ITEM 1.
BUSINESS
GENERAL
The Company was founded in 1982 under the laws of the State of Minnesota as Command Small Computer Learning Center, Inc., a computer training company. Over a period of years, the Company became involved in the sale of computer components and, eventually, became a value added reseller (VAR) of major computer brands. In 1987, the Company changed its name to Command Electronics, Inc. In February 1995, the Company acquired CyberStar Computer Systems, a manufacturer and marketer of microcomputers and servers, and in 1997 it changed its name to CyberStar Computer Corporation. In August of 2000, the Company changed its name to eNetpc, Inc. In December 2004, the Company elected to be regulated as a business development company under the Investment Company Act of 1940 and changed its name to BDC Capital Inc. Company headquarters are located at 11974 Portland Avenue, Burnsville, MN 55337, and its telephone and facsimile numbers are (952) 890-2362 and (952) 890-7451, respectively. The Company's Internet addresses are www.bdccapital.com and www.bdcpartners.com.
BDC Capital, Inc. is now a company that intends to build an investment portfolio consisting of revenue generating assets and emerging companies well positioned for future growth. A business development company is a unique kind of investment company that primarily focuses on investing in or lending to small private companies and making managerial assistance available to them. A business development company may use capital provided by public stockholders and from other sources to invest in growing small businesses.
A business development company provides stockholders the ability to retain the liquidity of a publicly traded stock while sharing in the possible benefits of investing in privately owned small-and medium-sized companies.
BDC Capital, Inc. currently has one investment portfolio company, 100% wholly own BDC Partners, Inc. which has its website at www.bdcpartners.com.
BDC Partners, Inc. is a private company founded in 2004. Located in Minneapolis it is a wholly own subsidiary of BDC Capital, Inc (www.bdccapital.com). It has a unique, multidisciplinary technology process paired with an intellectual property revenue-focused business model. While most companies are in the business of technology products (including start-ups that design and manufacture products), BDC Partners owns pure intellectual property with recurring revenues, creating, funding and commercializing innovative new ideas.
Current Intellectual Property of BDC Partners, Inc.
PC Related domains: BuildtoOrderPc series, including Laptopcomputers.com and Notebookcomputers.com.
GoSchools.com domains: Specializing in College, Universities (Division I, II and III, NAIA) and High School domain names.
Page
EMPLOYEES
As of April 28, 2006, BDC Capital, Inc. has two employees. The Company’s employees are not represented by a union. The Company considers its relations with its employees to be outstanding.
ITEM 1A.
ITEM 1A.
RISK FACTORS
We are subject to various risks that may materially harm our business, financial condition and results of operations. You should carefully consider the risks and uncertainties described below and the other information in this filing before deciding to purchase our common stock. If any of these risks or uncertainties actually occurs, our business, financial condition or operating results could be materially harmed. In that case, the trading price of our common stock could decline and you could lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
We Have Historically Lost Money and Losses May Continue in the Future
We have historically lost money. The loss for the twelve months ended February 28, was $1,059,421 and future losses are likely to occur. Accordingly, we may experience liquidity and cash flow problems if we are not able to raise additional capital as needed and on acceptable terms. No assurances can be given that we will be successful in reaching or maintaining profitable operations. Our current monthly operating expenses are $25,000 per month. Our current cash reserves after receiving payments of approximately $359,800 on subscription receivables subsequent to February 28, 2006 are sufficient to enable us to operate for the next 12 months.
We May Need to Raise Additional Capital to Finance Operations
Our operations have relied almost entirely on external financing to fund our operations. Such financing has historically come from a combination of borrowings and from the sale of common stock. We will need to raise additional capital to fund our anticipated operating expenses and future investments. Among other things, external financing will be required to cover our operating costs. We cannot assure you that financing whether from external sources or related parties will be available if needed or on favorable terms. The sale of our common stock to raise capital may cause dilution to our existing stockholders. Our inability to obtain adequate financing will result in the need to curtail business operations. Any of these events would be materially harmful to our business and may result in a lower stock price.
Our Common Stock May Be Affected By Limited Trading Volume and May Fluctuate Significantly
There has been a limited public market for our common stock and there can be no assurance that an active trading market for our common stock will develop. As a result, this could adversely affect our stockholders' ability to sell our common stock in short time periods, or possibly at all. Our common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations that could adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could cause the price of our common stock to fluctuate substantially. Substantial fluctuations in our stock price could significantly reduce the price of our stock.
Page
Our Common Stock is Traded on the "Over-the-Counter Bulletin Board," Which May Make it More Difficult For Investors to Resell Their Shares Due to Suitability Requirements
Our common stock is currently traded on the Over the Counter Bulletin Board (OTCBB) where we expect it to remain for the foreseeable future. Broker-dealers often decline to trade in OTCBB stocks given that the market for such securities is often limited, the stocks are more volatile, and the risks to investors are greater. These factors may reduce the potential market for our common stock by reducing the number of potential investors. This may make it more difficult for investors in our common stock to sell shares to third parties or to otherwise dispose of them. This could cause our stock price to decline.
We Could Fail to Retain or Attract Key Personnel
Our future success depends, in significant part, on the continued services of Richard Pomije, our Chief Executive Officer and Principal Financial Officer. We cannot assure you that we would be able to find an appropriate replacement for him or any other key personnel. Any loss or interruption of our key personnel's services could adversely affect our ability to develop our business plan. We do not have an employment agreement with Mr. Pomije, nor do we presently maintain key-man life insurance policies on him.
Minnesota Law and Our Charter May Inhibit a Takeover of Our Company That Stockholders May Consider Favorable
Provisions of Minnesota law, such as its business combination statute, may have the effect of delaying, deferring or preventing a change in control of our company. As a result, these provisions could limit the price some investors might be willing to pay in the future for shares of our common stock.
Our Officers and Directors Have the Ability to Exercise Significant Influence Over Matters Submitted for Stockholder Approval and Their Interests May Differ From Other Stockholders
Our executive officers and directors, in the aggregate, will have the ability to nominate two (2) members to the Board of Directors. Accordingly, our directors and executive officers, whether acting alone or together, may have significant influence in determining the outcome of any corporate transaction or other matter submitted to our Board for approval, including issuing common and preferred stock, and appointing officers, which could have a material impact on mergers, acquisitions, consolidations and the sale of all or substantially all of our assets, and also the power to prevent or cause a change in control. The interests of these board members may differ from the interests of the other stockholders.
RISKS RELATED TO OUR OPERATION AS A
BUSINESS DEVELOPMENT COMPANY
We May Change Our Investment Policies Without Further Stockholder Approval
Although we are limited by the Investment Company Act of 1940 with respect to the percentage of our assets that must be invested in qualified investment companies, we are not limited with respect to the minimum standard that any investment company must meet, nor the industries in which those investment companies must operate. We may make investments without stockholder approval and such investments may deviate significantly from our historic operations. Any change in our investment policy or selection of investments could adversely affect our stock price, liquidity, and the ability of our stockholders to sell their stock.
Page
Our Investments May Not Generate Sufficient Income to Cover Our Operations
We intend to make investments into qualified companies that will provide the greatest overall return on our investment. However, certain of those investments may fail, in which case we will not receive any return on our investment. In addition, our investments may not generate income, either in the immediate future, or at all. As a result, we may have to sell additional stock, or borrow money, to cover our operating expenses. The effect of such actions could cause our stock price to decline or, if we are not successful in raising additional capital, we could cease to continue as a going concern.
Investing in Private Companies Involves a High Degree of Risk
Our portfolio consists of primarily long-term loans to and 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. There is generally no publicly available information about the companies in which we invest, and we rely significantly on the diligence of our employees and agents to obtain information in connection with our investment decisions. 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, our investment in such businesses.
Specifically as it relates to our investment in BDC Partners, Inc. we rely on BDC Partners to timely renew its domain names which is its significant asset.
Our Portfolio of Investments are Illiquid
We generally acquire our investments directly from the issuer in privately negotiated transactions. The majority of the investments in our portfolio is typically subject to restrictions on resale or otherwise has no established trading market. We typically exit our investments when the portfolio company has a liquidity event such as a sale, recapitalization, or initial public offering of the company. The illiquidity of our investments may adversely affect our ability to dispose of debt and equity securities at times when it may be otherwise advantageous for us to liquidate such investments. In addition, if we were forced to immediately liquidate some or all of the investments in the portfolio, the proceeds of such liquidation would be significantly less than the current value of such investments. Substantially all of our portfolio investments are recorded at fair value as determined in good faith by our board of directors and, as a result, there is uncertainty regarding the value of our portfolio investments. Pursuant to the requirements of the 1940 Act, we value substantially all of our investments at fair value as determined in good faith by our board of directors on a quarterly basis. Since there is typically no readily ascertainable market value for the investments in our portfolio, our board of directors determines in good faith the fair value of these investments pursuant to a valuation policy and a consistently applied valuation process.
There is no single standard for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process for the types of investments we make. Unlike banks, we are not permitted to provide a general reserve for anticipated loan losses; we are instead required by the 1940 Act to specifically value each individual investment on a quarterly basis, and record unrealized depreciation for an investment that we believe has become impaired, including where collection of a loan or realization of an equity security is doubtful, or when the enterprise value of the company does not currently support the cost of our debt or equity investment. Conversely, we will record unrealized appreciation if we believe that the underlying portfolio company has appreciated in value and, therefore, our equity security has also appreciated in value. Without a readily ascertainable market value and because of the inherent uncertainty of valuation, the fair value of our investments determined in good faith by the board of directors may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material.
Page
We will adjust quarterly the valuation of our portfolio to reflect the board of directors' determination of the fair value of each investment in our portfolio. Any changes in estimated fair value will be recorded in our statement of operations as "Net unrealized gains (losses)."
Our Common Stock Price May be Volatile
The trading price of our common stock may fluctuate substantially. The price of the common stock may be higher or lower than the price you pay for your shares, depending on many factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include the following:
-
Price and volume fluctuations in the overall stock market from time to time;
-
Significant volatility in the market price and trading volume of securities of business development companies or other financial services companies;
-
Volatility resulting from trading in derivative securities related to our common stock including puts, calls, long-term equity anticipation securities, or Leaps, or short trading positions;
-
Changes in regulatory policies or tax guidelines with respect to business development companies or regulated investment companies;
-
Actual or anticipated changes in our earnings or fluctuations in our operating results or changes in the expectations of securities analysts;
-
General economic conditions and trends;
-
Loss of a major funding source; or
-
Departures of key personnel
ITEM 2.
ITEM 2.
PROPERTIES
BDC Capital, Inc. sub-leases from a director of the Company approximately 1,000 square feet of space used for offices and operations equipment storage at 11974 Portland Avenue, Burnsville, Minnesota at a monthly rent of $750 renewable monthly.
ITEM 3.
ITEM 3.
LEGAL PROCEEDINGS
The Company is exposed to asserted and unasserted claims encountered in the normal course of business. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations.
ITEM 4.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Page
PART II
ITEM 5.
ITEM 5.
MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
BDC's common stock has been traded on the OTC Bulletin Board ("OTCBB") since June 12, 1998. The following table sets forth the quarterly high and low sales prices as reported by the Nasdaq National Market during the last two fiscal years ended February 28, 2006 and February 28, 2005.
These quotations represent inter dealer prices, without retail markup, markdown, or commission, and may not reflect actual transactions. As of April 28, 2006, there were approximately 360 record holders of the Company's common stock.
DIVIDEND POLICY
The Company has never paid cash dividends on any of its securities. The Company currently intends to retain any earnings for use in its operations and does not anticipate paying cash dividends in the foreseeable future. Future dividend policy will be determined by the Company's Board of Directors based upon the Company's earnings, if any, it's capital needs and other relevant factors.
Page
ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial information for BDC Capital as of and for each of the two years in the period ended February 28, 2006, and has been derived from our audited consolidated financial statements.
The data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and related notes.
Page
ITEM 7.
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of operations of the Company for the year ended February 28, 2006 and for the year ended February 28, 2005, which should be read in conjunction with, and is qualified in its entirety by, the financial statements and notes thereto included elsewhere in this report.
The results of operations for 2005 are divided into two periods. The nine-month period, representing the period March 1, 2004 through November 30, 2004, reflects the Company's results prior to operating as a business development company under the Investment Company Act of 1940, as amended. The three-month period ended February 28, 2005, reflects the Company's results as a business development company under the Investment Company Act of 1940, as amended. Accounting principles used in the preparation of the financial statements beginning December 1, 2004 are different than those of prior periods and, therefore, the financial position and results of operations of these periods are not directly comparable. The primary differences in accounting principles relate to the carrying value of investments and consolidations.
Changes in unrealized gains (losses) on the change in value of portfolio investments for business development companies are recognized each period. Prior to becoming a business development company, unrealized gains (losses) on the change in value of investments were recorded as accumulated comprehensive income in the statement of stockholders equity. Gains (losses) on investment would only be recognized when realized or when an investment was permanently impaired.
As a business development company, consolidation of portfolio companies is not required in which the Company has a controlling interest. In contrast, prior to operating as a business development corporation, entities in which the Company had a controlling interest would have been required to be consolidated.
RESULTS OF OPERATIONS
YEARS ENDED FEBRUARY 28, 2006 AND FEBRUARY 28, 2005
The results of operations for fiscal year 2005 are divided into two periods. The nine-month period, representing the period March 1, 2004 through November 30, 2004 reflects the Company’s results prior to operating as a business development company under the Investment Company Act of 1940. The three-month period ended February 28, 2005 reflects the Company’s results as a business development company under the Investment Company Act of 1940. The year ended February 28, 2006 is a complete year as a business development company.
For the year ended February 28, 2006, the Company incurred a net investment loss of $1,059,421. The main components of this loss related to $79,790 of professional fees with a majority of these fees relating to accounting and investor relations and $809,888 for interest expense on convertible debt. On the interest expense, $775,906 relates to the amortization of original debt discount which originated from the beneficial conversion feature related to the debt. In addition, the Company recorded administrative expenses of $147,816 for the management of the company.
Page
For the three months ended February 28, 2005, the Company incurred a net investment loss of $217,353. The main components of this loss related to $69,901 of professional fees with a majority of these fees relating to setting up the Company as a business development company and $139,171 for interest expense on convertible debt. On the interest expense, $132,757 relates to the amortization of original debt discount which originated from the beneficial conversion feature related to the debt. In addition, the Company recorded an increase in unrealized appreciation on its investment in BDC Partners, Inc. of $607,597.
For the nine months ended November 30, 2004, the Company incurred a loss from operations of $148,074, compared to a loss of $136,707 for the year ended February 28, 2004. The change in the net loss in 2005 is primarily attributable to the continued decline in revenues from the computer sales division. The net assets and operations of the computer sales division was transferred to the BDC Partners, Inc. when the Company became a business development company.
LIQUIDITY AND CAPITAL RESOURCES
As a business development company
BDC Capital, Inc.’s cash position at February 28, 2006 was $15,346 , a decrease of $244,833 from $260,179 at February 28, 2005. During the year ended February 28, 2006, net cash used in operating activities was $507,628. Net cash provided by financing activities of $262,795 for the year ended February 28, 2006 consisted primarily of issuance of common and preferred stock and convertible debentures net of payments on convertible debt.
BDC Capital, Inc.’s cash position at February 28, 2005 was $260,179, an increase of $243,846 from $16,333 at November 30, 2004. During the three months ended February 28, 2005, net cash used in operating activities was $146,154. Net cash provided by financing activities of $390,000 for the three months ended February 28, 2005 consisted entirely of issuance of convertible debentures during the three month period.
Our current monthly operating expenses are approximately $25,000 per month. Our current cash reserves after receiving payments of approximately $359,800 on subscription receivables subsequent to February 28, 2006 are sufficient to enable us to operate for the next 12 months. We anticipate that any additional financing would be through the sales of our common stock or other equity-based securities. We do have in place a $16.5 million equity line from new and existing investors. BDC Capital, Inc. signed agreements for the equity line in February 2005. Under the terms of the agreement, BDC Capital may elect to receive as much as $16.5 million from the investors in common stock purchases over the next two years.
Prior to becoming a business development company
BDC Capital, Inc.’s cash position at November 30, 2004 was $16,333, an increase of $6,650 from $9,683 at February 28, 2004. During the nine months ended November 30, 2004, net cash used by operating activities was $113,873. Net cash provided by financing activities was $120,523 for the nine months ended November 30, 2004.
Recent Developments - Portfolio Companies
None.
Page
Critical Accounting Policies
Critical accounting policies are those that are both important to the presentation of our financial condition and results of operations and those that require management’s most difficult, complex or subjective judgments. Our critical accounting policies are those applicable to the valuation of investments.
Valuation of Portfolio Investments
As a business development company, we invest primarily in illiquid securities including debt and equity securities of private companies. The investments are generally subject to restrictions on resale and generally have no established trading market. We value substantially all of our equity investments at fair value as determined in good faith by our valuation committee on a quarterly basis. The valuation committee, comprised of two board members, reviews and approves the valuation of our investments within the guidelines established by the board of directors. Fair value is generally defined as the amount that an investment could be sold for in an orderly disposition over a reasonable time. Generally, to increase objectivity in valuing our assets, external measures of value, such as public markets or third party transactions, are utilized whenever possible. Valuation is not based on long term work-out value, nor immediate liquidation value, nor incremental value for potential changes that may take place in the future.
Recently issued accounting pronouncements:
In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement No. 123(R), "Shared-Based Payment," which is a revision of SFAS No. 123, and supersedes APB Opinion No. 25. SFAS 12(R) requires all share-based payments to employees and directors, as well as other equity-based compensation arrangements, to be recognized in the financial statements based on their fair values, using prescribed option-pricing models effective for the first annual period beginning after June 15, 2005. The pro forma disclosure previously permitted under SFAS No. 123 will no longer be an alternative to financial statements recognition. The adoption of this statement becomes effective for the Company on March 1, 2006.
The impact of adopting Statement No. 123(R) can not be predicted at this time because it will depend on levels of share-based payments granted in the future, valuation methodology adopted and assumptions selected at the time of future grants. With the adoption of Statement No. 123(R), we may elect to utilize a different valuation method and/or different valuation assumptions. These selections may have a significant impact on the amount of share based payment expense under Statement No. 123(R).
In May 2005, the FASB issued SFAS 154, "Accounting Changes and Error Corrections" which replaces APB Opinion No. 20 "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements-An Amendment of APB Opinion No. 28." SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, or the latest practicable date, as the required method for reporting a change in accounting principle and the reporting of a correction of an error. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We are currently evaluating the effect that the adoption of SFAS 154 will have on our results of operations and financial condition but do not expect that adoption will have a material impact.
Page
FORWARD-LOOKING INFORMATION
Any statements contained herein related to future events are forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on forward-looking statements. BDC Capital, Inc. undertakes no obligation to update any such statements to reflect actual events.
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 consolidated statement of operations as “Net unrealized appreciation (depreciation) on investment”.
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 February 28, 2006, 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.
Page
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
An evaluation made at the end of the period covered by this report was performed under the supervision and with the participation of the Company's president, chief executive officer ("CEO") and the chief financial officer ("CFO") of the effectiveness of the design and operation of the Company's disclosure controls and procedures to insure that the Company records, processes, summarizes and reports in a timely and effective manner the information required to be disclosed in reports filed with or submitted to the Securities and Exchange Commission. Based on that evaluation, the Company's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective in timely bringing to their attention material information related to the Company required to be included in the Company's periodic Securities and Exchange Commission filings. Since the date of this evaluation, there have been no significant changes in the Company's internal controls or in other factors that could significantly affect those controls.
However, due to the limited number of Company employees engaged in the authorization, recording, processing and reporting of transactions, there is inherently a lack of segregation of duties. The Company periodically assesses the cost versus benefit of adding the resources that would remedy or mitigate this situation, and currently does not consider the benefits to outweigh the costs of adding additional staff in light of the limited number of transactions related to the Company's operations.
(b) Changes in Internal Controls Over Financial Reporting.
There have been no significant changes in internal control over financial reporting that occurred during the fiscal period covered by this report that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
ITEM 9B.
ITEM 9B.
OTHER INFORMATION
None.
Page
PART III
ITEM 10.
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information concerning each of the directors and executive officers of BDC Capital, Inc.
Name
Age
Position
Richard A. Pomije
Chairman, President, CEO & Secretary/Treasurer
Jeff Mills
Director
Dan Janisch
Director
RICHARD A. POMIJE has been with eNetpc and BDC since 1982 and has served as President, Secretary, Treasurer, and a director since 1996. He had previously served in such positions from 1983 through 1992. Mr. Pomije's primary responsibilities include overall strategic planning. Mr. Pomije holds a degree in Communication Technology, Audio Technology and Technical Services from Brown Institute. Mr. Pomije also received a First Class FCC license with radar endorsement.
JEFF MILLS became a director in December 2003. Mr. Mills has worked for Xerox Corporation for the past 17 years in various operation and sales positions. He has also served as director for one private company and has served as president, owner and operator of various business ventures. Mr. Mills is a 1984 graduate of the University of Northern Iowa and has held several security licenses.
DAN JANISCH became a director in March 2005. Mr. Janisch is President and CEO of Black Diamond Capital, a private equity firm based in Minneapolis, Minnesota. He has more than 30 years of experience in business strategy development and operational execution in a wide range of industries, including manufacturing, technology, telecommunications, professional service, distribution and healthcare ranging from privately held emerging firms to Fortune 500 Companies. He has led the start-up and sale of two companies, and held corporate and or operational positions with Holiday Inns International, Honeywell Inc., and Cray Research. As president of Black Diamond Capital, Janisch is responsible for raising capital, due diligence, strategic acquisitions and operational oversight of portfolio companies. Prior to Black Diamond he was Vice President, Strategic Advisory & Turnaround group, one of the top five turnaround firms in the U.S.
Directors are elected at the annual meeting of the stockholders and serve until their successors are elected and qualified. Officers are elected by the Board of Directors and serve at the discretion of the Board of Directors or until their earlier resignation or removal.
Page
Section 16 Beneficial Ownership Reporting Compliance
Section 16 of the Securities Exchange Act of 1934, as amended, and the rules promulgated there under require the Company's officers, directors, and holders of 10% or more of its outstanding common stock to file certain reports with the Securities and Exchange Commission (the "Commission"). To the company's best knowledge, based solely on information provided by the reporting individuals, all of the reports required to be filed by these individuals were filed.
Audit Committee
Mills and Janisch currently serve as members of the Audit Committee. This committee met twice during the last fiscal year. The Audit Committee is responsible for assisting the Board of Directors with respect to its oversight of corporate accounting, reporting practices of the Company and the quality and integrity of the financial reports of the Company. The Board has named Jeff Mills as the "audit committee financial expert" as defined by Item 401(h)(2) of Regulation S-K under the Securities Act of 1933. The Company acknowledges that the designation of Mr. Mills as the audit committee financial expert does not impose on Mr. Mills any duties, obligations or liability that are greater than the duties, obligations and liability imposed on Mr. Mills as a member of the Audit Committee and the Board of Directors in the absence of such designation or identification.
ITEM 11.
ITEM 11.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid for services rendered during the fiscal years ended February 28, 2006, February 28, 2005, and February 28, 2004 to the Chairman and Chief Executive Officer. No other officers earned cash compensation in excess of $100,000 in fiscal 2006.
Summary Compensation Table
(1)
Automobile expenses.
(2)
Board member fees
OPTION GRANTS IN THE LAST FISCAL YEAR
The following table sets forth information regarding options granted to the Named Executive Officer during the 2006 and 2005 fiscal year.
No options were granted in fiscal 2006 and 2005.
Page
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table provides information relating to the value of shares of common stock subject to options held by the Named Executive Officer as of February 28, 2006.
(1) expiration is 30 days after service terminates.
DIRECTORS' COMPENSATION
To date, BDC Capital, Inc. currently pays it's directors a $500.00 monthly fee.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information as of February 28, 2006 with respect to the number of shares of Common Stock beneficially owned by (i) each person known by BDC Capital to own beneficially 10% or more of the Common Stock; (ii) each director; (iii) the Chief Executive Officer, and (iv) all directors and executive officers as a group. Unless otherwise noted, each person listed below has sole voting and investment power with respect to his shares. The address for each individual set forth below is 11974 Portland, Burnsville, MN 55337.
Common shares issued and outstanding as of 2/28/2006 were 427,572,138
Page
(1) The securities "beneficially owned" by a person are determined in accordance with the definition of "beneficial ownership" set forth in the regulations of the Commission and, accordingly, may include securities owned by or for, among others, the spouse, children or certain other relatives of such person as well as other securities as to which the person has or shares voting or investment power or has the right to acquire within 60 days.
(2) excludes 200,000 shares of Common Stock purchasable pursuant to the exercise of currently exercisable options.
(3) excludes 200,000 shares of Common Stock purchasable pursuant to the exercise of currently exercisable options.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
BDC Capital, Inc. sub-leases from a director of the Company approximately 1,000 square feet of space used for offices and operations equipment storage at 11974 Portland Avenue, Burnsville, Minnesota at a monthly rent of $750 renewable monthly.
ITEM 14.
ITEM 14.
Principal Accountant Fees and Services.
During the prior two fiscal years, the following was paid for accountant and related services:
(1) audit fees were paid to CMO during the year ended February 28, 2006 and to VK during the year ended February 28, 2005
(2) tax fees paid to Century Small Business Solutions
Audit Committee Policies and Procedures:
The primary responsibility of the Audit Committee is to oversee the Company’s financial reporting process on behalf of the Board and report the results of their activities to the Board. Management is responsible for preparing the Company’s financial statements, and the independent auditors are responsible for auditing those financial statements. The Committee in carrying out its responsibilities believes its policies and procedures should remain flexible in order to best react to changing conditions and circumstances.
The following shall be the principal recurring processes of the Audit Committee in carrying out its oversight responsibilities. The processes are set forth as a guide with the understanding that the Committee may supplement them as appropriate.
Page
·
The Committee shall have a clear understanding with management and the independent auditors that the independent auditors are ultimately accountable to the board and the Audit Committee, as representatives of the Company’s stockholders. The Committee shall have the ultimate authority for and responsibility to evaluate and annually recommend the selection, retention, and, where appropriate, the replacement of the independent auditors. The Committee shall review and approve the performance by the independent auditors of any non-audit-related service if the fees for such service are projected to exceed 15% of the most recently completed fiscal year’s combined audit fees and audit-related service fees. The Committee shall review and discuss with the auditors their independence from management and the Company and the matters included in the written disclosures required by professional independence standards applicable to the independent auditors. Annually, the Committee shall review and assess whether the independent auditor’s performance of non-audit services is compatible with the auditor’s independence. In addition, the Audit Committee shall review any candidate for the senior accounting and/or financial executive position prior to his or her appointment by the Company.
·
The Committee shall review and discuss with the independent auditors and with the head of the Company’s finance department the overall scope and plans for the audits. Also, the Committee shall discuss with management and the independent auditors the adequacy and effectiveness of the accounting and financial controls, including the Company’s system to monitor and manage business risk, and legal and ethical compliance programs. Further, the Committee shall meet separately with the independent auditors, without management present, to discuss the results of their respective audit procedures.
·
The Committee shall review and discuss the results of the quarterly review and any other matters required to be communicated to the committee by the independent auditors under generally accepted auditing standards. The chair of the Committee may represent the entire Committee for the purpose of this review.
·
The Committee shall review and discuss with management and the independent auditors the financial statements to be included in the Company’s annual report on Form 10-K, including their judgment about the quality, not just the acceptability, of accounting principles, the reasonableness of significant judgments, the basis and appropriateness of any change in significant accounting policies and the clarity of the disclosures in the financial statements. Also, the Committee shall review and discuss the results of the annual audit and any other matters required to be communicated to the Committee by the independent auditors under generally accepted auditing standards.
·
The Committee shall review and discuss with management and the independent auditors any material financial or non-financial arrangements of the Company which do not appear on the financial statements of the Company and any transactions or courses of dealing with parties related to the Company which transactions are significant in size or involve terms or other aspects that differ from those that would likely be negotiated with independent parties, in each case where such arrangements or transactions are relevant to an understanding of the Company’s financial statements.
Page
PART IV
ITEM 15.
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)
Financial Statements
Audited Financial Statements for the year ended February 28, 2006
(b)
Exhibits.
3.1
Articles of Incorporation, as amended (1)
3.2
Bylaws (1)
10.2
Employee Stock Option Plan, as amended to date (1)
Certifications of Chief Executive Officer and Chief Financial Officer under Rule 13a-14(a)/15d-14(a)
Certifications under Section 1350
(1) Incorporated by reference to exhibit filed as a part of Registration Statement on Form 10-SB (Commission File No. 000-27225).
SIGNATURES
Pursuant to the requirements of Section13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BDC CAPITAL, INC.
Dated: May 19, 2006
By: /s/ Richard A. Pomije
Richard A. Pomije, Chief Executive Officer
(Principal executive 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 Company and in the capacities and on the dates indicated.
Dated: May 19, 2006
By: /s/ Richard A. Pomije
Richard A. Pomije, Director, Chief Executive Officer,
Chief Financial Officer and President (Principal executive officer)
Dated: May 19, 2006
By:/s/ Dan Janisch
Dan Janisch, Director
Dated: May 19, 2006
By: /s/ Jeff Mills
Jeff Mills, Director
Page
BDC Capital, Inc.
FINANCIAL REPORT
FEBRUARY 28, 2006 AND 2005
Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
BDC Capital, Inc.
We have audited the accompanying balance sheets of BDC Capital, Inc. as of February 28, 2006 and 2005, including the schedule of investments and the related statements of operations, stockholders' equity and cash flows for the year ended February 28, 2006, the three months ended February 28, 2005 and the nine months ended November 30, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of BDC Capital, Inc. as of February 28, 2006 and 2005, and the results of its operations and its cash flows for the year ended February 28, 2006, the three months ended February 28, 2005 and the nine months ended November 30, 2004, in conformity with accounting principles generally accepted in the United States of America.
/s/ Carver Moquist & O’Connor, LLC
Bloomington, Minnesota
May 17,
Page
BDC Capital, Inc.
BALANCE SHEETS
February 28, 2006 and 2005
The accompanying notes are an integral part of these financial statements.
Page
BDC Capital, Inc.
STATEMENT OF OPERATIONS
The accompanying notes are an integral part of these financial statements.
Page
BDC Capital, Inc.
STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these financial statements.
Page
BDC Capital, Inc.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended February 28, 2006 and 2005
The accompanying notes are an integral part of these financial statements.
Page
BDC Capital, Inc.
STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
Page
BDC Capital, Inc.
(formerly eNetpc, Inc.)
SCHEDULE OF INVESTMENTS
February 28, 2006
BDC Partners, Inc is a private company founded in 2004 and is located in Minneapolis, MN. It is a wholly own subsidiary of BDC Capital, Inc. that has a unique, multidisciplinary technology process paired with an intellectual property revenue-focused business model.
Page
BDC Capital, Inc.
NOTES TO FINANCIAL STATEMENTS
Years Ended February 28, 2006 and 2005
Note 1. Nature of Business and Summary of Significant Accounting Policies:
Nature of business
BDC Capital, Inc. (“The Company”) was formed as a Minnesota corporation on April 7, 1982. It was incorporated under the name Command Small Computer Learning Center, Inc., a computer training company. In 1987, the Company changed its name to Command Electronics, Inc. In February 1995, the Company acquired CyberStar Computer Systems, a manufacturer and marketer of microcomputers and servers, and in 1997 it changed its name to CyberStar Computer Corporation. In 2000, the Company changed its name to eNetpc, Inc. In November of 2004 the Company changed its name to BDC Capital, Inc. BDC Capital, Inc. has engaged in the sale of computer components, development of software and resell of major computer brands. The names "BDC Capital, Inc." "we", "our" and "us" used in this report refer to BDC Capital, Inc.
On December 10, 2004, the Company elected to be regulated as a business development company (BDC) as outlined in the Investment Company Act of 1940 by filing a Form NT-54A. As a BDC, the Company plans to focus on current opportunities available to this attractive business model in these somewhat uncertain economic times.
Investment Strategy
BDC Capital, Inc. intends to build an investment portfolio consisting of revenue generating assets and emerging companies well positioned for future growth. A BDC is a unique kind of investment company that primarily focuses on investing in or lending to small private companies and making managerial assistance available to them. A BDC may use capital provided by public stockholders and from other sources to invest in growing small businesses.
A BDC provides stockholders the ability to retain the liquidity of a publicly traded stock while sharing in the possible benefits of investing in privately owned small-and medium-sized companies.
As a BDC, the Company is required to have at least 70% of its assets in portfolio companies.
Conversion to Business Development Company
The results of operations for 2005 are divided into two periods. The nine-month period, representing the period March 1, 2004 through November 30, 2004, reflects the Company's results prior to operating as a business development company under the Investment Company Act of 1940, as amended. The three-month period ended February 28, 2005, reflects the Company's results as a business development company under the Investment Company Act of 1940, as amended. Accounting principles used in the preparation of the financial statements beginning December 1, 2004 are different than those of prior periods and, therefore, the financial position and results of operations of these periods are not directly comparable. The primary differences in accounting principles relate to the carrying value of investments and consolidations.
Page
Changes in unrealized gains (losses) on the change in value of portfolio investments for business development companies are recognized each period. Prior to becoming a business development company, unrealized gains (losses) on the change in value of investments were recorded as accumulated comprehensive income in the statement of stockholders equity. Gains (losses) on investment would only be recognized when realized or when an investment was permanently impaired.
As a business development company, consolidation of portfolio companies is not required in which the Company has a controlling interest. In contrast, prior to operating as a business development corporation, entities in which the Company had controlling interest would have been required to be consolidated.
The Company has determined that there is no cumulative effect adjustment for the three-month period ended February 28, 2005 in order to reflect the effects of conversion to a business development company.
Revenue recognition - Prior to becoming a business development company
The Company recognizes sales when the products are shipped. Revenue from services is recognized when the service is provided. The Company ensures that the transaction complies with the seven conditions and the six considerations contained in Accounting and Auditing Enforcement Release No. 108 of the Securities and Exchange Commission.
Use of estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash Deposits in Excess of Federally Insured Limits
The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The balances are insured by the Federal Deposit Insurance Company up to $100,000. Account balances in excess of federally insured limits were $0 and $140,173 at February 28, 2006 and 2005. The Company has not experienced any losses in such accounts.
Cash and cash equivalents
The Company considers all highly liquid investments with original maturity of three months or less when purchased to be cash equivalents.
Valuation of Investments
Value, as defined in Section 2(a)(41) of 1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value is as determined in good faith by the board of directors. Since there is typically no readily available market value for the Company’s privately held investments, the Company values substantially all of its investments at fair value as determined in good faith by the board of directors pursuant to a valuation policy and a consistent valuation process. At February 28, 2006, approximately 98% of the Company’s total assets represented investments of which approximately 100% are valued at fair value. Because of the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments determined in good faith by the board of directors may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material.
Page
There is no single standard for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment. The Company must determine the fair value of each individual investment on a quarterly basis. The Company records unrealized depreciation on investments when it believes that an investment has decreased in value, including where collection of a loan or realization of an equity security is doubtful. Conversely, the Company records unrealized appreciation if it believes that the underlying portfolio company has appreciated in value and, therefore, the Company’s investment has also appreciated in value, where appropriate.
As a BDC, the Company invests primarily in illiquid securities including debt and equity securities of private companies. The Company’s investments are generally subject to some restrictions on resale and generally have no established trading market. Because of the type of investments that the Company makes and the nature of its business, the Company’s valuation process requires an analysis of various factors. The Company’s fair value methodology includes the examination of, among other things, the underlying portfolio company performance, financial condition and market changing events that impact valuation.
With respect to private debt and equity securities, each investment is valued using industry valuation benchmarks, and, where appropriate, the value is assigned a discount reflecting the illiquid nature of the investment and/or the Company’s minority, non-control position. When an external event such as a purchase transaction, public offering, or subsequent equity sale occurs, the pricing indicated by the external event will be used to corroborate the Company’s private debt or equity valuation.
Investments in equity securities
Under BDC accounting, all equity investments are carried at fair value with any adjustments recorded in the statement of operations, combined with adjustments in the fair value of investments in loans, as investment gains (losses)-unrealized.
In accordance with Article 6 of Regulation S-X under the Securities Act of 1933 and Securities Exchange Act of 1934, the Company does not consolidate portfolio company investments, including those in which it has a controlling interest.
Long-Lived Assets
Long-lived assets, such as property and equipment are reviewed for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Income taxes
Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating losses and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of the enactment.
Page
Stock-based employee compensation:
The Company follows Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25") and related interpretations in accounting for its stock options. Under APB 25, when the exercise price of stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The Company has elected to follow the disclosure only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("Statement 123"). Accordingly, the pro forma disclosures of what net income (loss) would have been had the provisions of Statement 123 been applied to the Company's stock options is as follows:
Pro forma information regarding net income (loss) is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of Statement 123. There were no options issued for the year ended February 28, 2006, the three months ended February 28, 2005 and the nine months ended November 30, 2004. All previous option grants are fully vested as of February 29, 2004.
Advertising
Advertising costs are charged to operations when incurred. The Company did not incur any advertising expense during the year ended February 28, 2006, the three months ended February 28, 2005 and the nine months ended November 30, 2004.
Net loss per share
Basic loss per share is computed using the weighted average number of shares outstanding for the period. Diluted loss per share is computed using the weighted average number of shares outstanding per share adjusted for the incremental shares attributed to outstanding stock options under the Company's stock option plans, convertible debt and convertible preferred stock. Incremental shares attributable to the assumed exercise of stock options and conversion of debt and preferred stock for the year ended February 28, 2006 and the nine months ended November 30, 2004 were excluded from the computation of diluted loss per share as their effect would be anti-dilutive. The diluted income per share computation does include the adjusted incremental shares for the convertible debentures and stock options for the three months ended February 28, 2005.
Page
Recently issued accounting pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement No. 123(R), "Shared-Based Payment," which is a revision of SFAS No. 123, and supersedes APB Opinion No. 25. SFAS 123(R) requires all share-based payments to employees and directors, as well as other equity-based compensation arrangements, to be recognized in the financial statements based on their fair values, using prescribed option-pricing models effective for the first annual period beginning after June 15, 2005. The pro forma disclosure previously permitted under SFAS No. 123 will no longer be an alternative to financial statement recognition. The adoption of this statement becomes effective for the Company on March 1, 2006.
The impact of adopting Statement No. 123(R) can not be predicted at this time because it will depend on levels of share-based payments granted in the future, valuation methodology adopted and assumptions selected at the time of future grants. With the adoption of Statement No. 123(R), the Company may elect to utilize a different valuation method and/or different valuation assumptions. These selections may have a significant impact on the amount of share based payment expense under Statement No. 123(R).
In May 2005, the FASB issued SFAS 154, "Accounting Changes and Error Corrections" which replaces APB Opinion No. 20 "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements-An Amendment of APB Opinion No. 28." SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, or the latest practicable date, as the required method for reporting a change in accounting principle and the reporting of a correction of an error. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company is currently evaluating the effect that the adoption of SFAS 154 will have on our results of operations and financial condition but does not expect that adoption will have a material impact.
Note 2. Property and Equipment
Property and equipment are as follows at February 28:
Depreciation expense was $0 for the year ended February 28, 2006, the three months ended February 28, 2005 and the nine months ended November 30, 2004. Depreciation was calculated over the assets useful lives ranging from three to seven years.
Page
Note 3. Convertible debentures
The Company had convertible debentures totaling $488,911 as of February 28, 2005, bearing interest at 8.0% payable at maturity and are convertible at 50% of the Company’s common stock fair value. In addition, the Company obtained $250,000 convertible debenture on March 26, 2005, bearing interest at 8% and convertible as previously noted. The debentures matured at various dates from April 1, through March 25, 2007. These debentures plus any accrued interest are convertible as of the date of issuance at the option of the Company or the debt holder. These debentures are subordinated to any bank financing. The application of the provisions of EITF 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,” and EITF 00-27, “Application of Issue 98-5 to Certain Convertible Instruments” resulted in the calculation of an embedded beneficial conversion feature which is required to be treated as an additional discount to the debt. The unamortized value of the beneficial conversion feature was $377,821 as of February 28, 2005. An additional beneficial conversion feature value of $250,000 was recorded for debt entered into for the year ended February 28, 2006. Amortization of the beneficial conversion feature into interest expense for the year ended February 28, 2006, the three months ended February 28, 2005 and the nine months ended November 30, 2004 was $627,821, $125,842 and $15,659, respectively. As of February 28, 2006, these debentures had either been paid or converted into stock.
During 2005, the Company had also issued long-term convertible preferred debentures to a majority stockholder totaling $65,000, bearing interest at 8.0% payable at maturity and are convertible at 50% of the Company’s common stock fair value. The debenture matures in February 2007. The Company also issued $90,000 in convertible debentures for services rendered to its majority stockholder during the year ended February 28, 2006. These debentures plus any accrued interest are convertible as of the date of issuance at the option of the Company or the debt holder. These debentures are subordinated to any bank financing. The application of the provisions of EITF 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,” and EITF 00-27, “Application of Issue 98-5 to Certain Convertible Instruments” resulted in the calculation of an embedded beneficial conversion feature which is required to be treated as an additional discount to the debt. The value of the beneficial conversion feature was $58,085 as of February 28, 2005 and an additional beneficial conversion feature value of $90,000 was recorded for the additional debt entered into for the year ended February 28, 2006. Amortization of the beneficial conversion feature into interest expense for the year ended February 28, 2006 and the three months ended February 28, 2005 was $148,085 and $6,915, respectively. All debentures were converted into stock during the year ended February 28, 2006.
Upon conversion, convertible debentures are issued with binding term sheets that require the following terms upon the sale of the converted stock by the purchaser:
A)
Purchaser shall first be entitled to an amount equal to 200% of the face amount of each debenture attributable to the sale of common stock acquired from the conversion of the associated debt.
B)
After the Purchaser receives the amount in A above, the Company shall be entitled to 50% of any additional Net Sales Proceeds of the stock. Net Sales Proceeds shall mean the gross proceeds received from the sale of the stock, less reasonable brokerage commissions.
C)
Final adjusted Net Sales Proceeds are to be wired to the Company within 7 days from the date of the final settlement of the sale of stock from the conversion of all of the outstanding debentures.
No net sales proceeds were received by the Company during the years ended February 28, 2006 and 2005.
Page
As of February 28, 2005, the Company entered into binding term sheets that also provide for convertible debt financing similar to the terms above totaling $16.5 million. The Company, at its option may draw up to $50,000 weekly against the total investor commitment over a 24 month period beginning February 28, 2006, subject to certain restrictions. As of February 28, 2006, no draws have been made against this commitment.
Note 4. Notes payable - stockholder
The Company had advances from a stockholder in the amount of $70,000 and $0 at February 28, 2006 and 2005, respectively. The unsecured notes are due at various dates from June 21, 2007 to August 1, 2007 with an interest rate of 8%. Interest expense was accrued during the years ended February 28, 2006 and 2005 totaling $3,876 and 0, respectively.
Note 5. Income Taxes
At February 29, 2006, the Company had net operating loss carryforwards of approximately $4,595,000. The net operating loss carryforwards are available to offset future taxable income through 2025 and may be subject to the limitations under Section 382 of the Internal Revenue Code if significant changes in the equity ownership of the Company have occurred. If not used, net operating loss carryforwards begin to expire in the following amounts each year:
The Company has recorded a full valuation allowance against its net deferred tax asset due to the uncertainty of realizing the related net benefits as follows:
Reconciliation between the federal statutory rate and the effective tax rate for the years ended February 28, 2006 and February 28, 2005 is as follows:
Page
Note 6. Stockholders' Equity (Deficit)
Preferred Stock
The Series A Preferred Stock ("Series A Preferred") is non-interest bearing, does not have voting rights and is not entitled to receive dividends. Each share of Series A Preferred issued can be converted into common stock on a 1:1 basis after a twelve month period. Should a liquidation event occur, the Series A Preferred automatically converts into common stock based on the foregoing formula. Further, the Series A Preferred is not affected by forward or reverse splits on the Corporation's common stock or other adjustments to the Corporation's capital structure. Finally, Series A Preferred is entitled to elect a majority of the Corporation's board of directors at all times, provided that a majority of the board of directors is, at all times, independent.
The Corporation has currently 20,000,000 and 3,939,000 Series A Preferred issued and outstanding as of February 28, 2006 and 2005, respectively.
Stock Dividend
On February 4, 2005 the board of directors of BDC Capital, Inc. ("Corporation") authorized the issuance of 3,939,000 shares of Class A Preferred Stock in a stock dividend to each stockholder of record as of November 30, 2004. For each share of common stock held as of the Record Date, the Company shall issue one share of Preferred Series A stock. The Corporation relied on exemptions provided by Section 4(2) of the Securities Act of 1933, as amended. In November 2005, the Company rescinded this stock dividend.
Stock options
The Company has a stock option plan that includes both incentive and non-statutory stock options granted to directors, officers, employees and consultants of the Company. The maximum number of shares of Common Stock reserved for issuance is 1,000,000 shares under the 1996 Stock Option Plan. Option activity is summarized as follows:
Page
Note 7. Related Party Transactions
As a business development company, the Company has issued convertible debentures totaling $204,322, as of February 28, 2005, bearing interest at 8.0% payable at maturity to various family members of the majority stockholder during the year ended February 28, 2005. This debt was converted into 20,432,200 shares of stock during 2005 and 2006. Interest expense was accrued during the years ended February 28, 2006 and 2005 totaling $0 and $2,953, respectively.
The Company issued a convertible debenture totaling $90,000 to its majority stockholder for administrative services performed during the year ended February 28, 2006. This debenture has been converted into 9,000,000 shares of Series A Preferred Stock.
The Company sub-leases from a director of the Company approximately 1,000 square feet of space used for offices and operations equipment storage at 11974 Portland Avenue, Burnsville, Minnesota at a monthly rent of $750 renewable monthly which is split equally between BDC Capital, Inc. and BDC Partners, Inc. The Company’s lease payments made to the director for the years ended February 28, 2006 and 2005 were $4,500 and $750, respectively.
Note 8. Commitments and Contingencies
The Company is exposed to asserted and unasserted claims encountered in the normal course of business. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations.
Note 9. Major Customers - Prior to becoming a business development company
The Company had one customer which represented 73% of total sales for the nine months ended November 30, 2004. Accounts receivable from this customer was $0 at February 28, 2005.
Note 10. Financial Highlights - as a business development company:
Following is a schedule of financial highlights for the year ended February 28, 2006 and the three months ended February 28, 2005:
Page