value common stock. As a result of the reverse split, 658,125,000 shares were returned to the Company and additional paid in capital was increased by $658,125 and common stock was reduced by the same amount. All references in the accompanying financial statements to the number of common shares and per share amounts for 2006, 2005 and 2004 have been restated to reflect the reverse stock split.
On May 17, 2005, the Board of Directors, with the approval of Consent to Action by the Stockholders, authorized a 1250:1 reverse stock split of the Company's $.001 par value common stock and $.001 convertible preferred stock. As a result of the reverse split, 2,397,768,000 shares were returned to the Company and additional paid in capital was increased by $2,397,768 and common stock was reduced by the same amount. All references in the footnotes and accompanying financial statements to the number of common shares and per share amounts for 2006, 2005 and 2004 have been restated reflect this reverse stock split.
NOTE H- COMMON STOCK SHARES ISSUED INTO ESCROW
On June 13, 2005, The Company settled a disputed debt with a creditor. The terms of the settlement required the Company to place 180,000 shares of its common stock into escrow as collateral against a $22,500 debt due to this creditor. At September 30, 2005, the debt was fully satisfied; however, the shares still remain in escrow as of December 31, 2006.
On December 30, 2005, the Company issued 1,600,000 shares of its common stock (Rule 144 restricted) into the “ACS Creditors Trust.” The trust was set up by the Company to settle all remaining indebtedness of American Card Services, Inc. These are voting shares and are therefore included in issued and outstanding shares at December 31, 2006 and December 31, 2005.
NOTE I- PREFERRED STOCK AND WARRANTS
On February 18, 2005, the Company entered into an agreement with its major note holder and the note holders of American Card Services, Inc. to exchange the debt that existed at February 18, 2005 for equity securities of the Company. The Company issued 240,000 shares of convertible preferred stock and 260,000 warrants to the note holders. (The Company also issued 240,000 shares of convertible preferred stock to KMA Capital Partners, LTD for professional services rendered in connection with the restructuring of this debt.) The number of shares and warrants to be issued was determined based on the value of the securities on the grant date in relation to the debt owed to the note holders. The warrants are convertible into preferred stock at a price of $.0001 and become convertible at the earlier of the effective date of a reverse split or six months. The convertible preferred shares are convertible into common stock one to one. The convertible preferred shares shall be entitled to one vote per share and, as a group, shall be entitled to a revenue sharing dividend of 25% of net revenues of the Company. Net revenue is defined as the net revenue as reported under SEC filings. Said dividend may be payable in cash or common stock at the option of the investors. The convertible preferred shares are callable by the Company at 120% of value after 24 months.
In accounting for the transaction, the Company used APB Opinion 23, Early Extinguishment of Debt. In Footnote 1 of APB 23, “extinguishment transactions between related parties may in essence be capital transactions” and not immediate recognition of income. Emerging Issues Task Force (EITF) 98-5, Accounting for Convertible Securities with Beneficial Conversion Features of Contingently Adjustable Conversion Ratios, takes the position that embedded beneficial conversion features of convertible securities should be recognized and measured by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The intrinsic value is the difference between the conversion price and the fair value of the security. In addition, any recorded discount resulting from the allocation of proceeds to the beneficial conversion feature is analogous to a dividend (deemed dividend) and should be recognized as a return to the preferred shareholder over the minimum period from the date of issuance to the date at which the preferred shareholder can realize that return using the effective yield method.
The convertible preferred shares are convertible on the date of issuance and the embedded beneficial conversion feature is recognized immediately On the date of issuance of the preferred stock (February 28, 2005), the Company recorded a deemed dividend of $120,000 using the intrinsic value of each convertible share (.5) multiplied by the number of shares (240,000).
The warrants, as stated above, are convertible to preferred shares upon the earlier of the effective date of a reverse stock split or six months. The Company effectuated a reverse stock split of 1250:1 on of May 17, 2005. This reverse split triggered the embedded beneficial conversion feature of the warrants and therefore, the Company recorded a deemed dividend of $130,000 (260,000 warrants multiplied by the intrinsic value of .5).
On September 20, 2005, all Class A preferred stock and the warrants were converted into common stock. At December 31, 2006, there were no classes of preferred stock or warrants issued or outstanding.
NOTE J- RELATED PARTY TRANSACTIONS
The Company owns 4,156,635 shares (or 4.1%) of the voting common stock of KMA Capital Partners, Inc. (KMA). KMA is a financial services company that provides management, financial, consulting and strategic planning services to the investment community.
In 2004, KMA charged the Company a restructuring fee of $250,000 which was paid for by issuing 200,000 shares of the Company's common stock.
Effective January 1, 2005, the Company entered into a one year consulting contract with KMA, at a fee of $125,000 per month, to be payable in cash or in Rule 144 stock of the Company with an equivalent fair value. The Company was charged an additional $25,000 fee for January 2005. The consulting agreement provides for consulting advice regarding the Company's business plan, contemplated business operations, strategic planning, financial advisory services and merger and acquisition advisory services in relation to the restructuring of the Company. By mutual consent, the consulting contract was terminated as of August 31, 2005. The amount of these services totaled $1,025,000 for the year ended December 31, 2005. KMA Capital Partners, Ltd. received $ 328,700 in cash and the balance in 2,417,238 shares of Rule 144 restricted stock valued at $696,300. All of these fees were classified as Professional Fees - Related Party in the 2005 statement of operations.
In connection with the February 2005 restructuring of American Card Services, the Company issued 240,000 shares of its convertible preferred class A stock to KMA for professional services rendered. The beneficial conversion feature of the preferred stock was recorded as professional fees in the accompanying 2005 statement of operations. The amount of this conversion feature was $120,000.
In January 2006, the Company entered into another one year consulting contract with KMA at a fee of $35,000 per month, plus incidentals, to be payable in cash. However, the contract was altered as of April 1, 2006 to establish a new monthly fee which is based on the time actually spent on managing the account as opposed to a fixed monthly fee. For the three and twelve months ended December 31, 2006, the Company was charged $92,963 and $359,768, respectively, by KMA which have all been classified as Professional Fees - Related Party. In connection with the February 2005 restructuring of American Card Services, Inc., the Company issued 240,000 shares of its convertible preferred class A stock to KMA for professional services rendered. The beneficial conversion feature of the preferred stock was recorded as professional fees in the accompanying statement of operations. The amount of this conversion feature was $120,000. See Note I- “Preferred Stock and Warrants.”
On September 21, 2005, the Company exchanged with KMA Capital Partners, Ltd. 1,500,000 shares of its Rule 144 restricted stock for 30,000,000 shares of NX2U, Inc. stock (a pink sheet company). On February 24, 2006, KMA purchased these shares back from the Company in exchange for a $250,000 note. The note is non interest bearing with no repayment schedule; however, the Company expects to be repaid in full by December 31, 2006 and has therefore recorded this loan in the current assets section of the balance sheet. At December 31, 2006, the loan was repaid in full.
On October 17, 2005, the Company exchanged 9 units of KMA Capital Partners, Ltd. limited partnership units for 3,707,762 of the Company’s stock. The cost of the investment was based on the fair value of the Company’s stock at the date of the exchange, less a discount for lack of marketability. On February 27, 2006, KMA Capital Partners, Ltd. merged with NEXTU, Inc. (with the merged entity being re-named KMA Capital Partners, Inc.) and the limited partnership units were exchanged for 4,156,635 shares of KMA Capital Partners, Inc. stock.
The Company entered into an exchange agreement with KMA Capital Partners, Inc. (KMA) on December 27, 2006 whereby the Company will surrender the 4,156,109 shares of KMA stock that it had acquired on February 27, 2006, in exchange for KMA surrendering 6,625,000 shares of the Company's stock that KMA owned. The stock swap was consummated subsequent to December 31, 2006. As of December 31, 2006, the Company wrote down its investment in this entity to its expected net realizable value, which was $166,265, and recorded an unrealized loss of $283,735 in 2006. The original investment at cost was $450,000.
Also, as part of the agreement, the Company acknowledges receipt of payment in full, as of December 31, 2006, of the note receivable due from KMA, originally dated February 24, 2006 in the amount of $250,000 in exchange for professional services by KMA during 2006 to the Company.
On April 1, 2006, the Company assumed a portion of consulting agreement between TB of Tampa, LLC, a company owned by the Company's CEO's wife, and Entellectual Solutions Properties Group, Inc.that requires the Company to compensate its CEO through at a fee of $11,000 per month, plus incidental, expenses up to $1,000 per month, to be payable in cash. During 2006, the consulting expense was $77,000. (See Note N - Subsequent Events).
Also during 2006, services in the form of office help were performed by TB of Tampa, LLC, the total of which was $3,000.
Due from Related Parties represent the net advances of $14,650 during 2006 to Elite Corp., a company that the Company's CEO has an ownership interest in.
Due to Related Parties of $243,279 primarily consists of the following as of December 31, 2006:
·
During 2006, Denoument Strategies, a company owned by John Stanton, a principal shareholder of VitalTrust Business Development Corporation, has advanced the Company $185,000 to fund the Company's operations. The advances are evidenced by unsecured promissory notes with interest at 7% per year. The notes are payable, with accrued interest, upon demand on or after May 31, 2007.
·
TB of Tampa, LLC ("TB"), a Company owned by the wife of the Company's CEO is owed $38,164 as of December 31, 2007. This balance primarily represents unpaid consulting fees payable in connection with the consulting agreement between the Company and the CEO.
·
Vital Trust Solutions, a portfolio investment company of the Company, has made non-interest bearing net advances of $19,890 to the Company during 2006, and that balance remains outstanding as of December 31, 2006.
NOTE K - UNAUDITED PRO FORMA and CONDENSED INFORMATION
As described in Note A, American Card Services. was treated as the accounting acquirer of the registrant in compliance with the accounting guidelines of a reverse acquisition. The acquisition was completed on May 12, 2004, after the Company increased authorized shares to a total sufficient to effect the transaction. On August 3, 2004, the Company elected BDC status and in accordance with those regulations, management placed American Card Services assets and liabilities into a subsidiary and reclassified American Card Services as a portfolio investment of the Company. The following unaudited pro forma information summarizes the combined results of the Company and American Card Services as if the merger took place at the beginning of 2004. The 2004 combined results include the results of operations of ACS through August 3, 2004. In addition, the weighted average shares have been adjusted to reflect the 40 to 1 and 1250 to 1 reverse stock splits which occurred in August 2004 and May 2005, and for the effective exchange ratio of shares issued for American Card Services, Inc.’s net assets at the date of the reverse acquisition.
NOTE L- FINANCIAL HIGHLIGHTS
NOTE M - SELECTED QUARTERLY DATA (UNAUDITED)
The following table sets forth certain quarterly financial information for each of the fiscal quarters during the years ending December 31, 2006, 2005 and 2004. This information was derived from the Company's unuadited financial statements. Results for any quarter are not necessarily indicative of results for the full year.
NOTE N - SUBSEQUENT EVENTS (UNAUDITED)
During March 2007, at a Special Meeting of Directors, our dis-interested directors approved a proposed transaction wherein the Company would exchange a Preferred Stock with limited redemption rights for a portfolio of securities with a market value in excess of $130,000,000. On March 2, 2007, the Company executed an agreement wherein the Company will create a preferred stock with certain rights which the Company would thereafter exchange for the portfolio of securities. Company counsel is preparing the required state filings necessary to create the preferred stock. The Company anticipates a final closing on the portfolio of securities will occur prior to April 30, 2007.
At a special formation meeting of the Board of Directors on March 3, 2007, the Company proposed entering into engagement agreements with its CEO and COO to compensate each individual at the rate of $20,000 per month.
Subsequent to December 31, 2007, the Company reached management agreements with several qualified US corporations including PatienTree, Inc. a facilitator of medical communications technologies and procedures; Inteligy, Inc. a facilitator of telephone systems for small to medium sized corporations, and; Calgenex, Inc. a facilitator of products and systems to reduce the amount of calcium in the human body. The Company's management agreements require a high degree of hands-on involvement including finalizing their business plan, crafting a series of milestones to achieve the company's objectives and on-going meetings to evaluate the degree such milestones are achieved. While VitalTrust intends to provide finance to its client companies, funds will be distributed monthly following a review of on-going activities.
Subsequent to December 31, 2007 we formed Resource Command Incorporated, an entity designed to acquire up to a 49% interest in Service-Related Disabled Veteran Owned Small Businesses (SDVO). SDVOs are companies a majority of which (51%) must be owned by a disabled American veteran. The Company intends to retain a minority position and provide finance and management to US disabled veterans primarily engaged in government contracting. The Company is currently in discussions with two SDVOs and intends to notify all Veteran affairs and Veteran hospitals to ensure that service men and women who qualify are made aware that Resource Command is designed to provide initial seed capital and extensive executive-level management to help launch their respective companies.