ITEM 1: DESCRIPTION OF BUSINESS
Business History
Interim Capital Corp. (the "Company," "we," "us" or "ICC") has its headquarters in Las Vegas, Nevada, with an office in Dallas, Texas, and was organized by the filing of articles of incorporation with the Secretary of State of the State of Nevada on August 21, 2002. We were formed with the express purpose of assisting private companies through the preparation and filing of all the required documents with regards to the listing of the client company on the public markets.
Our objectives were to:
o Assist our client companies in achieving their fair market value both internally and externally;
o Become the intermediary to facilitate the steps involved, from inception to completion, with small public offerings;
o Orchestrate the client's conversion from private to public; and
o Utilize a thorough network of contacts to manage small public offerings in a timely and profitable manner.
We intended to create these opportunities through the close relationship we intended to develop with prospective client companies by providing them cost-saving personal services. As an extension of this service, we intended to then be able to offer the prospective client company opportunities to not only save money but actually increase their time value by allowing the client company to maintain a strict focus on its day to day operations.
Our business was to consult with and help to develop established companies seeking to become publicly traded by providing or arranging for the necessary financing, management, legal, accounting and related services and a public vehicle. We expected to generate revenue by providing our consulting services to our portfolio companies. After a client company becomes publicly traded, we planned to continue to provide strategic, managerial and operational support and we also might have sought representation on the board of directors of the
company. We intended to provide or arrange for our portfolio companies' financial, operations and management needs to facilitate their shares becoming publicly traded. We might have also engaged investment banks and others to provide alternate methods of financing for the ongoing operations of or, if desired, exit strategies for our portfolio companies through initial public offerings or finding suitable acquiring companies. Typical transaction values were expected to range from approximately $50,000 to $300,000 in addition to receiving a percentage of the company's stock.
On February 14, 2006, we filed a notification on Form N54a with the U.S. Securities and Exchange Commission ("SEC"), indicating our election to be regulated as a Business Development Company ("BDC") under the Investment Company Act of 1940, as amended. Under this election, we have been organized to provide investors with the opportunity to participate, with a modest amount in venture capital, in investments that are generally not available to the public and that typically require substantially larger financial commitments. In addition, we will provide professional management and administration that might otherwise be unavailable to investors if they were to engage directly in venture capital investing.
We are currently seeking to identify portfolio or client companies whose shares are capable of being publicly traded which are at a stage of development that would benefit from our business development, management support, our financing services, and market knowledge. We will generally invest in client companies in which we can purchase a large enough stake to enable us to have significant influence over the management and policies of such client companies, to realize a large enough return to compensate us for our investment of management services provided to it and facilitating the provision of capital.
We hope to realize value for our investors through the appreciation of the equity positions, which we will take in client companies, and through our consulting income. We anticipate that the average target length of our ownership in the equity of a particular investment will be approximately 3 to 24 months, although actual ownership periods may vary.
Business Summary
Under the recent election to be governed as a business development company under the 1940 Act, we have been organized to provide investors with the opportunity to participate, with a modest amount in venture capital, in investments that are generally not available to the public and that typically require substantially larger financial commitments. In addition, we will provide professional management and administration that might otherwise be unavailable to investors if they were to engage directly in venture capital investing. We have decided to be regulated as a business development company under the 1940 Act, and will operate as a non-diversified company as that term is defined in Section 5(b)(2) of the 1940 Act. We will, at all times, conduct our business so as to retain our status as a BDC. We may not change the nature of our business so as to cease to be, or withdraw our election as, a BDC without the approval of the holders of a majority of our outstanding voting stock as defined under the 1940 Act.
As a business development company, we are required to invest at least 70% of our total assets in qualifying assets, which, generally, are securities of private companies or securities of public companies whose securities are not eligible for purchase on margin (which includes many companies with thinly traded securities that are quoted in the pink sheets or the NASD Electronic Quotation
Service.) We must also offer to provide significant managerial assistance to these portfolio companies. Qualifying assets may also include:
o cash, o cash equivalents, o U.S. Government securities, or o high-quality debt investments maturing in one year or less from the date of investment.
We may invest a portion of the remaining 30% of our total assets in debt and/or equity securities of companies that may be larger or more stabilized than target portfolio companies.
Nature of a BDC
The 1940 Act defines a BDC as a closed-end management investment company that provides small businesses that qualify as an eligible portfolio company with investment capital and also significant managerial assistance. A BDC is required under the 1940 Act to invest at least 70% of its total assets in qualifying assets consisting of eligible portfolio companies as defined in the 1940 Act and certain other assets including cash and cash equivalents.
An eligible portfolio company generally is a United States company that is not an investment company and that:
o does not have a class of securities registered on an exchange or included in the Federal Reserve Board's over-the-counter margin list; o is actively controlled by a BDC and has an affiliate of a BDC on its board of directors; or o meets such other criteria as may be established by the SEC.
Control under the 1940 Act is presumed to exist where a BDC owns more than 25% of the outstanding voting securities of the eligible portfolio company. We may or may not control our portfolio companies.
An example of an eligible portfolio company is a new start up company or a privately owned company that has not yet gone public by selling its shares in the open market and has not applied for having its shares listed on a nationally recognized exchange such as the NYSE the American Stock Exchange, National Association of Securities Dealers' Automated Quotation System, or the National Market System. An eligible portfolio company can also be one which is subject to filing, has filed, or has recently emerged from reorganization protection under Chapter 11 of the Bankruptcy Act.
A BDC may invest the remaining 30% of its total assets in non-qualifying assets, including companies that are not eligible portfolio companies. The foregoing percentages will be determined, in the case of financings in which a BDC commits to provide financing prior to funding the commitment, by the amount of the BDC's total assets represented by the value of the maximum amount of securities to be issued by the borrower or lessee to the BDC pursuant to such commitment. As a BDC, we must invest at least 70% of our total assets in qualifying assets but may invest more in such qualifying assets.
Primary Strategy
We will have significant relative flexibility in selecting and structuring our investments. We will not be subject to many of the regulatory limitations that govern traditional lending institutions such as banks. We will seek to structure our investments so as to take into account the uncertain and potentially variable financial performance of our portfolio companies. This should enable our portfolio companies to retain access to committed capital at different stages in their development and eliminate some of the uncertainty surrounding their capital allocation decisions. We will calculate rates of return on invested capital based on a combination of up-front commitment fees, current and deferred interest rates and residual values, which may take the form of common stock, warrants, equity appreciation rights or future contract payments. We believe that this flexible approach to structuring investments will facilitate positive, long-term relationships with our portfolio companies and enable us to become a preferred source of capital to them. We also believe our approach should enable debt financing to develop into a viable alternative capital source for funding the growth of target companies that wish to avoid the dilutive effects of equity financings for existing equity holders.
Longer Investment Horizon - We will not be subject to periodic capital return requirements. These requirements, which are standard for most private equity and venture capital funds, typically require that these funds return to investors the initial capital investment after a pre-agreed time, together with any capital gains on such capital investment. These provisions often force such funds to seek the return of their investments in portfolio companies through mergers, public equity offerings or other liquidity events more quickly than they otherwise might, which can result in a lower overall return to investors and adversely affect the ultimate viability of the affected portfolio companies. Because we may invest in the same portfolio companies as these funds, we are subject to these risks if these funds demand a return on their investments in the portfolio companies. We believe that our flexibility to take a longer-term view should help us to maximize returns on our invested capital while still meeting the needs of our portfolio companies.
Established Deal Sourcing Network - We believe that, through our management and directors, we have solid contacts and sources from which to generate investment opportunities. These contacts and sources include:
o public and private companies, o investment bankers, o attorneys, o accountants, o consultants, and o commercial bankers.
However, we cannot assure you that such relationships will lead to the origination of debt or other investments.
Investment Criteria
As a matter of policy, we will not purchase or sell real estate or interests in real estate or real estate investment trusts except that we may:
o purchase and sell real estate or interests in real estate in connection with the orderly liquidation of investments, or in connection with foreclosure on collateral; o own the securities of companies that are in the business of buying, selling or developing real estate; or o finance the purchase of real estate by our portfolio companies.
We will limit our investments in more traditional securities (stock and debt instruments) and will not, as a matter of policy:
o sell securities short except with regard to managing the risks associated with publicly-traded securities issued by our portfolio companies; o Purchase securities on margin (except to the extent that we may purchase securities with borrowed money); or o engage in the purchase or sale of commodities or commodity contracts, including futures contracts except where necessary in working out distressed loan; or o investment situations or in hedging the risks associated with interest rate fluctuations, and, in such cases, only after all necessary registrations or exemptions from registration with the Commodity Futures Trading Commission have been obtained.
Prospective Portfolio Company Characteristics - We have identified several criteria that we believe will prove important in seeking our investment objective with respect to target companies. These criteria will provide general guidelines for our investment decisions; however, we caution readers that not all of these criteria will be met by each prospective portfolio company in which we choose to invest.
Experienced Management - We will generally require that our portfolio companies have an experienced president or management team. We will also require the portfolio companies to have in place proper incentives to induce management to succeed and to act in concert with our interests as investors, including having significant equity interests. We intend to provide assistance in this area either supervising management or providing management for our portfolio companies.
Products or Services - We will seek companies that are involved in products or services that do not require significant additional capital or research expenditures. In general, we will seek target companies that make innovative use of proven technologies or methods.
Proprietary Advantage - We expect to favor companies that can demonstrate some kind of proprietary sustainable advantage with respect to their competition. Proprietary advantages include, but are not limited to:
o patents or trade secrets with respect to owning or manufacturing its products, and o a demonstrable and sustainable marketing advantage over its competition
Marketing strategies impose unusual burdens on management to be continuously ahead of its competition, either through some kind of technological advantage or by being continuously more creative than its competition.
Profitable or Nearly Profitable Operations Based on Cash Flow from Operations - We will focus on target companies that are profitable or nearly profitable on an operating cash flow basis. Typically, we would not expect to invest in start-up companies unless there is a clear exit strategy in place.
Potential for Future Growth - We will generally require that a prospective target company, in addition to generating sufficient cash flow to cover its operating costs and service its debt, demonstrate an ability to increase its revenues and operating cash flow over time. The anticipated growth rate of a prospective target company will be a key factor in determining the value that we ascribe to any warrants or other equity securities that we may acquire in connection with an investment in debt securities.
Exit Strategy - Prior to making an investment in a portfolio company, we will analyze the potential for that company to increase the liquidity of its common equity through a future event that would enable us to realize appreciation, if any, in the value of our equity interest. Liquidity events may include:
o an initial public offering, o a private sale of our equity interest to a third party, o a merger or an acquisition of the portfolio company, or o a purchase of our equity position by the portfolio company or one of its stockholders.
We may acquire warrants to purchase equity securities and/or convertible preferred stock of the eligible portfolio companies in connection with providing financing. The terms of the warrants, including the expiration date, exercise price and terms of the equity security for which the warrant may be exercised, will be negotiated individually with each eligible portfolio company, and will likely be affected by the price and terms of securities issued by the eligible portfolio company to other venture capitalists and other holders. We anticipate that most warrants will be for a term of five to ten years, and will have an exercise price based upon the price at which the eligible portfolio company most recently issued equity securities or, if a new equity offering is imminent, equity securities. The equity securities for which the warrant will be exercised generally will be common stock of which there may be one or more classes or convertible preferred stock. Substantially all the warrants and underlying equity securities will be restricted securities under the 1933 Act at the time of the issuance. We will generally negotiate for registration rights with the issuer that may provide:
o "piggyback" registration rights, which will permit us under certain circumstances, to include some or all of the securities owned by us in a registration statement filed by the eligible portfolio company, or o in circumstances, "demand" registration rights permitting us under certain circumstances, to require the eligible portfolio company to register the securities under the 1933 Act, in some cases at our expense. We will generally negotiate net issuance provisions in the warrants, which will allow us to receive upon exercise of the warrant without payment of any
cash a net amount of shares determined by the increase in the value of the issuer's stock above the exercise price stated in the warrant.
Liquidation Value of Assets - Although we do not intend to operate as an asset-based lender, the prospective liquidation value of the assets, if any, collateralizing any debt securities that we hold will be an important factor in our credit analysis. We will emphasize both tangible assets, such as:
o accounts receivable, o inventory, and o equipment,
and intangible assets, such as:
o intellectual property, o customer lists, o networks, and o databases.
Investment Process
Due Diligence - If a target company generally meets the characteristics described above, we will perform initial due diligence, including:
o company and technology assessments, o existing management team, o market analysis, o competitive analysis, o evaluation of management, risk analysis and transaction size, o pricing, and o structure analysis.
Much of this work will be done by management and professionals who are well known by management. The criteria delineated above provide general parameters for our investment decisions. We intend to pursue an investment strategy by further imposing such criteria and reviews that best insures the value of our investments. As unique circumstances may arise or be uncovered, not all of such criteria will be followed in each instance but the process provides a guideline by which investments can be prudently made and managed. Upon successful completion of the preliminary evaluation, we will decide whether to deliver a non-binding letter of intent and move forward towards the completion of a transaction.
In our review of the management team, we look at the following:
o Interviews with management and significant shareholders, including any financial or strategic sponsor; o Review of financing history; o Review of management's track record with respect to: o product development and marketing,
o mergers and acquisitions, o alliances, o collaborations, o research and development outsourcing and other strategic activities; o Assessment of competition; and o Review of exit strategies.
In our review of the financial conditions, we look at the following:
o Evaluation of future financing needs and plans; o Detailed analysis of financial performance; o Development of pro forma financial projections; and o Review of assets and liabilities, including contingent liabilities, if any, and legal and regulatory risks.
In our review of the products and services of the portfolio company, we look at the following:
o Evaluation of intellectual property position; o Review of existing customer or similar agreements and arrangements; o Analysis of core technology; o Assessment of collaborations; o Review of sales and marketing procedures; and o Assessment of market and growth potential.
Upon completion of these analyses, we will conduct on-site visits with the target company's management team. Also, in cases in which a target company is at a mature stage of development and if other matters that warrant such an evaluation, we will obtain an independent appraisal of the target company.
Ongoing Relationships with Portfolio Companies
Monitoring - We will continuously monitor our portfolio companies in order to determine whether they are meeting our financing criteria and their respective business plans. We may decline to make additional investments in portfolio companies that do not continue to meet our financing criteria. However, we may choose to make additional investments in portfolio companies that do not do so, but we believe that we will nevertheless perform well in the future.
We will monitor the financial trends of each portfolio company to assess the appropriate course of action for each company and to evaluate overall portfolio quality. Our management team and consulting professionals, who are well known by our management team, will closely monitor the status and performance of each individual company on at least a quarterly and, in some cases, a monthly basis.
We will use several methods of evaluating and monitoring the performance and fair value of our debt and equity positions, including but not limited to the following:
o Assessment of business development success, including product development, financings, profitability and the portfolio company's overall adherence to its business plan; o Periodic and regular contact with portfolio company management to discuss financial position, requirements and accomplishments; o Periodic and regular formal update interviews with portfolio company management and, if appropriate, the financial or strategic sponsor; o Attendance at and participation in board meetings; o Review of monthly and quarterly financial statements and financial projections for portfolio companies.
Managerial Assistance - As a business development company, we will offer, and in many cases may provide, significant managerial assistance to our portfolio companies. This assistance will typically involve:
o monitoring the operations of our portfolio companies, o participating in their board and management meetings, o consulting with and advising their officers, and o providing other organizational and financial guidance.
Diversification
As a BDC, we must invest at least 70% of our total assets in qualifying assets consisting of investments in eligible portfolio companies and certain other assets including cash and cash equivalents. In order to receive favorable pass-through tax treatment on its distributions to our shareholders, we intend to diversify our pool of investments in such a manner so as to qualify as a diversified closed end management investment company. However, because of the limited size of the funding which is likely to be available to us, we will likely be classified as a non-diversified closed end investment company under the 1940 Act. Until we qualify as a registered investment company, we will not be subject to the diversification requirements applicable to RICs under the Internal Revenue Code. Therefore, we will not receive favorable pass through tax treatment on distributions to our shareholders. In the future, we will seek to increase the diversification of our portfolio so as to make it possible to meet the RIC diversification requirements, as described below. We cannot assure you, however, that we will ever be able to meet those requirements.
To qualify as a RIC, we must meet the issuer diversification standards under the Internal Revenue Code that require that, at the close of each quarter of our taxable year,
o not more than 25% of the market value of our total assets is invested in the securities of a single issuer, and o at least 50% of the market value of our total assets is represented by cash, cash items, government securities, securities of other RICs, and other securities.
Each investment in these other securities is limited so that not more than 5% of the market value of our total assets is invested in the securities of a single issuer and we do not own more than 10% of the outstanding voting securities of a
single issuer. For purposes of the diversification requirements under the Internal Revenue Code, the percentage of our total assets invested in securities of a portfolio company will be deemed to refer, in the case of financings in which we commit to provide financing prior to funding the commitment, to the amount of our total assets represented by the value of the securities issued by the eligible portfolio company to us at the time each portion of the commitment is funded.
Investment Amounts
The amount of funds committed to a portfolio company and the ownership percentage received will vary depending on the maturity of the portfolio company, the quality and completeness of the portfolio company's management team, the perceived business opportunity, the capital required compared to existing capital, and the potential return. Although investment amounts will vary considerably, we expect that the average investment, including follow-on investments, will be between $25,000 and $1,000,000.
Competition
Our primary competitors to provide financing to target companies will include private equity and venture capital funds, other equity and non-equity based investment funds and investment banks and other sources of financing, including traditional financial services companies such as commercial banks and specialty finance companies. Many of these entities have substantially greater financial and managerial resources than we will have. We believe that our competitive advantage with regard to quality target companies relates to our ability to negotiate flexible terms and to complete our review process on a timely basis. We cannot assure you that we will be successful in implementing our strategies.
Current Portfolio Companies
As of December 31, 2006, we have three investments in unaffiliated companies included in our investment portfolio. Our valuation of these investments is included in Item 7 and Item 8 herein.
Valuation Methodology
As an investment company under the Investment Company Act of 1940, all of the Company's investments must be carried at market value or fair value as determined by Management for investments which do not have readily determinable market values. Prior to this conversion, only marketable debt and equity securities and certain derivative securities were required to be carried at market value.
Beginning February 15, 2006, portfolio assets for which market prices are available are valued at those prices. Securities that are traded in the over-the-counter market or on a stock exchange generally will be valued at the prevailing bid price on the valuation date. However, the Company's current investments were acquired in privately negotiated transactions and have no readily determinable market values. These securities are carried at fair value as determined by Management and outside professionals as necessary under the Company's valuation policy. Currently, the valuation policy provides for Management's review of the management team, financial conditions, and products
and services of the portfolio company. In situations that warrant such an evaluation, an independent business valuation may be obtained.
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 Management. 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 will record unrealized depreciation on investments when it believes that an investment has become impaired, including where realization of an equity security is doubtful. Conversely, the Company will record unrealized appreciation if the Company believes that the underlying portfolio company has appreciated in value and, therefore, its investment has also appreciated in value, where appropriate.
As an investment company, the Company invests primarily in illiquid securities including equity securities of private companies. The structure of each equity security is specifically negotiated to enable the Company to protect its investment and maximize its returns. The Company generally includes many terms governing ownership parameters, dilution parameters, liquidation preferences, voting rights, and put or call rights. 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 investment performance, financial condition and market changing events that impact valuation.
ITEM 1A:
ITEM 1A: RISK FACTORS
On February 14, 2006, we filed a notification on Form N54a with the U.S. Securities and Exchange Commission ("SEC"), indicating our election to be regulated as a business development company under the Investment Company Act of 1940, as amended. Following are the risk factors associated with our new business.
In the normal course of business in an effort to keep our shareholders and the public informed about our operations and portfolio of investments, we may from time-to-time issue certain statements, either in writing or orally, that contain or may contain forward-looking information. Generally, these statements relate to our business plans or strategies or portfolio companies, projected or anticipated benefits or consequences of such plans or strategies, projected or anticipated benefits of new or follow-on investments made by or to be made by us, or projections involving anticipated purchases or sales of securities or other aspects of our operating results. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially. As noted elsewhere in this report, our operations and portfolio of investments are subject to a number of uncertainties, risks, and other influences, many of which are outside our control, and any one of which, or a combination of which, could materially affect the results of our operations, or our NAV, the market price of our common stock, and whether any forward-looking statements made by us ultimately prove to be accurate.
Investing in us involves a number of significant risks relating to our business and investment objective. As a result, there can be no assurance that we will achieve our investment objective. In addition, the following risk factors are applicable to an investment in our common stock.
GENERAL RISK FACTORS
Investments in the Company by new shareholders will be diluted immediately.
Some of our present shareholders have acquired an interest in our common stock at a total cost substantially less than the total cost that newer investors will likely pay for their shares. Therefore, the newer investors will bear a greater proportion of the risk of loss (measured by the cost of shares). As of December 31, 2006, there were 225,000,000 shares of common stock authorized and 10,505,000 common shares outstanding.
We may sell additional equity in the future that may further dilute the value of your investment.
Reductions in the price of our stock resulting from the performance of our portfolio or other market conditions might result in stock being sold to new investors, including management, at prices below the price paid by you. Senior management may be granted the right, and others may have the right, under certain circumstances, to acquire additional shares of our common stock at a price equal to the market price as it exists at a point in the future. If such a grant of a right occurred at a time when the price of the stock has fallen relative to the current market value and falls below the price paid by you, management might be given the right to purchase stock at a price below your cost. In either of these cases, the value of your investment would be further diluted.
Limitation of liability and indemnification of management.
While limitations of liability and indemnification are themselves limited, we have instituted provisions in our bylaws indemnifying, to the extent permitted, against and not making management liable for, any loss or liability incurred in connection with our affairs, so long as such loss or liability arose from acts performed in good faith and not involving any fraud, gross negligence or willful misconduct. Therefore, to the extent that these provisions provide any protection to management, that protection may limit the right of a shareholder to collect damages from members of management. Management is accountable to the shareholder as a fiduciary and, consequently, members of management are required to exercise good faith and integrity in handling our affairs.
Our business may become subject to extensive regulation at the federal and state levels. The value of securities we own may be adversely impacted by subsequent regulatory changes.
Our operations are and will be affected by current and future legislation and by the policies established from time to time by various federal and state regulatory authorities. It is not possible to predict what changes, if any, will be made to existing federal and state legislation and regulations or the effect that such changes may have on our future business and earnings prospects. Our
current investment strategy includes purchase of unregistered securities in both private companies as well as private placements offered by public companies. We are able to purchase securities pursuant to exemptions to the registration requirements of United States Federal securities laws. Changes in such laws or their interpretation could adversely impact our ability to resell such securities which would have a negative effect on the value of such securities as well as impact our overall investment strategy and the liquidity of our investments. In such an event, we may need to reformulate our investment strategy or we may choose to liquidate.
We cannot guarantee paying dividends to our stockholders.
We are allowed by our articles of incorporation and/or by-laws to pay dividends to our stockholders. However, there can be no guarantee we will have sufficient revenues to pay dividends during any period. We currently intend to retain our capital for use in growing our business and not make dividend distributions. We cannot assure you that we will achieve investment results or maintain a tax status that will allow or require any specified level of cash distributions. In addition, due to the asset coverage test applicable to us as a business development company, we may be limited in our ability to make distributions. Investors in need of liquidity through the payment of dividends should refrain from common stock which does not have a dividend requirement.
Investing in our shares may involve a high degree of risk.
The investments we make in accordance with our investment objective may result in a higher amount of risk than alternative investment options and volatility or loss of principal. Our investments in portfolio companies may be speculative and aggressive, and therefore, an investment in our shares may not be suitable for someone with low risk tolerance.
There is no current public market for our common stock, if and/or when a public market were to develop, the market price for our common stock may fluctuate significantly.
The market price and liquidity of the market for shares of our common stock may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance. These factors, may adversely affect our ability to raise capital through future equity financings. These factors include:
o significant volatility in the market price and trading volume of securities of business development companies or other companies in the investment industry, which are not necessarily related to the operating performance of these companies;
o changes in regulatory policies or tax guidelines, particularly with respect to RICs or business development companies;
o our common stock is unlikely to be followed by any market analysts, and there may be few institutions acting as market makers for the common stock which can adversely affect its price;
o loss of or inability to qualify for RIC status or BDC status;
o changes in earnings or variations in operating results;
o changes in the value of our portfolio of investments;
o any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts;
o departure of one or more of our key personnel;
o operating performance of companies comparable to us;
o potential legal and regulatory matters;
o changes in prevailing interest rates;
o general economic trends and other external factors; and
o loss of a major funding source.
Sales of substantial amounts of our common stock may have an adverse effect on the market price of our common stock.
We currently have 10,505,000 shares of common stock outstanding. We plan to raise funds in the future through sales of our common stock pursuant to Regulation E, which provides in part for issuance of freely trading shares. Sales of substantial amounts of our common stock or the availability of such shares for sale could adversely affect the prevailing market price for our common stock. If this occurs and continues, it could impair our ability to raise additional capital through the sale of equity securities should we desire to do so.
Our board of directors also has authority, without action or vote of the shareholders, to issue all or part of our authorized but unissued shares. Any such issuance will dilute the percentage ownership of shareholders and may, subject to the regulations pertaining to the minimum prices for which shares may be sold, further dilute the book value of the common stock. These issuances may also serve to enhance existing management's ability to maintain control of the Company.
We have the right, but do not intend to issue senior securities, including debt. If we were to reverse that decision and offer for sale and/or issue senior securities, you will be exposed to additional risks, including the typical risks associated with leverage.
You will be exposed to increased risk of loss if we incur debt to make investments. If we do incur debt, a decrease in the value of our investments would have a greater negative impact on the value of our common stock than if we did not use debt.
o Our ability to pay dividends would be restricted if our asset coverage ratio were not at least 200% and any amounts that we use to service our indebtedness would not be available for dividends to our common stockholders.
o It is likely that any debt we incur will be governed by an indenture or other instrument containing covenants restricting our operating flexibility.
o We and you as shareholders will bear the cost of issuing and servicing our senior securities.
o Any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock.
Our investments may require us to raise additional capital on different terms.
We will require additional capital in the future. For additional requirements, we may raise capital by issuing equity or convertible debt securities, and when we do, the percentage ownership of our existing stockholders will be diluted. In addition, any new securities we issue could have rights, preferences and privileges senior to our existing equity (although we do not intend to sell debt or preferred equity interests).
Our ability to raise capital as a BDC is limited by the requirement that we not sell shares below the NAV/S without approval of a majority of our shareholders. While we do not anticipate that the NAV/S calculation will ever result in a negative number or a nominally positive number, the Company would be severely limited in its ability to sell shares if such a negative number or a nominally positive number were to be the result of a NAV/S calculation.
Increases in market interest rates may both reduce the value of our portfolio investments and increase our cost of capital.
We expect that we may offer loans to our portfolio companies with interest at fixed rates and the value of these investments could be negatively affected by increases in market interest rates. In addition, an increase in interest rates would make it more expensive to use debt to finance our investments. As a result, a significant increase in market interest rates could both reduce the value of our portfolio investments and increase our cost of capital, which would reduce our net investment income.
The lack of liquidity in our investments may adversely affect our business.
We will generally make investments in private companies. Substantially all of these securities will be subject to legal and other restrictions on resale or will otherwise be less liquid than publicly traded securities. The illiquidity of our investments may make it difficult for us to sell such investments if the need arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, due to changes in capital needs or otherwise, we may realize significantly less than the value at which we have previously recorded our investments. In addition, we may face other restrictions on our ability to liquidate an investment in a portfolio company to the extent that we or our investment adviser has material non-public information regarding such portfolio company.
We may experience fluctuations in our quarterly and annual results.
We could experience fluctuations in our quarterly and annual operating results due to a number of factors, including the interest or dividend rates payable on the debt or equity securities we acquire, performance and/or default rate on securities we acquire, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets, changes in the investment industry, and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.
We may not realize gains or income from our investments.
We seek to generate both current income and capital appreciation. However, the securities, in which we invest, may not appreciate and, in fact, may decline in value, and the issuers of debt securities, in which we invest, may default on interest and/or principal payments. Accordingly, we may not be able to realize gains from our investments, and any gains that we do realize may not be sufficient to offset any losses we experience.
Your influence in matters requiring shareholder action will be limited due to a significant position held by a single shareholder.
There is a single shareholder with a controlling interest and this single shareholder would likely exercise voting control over all matters that may be submitted for approval by our shareholders. This shareholder has a material and significant position of control. The Company's officers or directors own less than 1% of the issued and outstanding shares of our voting securities but, to the extent that this single controlling shareholder votes to affirm decisions of management, notwithstanding the fact that the number of shares controlled by the officers and directors is less than a majority, their position of control is also material and significant.
Pursuant to our articles of incorporation, our Board of Directors has the authority to issue shares of stock without any further vote or action by the stockholders. The issuance of stock under certain circumstances could have the effect of delaying or preventing a change in control of the Company or may deter takeover attempts.
Our articles of incorporation contain provisions that may have the effect of discouraging, delaying or making more difficult a change in control and preventing the removal of incumbent directors. The existence of these provisions may reduce any premiums over market price that a potential acquirer would offer to shareholders for their shares of our common stock. Furthermore, we are subject to provisions of the Nevada Revised Statutes that may make it difficult for a potential acquirer to exert control over our Board of Directors and may discourage attempts to gain control without the consent of the Board of Directors.
GENERAL RISKS ASSOCIATED WITH BUSINESS DEVELOPMENT COMPANIES
BDCs generally require substantial amounts of time to realize the benefits from investments.
Venture capital investments typically take from four to eight years from the date of initial investment to reach a state of maturity at which liquidation can
be considered practical. We have not completed funding of some of our portfolio companies and we anticipate that there may be an additional period of time ranging from three to six months before we have obtained funding and completed investing that funding in our portfolio companies for our first round of equity investments. In light of the foregoing, it is unlikely that any significant distributions of the proceeds from the liquidation of equity investments will be made for several years after inception, if at all.
Our present senior management team has limited experience managing a business development company under the Investment Company Act of 1940.
The 1940 Act imposes numerous constraints on the operations of business development companies. For example, business development companies are required to invest at least 70% of their total assets primarily in securities of privately held or thinly traded U.S. public companies, cash, cash equivalents, U.S. government securities and other high quality debt investments that mature in one year or less. The lack of experience of our senior management team in managing a portfolio of assets under such constraints may hinder their ability to take advantage of attractive investment opportunities and, as a result, achieve our investment objective. Within the BDC format, the information about deals and deal flow generated by our senior management in connection with their investment and portfolio management activities will have a significant impact on our future success as a BDC. The senior management team will evaluate, structure, negotiate terms and close investments on those terms, monitor and service our investments and their abilities to perform these functions as members of a BDC will also have a significant impact on our future success as a BDC.
We will be wholly dependent for the selection, structuring, closing and monitoring of all of our investments on the diligence and skill of our management, acting under the supervision of our Board of Directors. None of these individuals has substantial experience, within or under a BDC investment and management format, in acquiring and investing in growth stage companies, the negotiation of the terms of such investments and the monitoring of such investments after they are made. In addition, we will engage outside consultants and professionals known to management to assist in evaluating and monitoring portfolio companies and maintaining regulatory compliance.
While we believe that our management possesses certain fundamental business skills that will increase our likelihood to succeed, our management team has never operated a BDC and must be considered as inexperienced when it comes to the both the day to day operations of an investment company and the management of investments. We intend to rely on the general skills and business acumen of our management team as well as engaging other professionals and consultants from time to time to insure that it gains the expertise to manage a BDC.
We may change our investment policies without further shareholder approval.
Although we are limited by the 1940 Act with respect to the percentage of our assets that must be invested in qualified portfolio 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 shareholder 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 shareholders to sell their stock.
We may allocate the net proceeds from stock sales in ways with which you may not agree.
We will have significant flexibility in investing the net proceeds of our stock sales. We may use the net proceeds in ways with which you may not agree or for investments other than those contemplated at the time we sell the stock, unless such change in the use of proceeds is subject to stockholders' approval or prohibited by law.
We will have broad discretion in using the proceeds from any offering
Our management has broad discretion with respect to the specific application of the net proceeds of any funding that we obtain. While our corporate governance resolutions require the Board of Directors and Investment Committee to adhere to certain standards, even acting in compliance with those guidelines, our Board of Directors and Investment Committee have discretion. We do not permit the Board of Directors and Investment Committee to use proceeds in a manner inconsistent with the operation of a BDC. Although substantially all of the net proceeds from any offering is intended to be applied for investments in eligible portfolio companies which satisfy our investment criteria, we may invest some of the proceeds in the provision of services to our portfolio companies rather than invest directly. Therefore, we can not accurately predict costs associated with such professionals and consultants. For that reason, the use of proceeds can not be determined with absolute certainty. You will not have an opportunity to evaluate the basis for our decisions on the use of the proceeds, and will not be able to participate in such decisions.
Our investments may not generate sufficient income to cover our operations.
While we intend to make investments into those qualified companies that will provide the greatest overall return on our investment, we are required to make investments into those companies which, whether due to lack of experience or financial instability (including insolvency), may present the greatest risk. This is in conformity with the Small Business Investment Incentive Act of 1980 which amended the 1940 Act and permitted the creation of BDC's. 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. It should be noted that our operational costs are higher as a result of our having elected to be governed as a BDC.
Shares in a BDC will likely trade at a discount.
Shares of many closed-end investment companies and most BDC's frequently trade at a discount to their net asset value. This characteristic is separate and distinct from the risk that our net asset value could decrease as a result of investment activities. This likely discount in share pricing in the market may pose a greater risk to investors expecting to sell their shares in a relatively
short period after purchase. We cannot predict whether our shares will trade at prices above, at or below our net asset value.
Regulations governing our operation as a business development company affect our ability to raise, and the way in which we raise, additional capital.
We have the right to issue debt securities or preferred stock and/or borrow money from banks or other financial institutions, which we refer to collectively as "senior securities," only in amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after each issuance of senior securities, the maximum amount permitted by the 1940 Act. If the value of our assets declines, we may be unable to satisfy this test. If that happens, we may be required to sell a portion of our investments or sell additional shares of common stock and, depending on the nature of our leverage, to repay a portion of our indebtedness at a time when such sales may be disadvantageous. In addition, any future issuance of additional shares of our common stock could dilute the percentage ownership of our current stockholders in us.
As a business development company regulated under provisions of the 1940 Act, we are not generally able to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the current net asset value of our common stock (1) if our Board of Directors determines that such sale is in the best interests of us and our stockholders, and (2) our stockholders approve such sale. In any such case, the price at which our securities are to be issued and sold may not be less than a price which, in the determination of our Board of Directors, closely approximates the market value of such securities (less any sales load).
In addition, we may in the future seek to securitize or hypothecate loans previously made by us to generate cash for funding new investments. To securitize or hypothecate these loans, we may contribute a pool of such loans to a wholly-owned subsidiary. This could include the sale of interests in the subsidiary on a non-recourse basis to purchasers who we would expect to be willing to accept a lower interest rate to invest in investment grade loan pools although we would expect to retain a portion of the equity in the securitized pool of loans. An inability to successfully securitize and sell all or part of such a loan portfolio could limit our ability to grow our business, fully execute our business strategy and could decrease our earnings, if any. Moreover, the successful securitization of our loan portfolio might expose us to losses because the residual loans in which we do not sell interests will tend to be those that are riskier and more likely to generate losses.
Our election to be governed as a BDC will require us to comply with significant regulatory requirements.
We elected to be regulated as a Business Development Company under the 1940 Act and be subject to Sections 54 through 65 of said Act. As a result of this election, the Company is subject to the provisions of 1940 Act as it applies to BDCs as of the date of such election. Being subject to the BDC provisions requires us to meet significant numbers of regulatory and financial requirements. Compliance with these regulations is expensive and may create financial problems for us in the future. These laws and regulations, as well as their interpretation, may be changed from time to time. Accordingly, any change in these laws or regulations could have a material adverse effect on our business.
Specifically, it must be noted that there are increased costs associated with compliance with the 1940 Act as a result of our election to become a BDC. These costs include costs associated with the increased demand for compliance including oversight by our Chief Compliance Officer and counsel to the Company as well as increased costs due to accounting methodology and valuations which increase the time and work required of both our accounting service providers and independent auditors. These costs require us to expend capital and resources that might otherwise be used to meet the needs or opportunities relating to investments and/or our portfolio companies or other income-producing assets.
If we do not remain a business development company, we might continue to be regulated as a closed-end investment company under the 1940 Act, which would decrease our operating flexibility. We cannot assure you that we will successfully retain our BDC status.
If our primary investments are deemed not to be qualifying assets, we could lose our status as a business development company or be precluded from investing according to our current business plan.
Under the 1940 Act, in order to maintain our status as a business development company, we must not acquire any assets other than "qualifying assets" unless, at the time of and after giving effect to such acquisition, at least 70% of our total assets are qualifying assets. If we acquire mezzanine loans or dividend-paying equity securities from an issuer that has outstanding marginable securities at the time we make an investment, these acquired assets cannot be treated as qualifying assets since the issuer might not be considered an "eligible portfolio company" under the 1940 Act. "Marginable securities" include any non-equity security, pursuant to certain 1998 amendments to Regulation T under the Securities Exchange Act of 1934, as amended, which raises the question as to whether a private company that has outstanding debt securities would qualify as an eligible portfolio company.
We operate in a highly competitive market for investment opportunities.
A large number of entities will compete with us to make the types of investments that we plan to make in target portfolio companies. We will compete with other business development companies, public and private funds, commercial and investment banks and commercial financing companies. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. For example, some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a business development company. We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations. Also, as a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time, and we can offer no assurance that we will be able to identify and make investments that are consistent with our investment objective.
We may never be able to qualify for the income tax benefits offered to RICs.
We will be classified as a non-diversified investment company under the 1940 Act. Until we achieve a threshold level of diversification, we will not be subject to the applicable provisions for RICs under the Internal Revenue Code. Therefore, we will not receive favorable pass through tax treatment on distributions to our shareholders. This means that we will be taxed as an ordinary corporation on our taxable income even if that income is distributed to shareholders, and all distributions out of our earnings and profits will be taxable to shareholders as dividends. Thus, this income will be subject to a double layer of taxation.
RISKS ASSOCIATED WITH INVESTMENTS AND PORTFOLIO COMPANIES
There are costs associated with the purchase and sale of securities.
While the general approach of a BDC may suggest a long-term holding position of the securities of its portfolio companies, some of our strategies may include purchases of different classes of securities or frequent trading to maximize profits and, as a consequence, risks related to turnover and costs such as brokerage commissions may be greater than for an investment in a single entity for a single class of security held for a longer period of time. Our operating expenses, including, but not limited to, fees paid to accountants, attorneys, fees to execute trades, manage investments and fees paid to any investment advisor may, in the aggregate, constitute a high percentage relative to the expenses and fees than for an investment in a single entity for a single class of security held for a longer period of time.
There are numerous risks arising from investing in securities.
The securities industry is generally competitive and methods of investment strategy involve a degree of risk. We will compete with firms, including many of the larger securities and investment banking firms, which have substantially greater financial resources and research staffs. Where we purchase securities in portfolio companies for appreciation, our profitability substantially depends upon our ability to correctly assess the future price movements of stocks. There can be no assurance that we will be able to accurately predict price movements of securities purchased.
Security investments generally involve a high degree of risk. The performance of securities in which we may invest are subject to numerous factors which are neither within the control of nor predictable by us. Such factors can include a wide range of economic, political, competitive and other conditions which may affect investments in general or specific industries or companies. In recent years, the securities markets have become increasingly volatile and this volatility has increased the degree of risk.
Our investments in prospective portfolio companies may be risky and you could lose all or part of your investment.
We will invest primarily in private or thinly-traded public companies, most of which have relatively short or no operating histories. These companies will be subject to all of the business risk and uncertainties associated with any new business enterprise, including the risk that these companies may not reach their investment objective and the value of our investment in them may decline
substantially or fall to zero. Most of the portfolio companies into which we intend to invest will be considered "growth stage" companies.
Investments in growth stage companies offer the opportunity for significant gains. However, each investment involves a high degree of business and financial risk that can result in substantial losses. Among these are the risks associated with:
o these companies may have limited financial resources and may be unable to meet their obligations under their securities that we hold, which may be accompanied by a deterioration in the value of their equity securities or of any collateral with respect to debt securities and a reduction in the likelihood of us realizing on any guarantees we may have obtained in connection with our investment;
o they may have shorter operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors' actions and market conditions, as well as general economic downturns;
o because many of these companies are privately held companies, public information is generally not available about these companies. As a result, we will depend on the ability of our investment committee to obtain adequate information to evaluate these companies in making investment decisions. If our investment committee is unable to uncover all material information about these companies, it may not make a fully informed investment decision, and we may lose money on our investments;
o they are more likely to depend on the management talents and efforts of a small group of persons; therefore, the death, disability, resignation or termination of one or more of these persons could have a material adverse impact on our portfolio company and, in turn, on us;
o companies operating at a loss or with substantial variations in operating results from period to period, with the need for, but generally limited ability to provide for internally, substantial additional capital to support expansion or to achieve or maintain a competitive position;
o these companies may face intense competition, including competition from companies with greater financial resources, more extensive development, manufacturing, marketing, and service capabilities, and larger number of qualified managerial and technical personnel; and
o they may have less predictable operating results, may from time to time be parties to litigation, may be engaged in changing businesses with products subject to a risk of obsolescence and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position. In addition, our executive officers, directors and our investment adviser could, in the ordinary course of business, be named as defendants in litigation arising from our investments in the portfolio companies.
Economic recessions or downturns could impair our portfolio companies and harm our operating results.
Our portfolio companies will generally be affected by the conditions and overall strength of the national, regional and local economies, including interest rate fluctuations, changes in markets and changes in the prices of their primary commodities and products. These factors could adversely impact the customer base of our portfolio companies. As a result, many of our portfolio companies may be susceptible to economic slowdowns or recessions and may be unable to repay loans or meet other obligations during these periods. Therefore, our non-performing assets are likely to increase, and the value of our portfolio is likely to decrease, during these periods. Adverse economic conditions also may decrease the value of collateral securing some of our loans and the value of our equity investments. Economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could prevent us from increasing investments and harm our operating results.
A portfolio company's failure to satisfy financial or operating covenants imposed by us or other investors or lenders could lead to defaults and, potentially, termination of loans and foreclosure on secured assets, which could trigger cross-defaults under other agreements and jeopardize our portfolio company's ability to meet its obligations under the debt or equity securities that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms, which may include the waiver of certain financial covenants, with a defaulting portfolio company. In addition, if one of our portfolio companies were to go bankrupt, even though we may have structured our interest as senior debt or preferred equity, depending on the facts and circumstances, including the extent to which we actually provided managerial assistance to that portfolio company, a bankruptcy court might re-characterize our debt or equity holding and subordinate all or a portion of our claim to those of other creditors.
Our portfolio companies may incur debt or issue equity securities that rank equally with, or senior to, our investments in such companies.
We intend to invest primarily in mezzanine debt and dividend-paying equity securities issued by our portfolio companies. Our portfolio companies usually will have, or may be permitted to incur, other debt, or issue other equity securities, that rank equally with, or senior to, the securities in which we invest. By their terms, such instruments may provide that the holders are entitled to receive payment of dividends, interest or principal on or before the dates on which we are entitled to receive payments in respect of the securities in which we invest. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of securities ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we receive any distribution in respect of our investment. After repaying the senior security holders, the portfolio company may not have any remaining assets to use for repaying its obligation to us. In the case of securities ranking equally with securities in which we invest, we would have to share on an equal basis any distributions with other security holders in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company. In addition, we may not be in a position to control any portfolio company in which we invest. As a result, we are subject to the risk that a portfolio company in which we invest may make business decisions with which we disagree and the management of such
company, as representatives of the holders of their common equity, may take risks or otherwise act in ways that do not serve our interests as debt or preferred equity investors.
We may not be able to fully realize the value of any collateral securing any debt investments made into portfolio companies.
Although we expect that a substantial amount of our debt investments will be protected by holding security interests in the assets of the portfolio companies, we may not be able to fully realize the value of the collateral securing any such investments due to one or more of the following factors:
o since these debt investments will be primarily made in the form of unsecured or wrap-loans, the liens on the collateral, if any, will be subordinated to those of the senior secured debt of the portfolio companies, if any. As a result, we may not be able to control remedies with respect to the collateral;
o the collateral may not be valuable enough to satisfy all of the obligations under our secured loan, particularly after giving effect to the repayment of secured debt of the portfolio company that ranks senior to our loan;
o bankruptcy laws may limit our ability to realize value from the collateral and may delay the realization process;
o our rights in the collateral may be adversely affected by the failure to perfect security interests in the collateral;
o how effectively the collateral would be liquidated and the value received could be impaired or impeded by the need to obtain regulatory and contractual consents; and
o by its nature, some or all of the collateral may be illiquid and may have no readily ascertainable market value. The liquidity and value of the collateral could be impaired as a result of changing economic conditions, competition, and other factors, including the availability of suitable buyers.
Our success will depend upon the success of the portfolio companies and, in great part, upon the abilities of their management.
Although our management expects to provide portfolio companies with assistance (particularly with regard to capital formation, major personnel decisions, and strategic planning), the day-to-day operations will be controlled by the management of the portfolio companies. As the portfolio companies have not all been identified, investors must rely upon our management to select portfolio companies that have, or can obtain, the necessary management resources. We will depend on the diligence, skill and network of business contacts of the senior management of each of the portfolio companies in which we invest and the professionals chosen by them, subject to the oversight of our senior management, and the information and interaction between management of the portfolio companies and our management. Our future success will depend to a significant extent on the continued service of the senior management team of each portfolio
company, the departure of any of whom could have a material adverse effect on our ability to achieve our investment objective. Problems may arise at portfolio companies that local management do not recognize or cannot resolve. In addition, the management of portfolio companies may conceal the existence of problems from us.
Many of our portfolio investments will be recorded at fair value as determined in good faith by our board of directors and, as a result, there will be uncertainty as to the value of our portfolio investments.
A large percentage of our portfolio investments will consist of securities of privately held or thinly traded public companies. The fair value of these securities may not be readily determinable. We will value these securities quarterly at fair value as determined in good faith by our Board of Directors based on input from our audit committee with or without the benefit of an opinion from a third party independent valuation firm. We may also be required to value any publicly traded securities at fair value as determined in good faith by our Board of Directors to the extent necessary to reflect significant events affecting the value of those securities. Our Board of Directors may, to the extent circumstances warrant it, utilize the services of an independent valuation firm to aid it in determining the fair value of any securities. The types of factors that may be considered in fair value pricing of our investments include the nature and realizable value of any collateral, the portfolio company's ability to make payments and its earnings, the markets in which the portfolio company does business, comparison to publicly traded companies, discounted cash flow and other relevant factors. Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, valuations may fluctuate over short periods of time and may be based on estimates, the determinations of fair value by our Board of Directors may differ materially from the values that would have been used if a ready market for these securities existed. Our net asset value could be adversely affected if the determinations regarding the fair value of our investments were materially higher than the values that we ultimately realize upon the disposal of such securities.
Limitations on availability of investment capital may adversely affect other investments.
We may be reliant on the availability of capital to generate profits under our investment strategy and such availability will depend, in part, on our ability to timely liquidate existing positions in order to reinvest the proceeds thereof. To the extent that we own securities which are not subject to a valid registration statement or otherwise available for trading under applicable securities laws, our ability to liquidate our position in such securities may be limited. We intend to require some of our portfolio companies to use their best efforts to cause a registration statement covering the resale of the securities purchased by us to be filed and declared effective by the SEC or become otherwise freely tradeable. However, there can be no guarantee that the SEC or other regulating body will declare such a registration statement effective or permit such security to become free of restrictions within such period and, until such securities become freely tradable, we will likely be unable to freely liquidate such interests in restricted securities in the manner and at the prices desired. This resulting lack of liquidity could impair our ability to generate the cash flow from these positions to timely pay our liabilities or obtain funds for the purpose of reinvestment. Although we intend to maintain adequate liquidity to achieve our future investment objectives, there can be no assurance this can be accomplished in all circumstances.
Portfolio companies are likely to need additional funding.
We expect that many portfolio companies will require additional financing to satisfy their working capital requirements. The amount of additional financing needed will depend upon the maturity and objectives of the particular company. Each round of venture financing, whether from us or other investors is typically intended to provide a portfolio company with enough capital to reach the next major valuation milestone. If the funds provided are not sufficient, a portfolio company may have to raise additional capital at a price unfavorable to us and the other existing investors. The availability of capital is generally a function of capital market conditions that are beyond our control or the control of any portfolio company. We cannot assure you that our management or the managements of portfolio companies will be able to predict accurately the future capital requirements necessary for success or that additional funds will be available to portfolio companies from any source. If funding is not available, some portfolio companies may be forced to cease operations.
BDC investments are generally illiquid.
We anticipate that most of our holdings in portfolio companies will be securities that are subject to restrictions on resale. Generally, unless the securities are subsequently registered under the 1933 Act, we will not be able to sell these securities unless we meet all of the conditions of Rule 144 or another rule under the 1933 Act that permits limited sales under specified conditions. When restricted securities are sold to the public, we may be deemed an underwriter, or possibly a controlling person, with respect thereto for the purpose of the Securities Act and may be subject to liability as such under the 1933 Act. These restrictions could require us to hold securities or refrain from sale and be unable to liquidate a position even at a loss.
Even if we meet all of the conditions of the 1933 Act, there may be no market for the securities that we hold. These limitations on liquidity of a BDC's investments could prevent a successful sale thereof, result in delay of any sale, or substantially reduce the amount of proceeds that might otherwise be realized. It is possible that one or more of the portfolio companies may not qualify to rely on such exemptions or to use a registration statement. In such event, we would end up owning "restricted" securities subject to resale under Rule 144
There are risks which result from the inherent concentration of investments prior to diversification.
While we intend to allocate our investments among different portfolio companies, it is possible that, prior to our achieving diversification, a significant amount of or all of our investments and, hence, our NAV could, at any one time, be invested in the securities of just a few portfolio companies. Thus, our success and NAV would be dependent on the success of just a few portfolio companies and all of the risks associated with ownership of such portfolio companies including success dependent on management, success dependent on market conditions within the industry or field of such portfolio companies, success dependent on achieving the business objectives of such portfolio companies and success dependent on economic conditions and other conditions relative to the operation of such portfolio companies, would become risks borne by us.
There are risks associated with investments in companies with small capitalization.
The portfolio companies that we expect to invest in are thinly capitalized and generally will have a market capitalization below $100 million (and frequently substantially less). These companies generally do not have experience, market awareness, tracking by analysts, institutional investors and other benefits of larger companies that result in more marketability and more stability in the pricing of their securities. This impacts the liquidity of securities issued by those portfolio companies. It is expected that the securities of most, if not all, of the portfolio companies will be thinly traded. This could present a problem when we determine to liquidate our position. We may not be able to sell the securities in the time frame and at the price we would like. Furthermore, in certain situations, as a result of a security being thinly traded, we could experience a significant loss in value should we be forced to liquidate our investment as a result of rapidly changing market conditions or other factors.
There are risks associated with investments in companies with securities that are not readily marketable.
We may invest in securities that are initially, or that later become, not readily marketable. For example, we may acquire restricted securities of an issuer in a private placement pursuant to an arrangement whereby the issuer agrees to register the resale of those securities, or, in the case of an investment in convertible or exchangeable securities, the securities underlying such securities, within a certain period of time. Such registration requires compliance with United States Federal and state securities laws and the approval of the SEC. Unless and until such registration or compliance with applicable regulation occurs, there is likely to be no market for the restricted securities. No assurance can be given that issuers will not breach their obligation to obtain or meet such registration or other compliance obligation. Similarly, securities that are at one time marketable may become unmarketable (or more difficult to market) for a number of reasons. For example, securities traded on a securities exchange or quotation system may become unmarketable if delisted from such exchange or quotation system for among other reasons, failing to satisfy the requirements for continued listing, which may include minimum price requirements. In addition, we may acquire restricted securities, for which no market exists, which are convertible or exchangeable into common stock of the issuer. No assurances can be given that a portfolio company which has sold a convertible security requiring exchange or conversion, will not breach its obligation to convert or exchange such securities upon demand, in which case our liquidity may be adversely affected. In general, the stability and liquidity of the securities in which we invest will depend in large part on the creditworthiness of the issuers. Issuers' creditworthiness will be monitored on an ongoing basis by us. If there is a default by the issuer, we may have contractual remedies under the applicable transaction documents. However, exercising such contractual rights may involve delays in liquidating our position and the incurrence of additional costs.
Portfolio companies in which investments are made may have publicly-traded securities but those companies or their securities may become subject to restrictions due to non-compliance. Our ability to generate profits from our investment activities may be adversely affected by a failure of portfolio companies to comply with registration, conversion, exchange or other obligations under the agreements pursuant to which such securities have been sold to us. The failure of an issuer to register the resale of its securities sold to us may decrease the amount of available capital with which we may pursue other investment opportunities or meet current liabilities. We may invest in
securities that are convertible into or exchangeable for common stock of the issuer, the resale of which by us is (or is to be) registered. If an issuer refuses, is unable to, or delays in timely honoring its obligation to issue conversion or exchange securities, our ability to liquidate our position will be adversely affected, and our profits may be adversely affected.
We have not yet identified all of the potential investments for our portfolio.
We have not yet identified all of the potential investments for our portfolio, and, thus, you will not be able to evaluate all of our potential investments prior to purchasing shares of our common stock. This factor will increase the uncertainty, and thus the risk, of investing in our shares.
We may sustain losses from fraud within our portfolio companies.
The risk of fraud losses on our assets varies with, among other things, the effectiveness of security procedures utilized. Management anticipates that fraud losses, if any, will be unlikely as controls and other security measures will have been adopted by each portfolio company as a condition to our investment to protect against fraudulent misappropriation of cash and other assets. However, although our management believes that any loss due to fraud will be unlikely, there can be no assurance that fraud loss experience will not become material in amount. Fraud at the BDC level is far less likely as BDC's are required to have and to have tested controls to limit this possibility. It must be noted that, in addition to basic controls as to financial data, BDC's are required to have in place certain safeguards which may render risks to investment assets from fraud to be nominal but these risks do exist and even requirements such as holding physical certificates of shares in portfolio companies in a safe do not, in and of themselves, eliminate the possibility of fraud.
RISKS OF THE COMPANY AT ITS PRESENT STAGE
Although we have been in existence for a number of years, we may still be considered to have a limited operating history as a BDC. We are a relatively new business development company with limited resources and sources of revenues.
We were incorporated on August 21, 2002, and we have commenced investment operations but the extent of our investment activities will characterize us as a newer investment company. We made our election to become a BDC on February 14, 2006, and, while we have owned shares in some portfolio companies, we have not realized any significant revenues from the sale or other liquidity event involving our past or present portfolio companies. As we have made investments only in four portfolio companies, we have limited experience relating to the identification, evaluation and acquisition of target businesses and, accordingly, there is only a limited basis upon which to evaluate our prospects for achieving our intended business objectives. We have limited resources and have realized limited revenues to date. In addition, we will not achieve any revenues until, at the earliest, we are able to obtain funding, make investments and sell our position of securities in an underlying portfolio company for a profit. We will be wholly dependent for the selection, structuring, closing and monitoring of all of our investments on the diligence and skill of our management, acting under the supervision of our Board of Directors. None of these individuals has substantial experience, within the BDC business format, in
acquiring and investing in growth stage companies, the negotiation of the terms of such investments and the monitoring of such investments after they are made. We cannot assure you that we will attain our investment objective.
We are subject to all of the business risks and uncertainties associated with any new business enterprise, including the risk that we will not achieve our investment objective and that the value of your investment in us could decline substantially or fall to zero.
We will be confronted by competition from entities having substantially greater resources and experience.
Other entities and individuals compete for investments similar to those proposed to be made by us, many of whom will have greater financial and management resources than we do. Furthermore, we must comply with provisions of the 1940 Act pertaining to BDCs and, if we qualify as a RIC, provisions of the Internal Revenue Code pertaining to RICs might restrict our flexibility as compared with our competitors. The need to compete for investment opportunities may make it necessary for us to offer portfolio companies more attractive transaction terms than otherwise might be the case. These factors may prevent us from ever becoming profitable.
Distributions to shareholders may never equal the amount invested by the shareholders.
We cannot assure you that any distributions to shareholders will be made by us or that aggregate distributions, if any, will equal or exceed the shareholders' investment in us. Sales of portfolio company securities will be a principal source of distributable cash to shareholders. The Board of Directors has absolute discretion in the timing of distributions to shareholders. Securities acquired by us through equity investments will be held by us and will be sold or distributed at the sole discretion of the Board of Directors.
There are significant potential conflicts of interest, which could impact our investment returns.
Our executive officer(s) and Director(s) serve or may serve as officers and directors of entities who operate in the same or related line of business as we do. Accordingly, they may have obligations to investors in those entities, the fulfillment of which might not be in the best interests of us or our stockholders. It is possible that new investment opportunities that would otherwise meet our investment objective may come to the attention of one these entities, and, if so, such opportunity might not be offered, or otherwise made available, to us. However, our executive officer(s) and Director(s) do have fiduciary obligations to act in our best interests and must, in such a circumstance or conflict, endeavor to allocate investment opportunities in a fair and equitable manner over time so as not to discriminate one company against another, where equal fiduciary obligations are owed. In addition, they may not be available to us if there are time conflicts involving other entities.
Our common stock is subject to the "Penny Stock" rules of the SEC and the trading market in our securities is limited, which makes transactions in our stock cumbersome and may reduce the value of an investment in our stock.
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant to us, as any
equity security that has a market price of less than $5.00 per share or option to acquire any equity security with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:
o that a broker or dealer approve a person's account for transactions in penny stocks; and
o the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the broker or dealer must:
o obtain financial information and investment experience objectives of the person; and
o make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the suitability determination; and
o that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
We have limited operating history upon which to base your investment decision.
While we started operations on August 21, 2002, we have a limited operating history available to evaluate the likelihood of the success of our business. We became a BDC on February 14, 2006. Our prospects should be considered in light of the risks, expenses and uncertainties that may be encountered by development stage companies. Among other things, we must build our customer base, respond to competitive developments, attract, retain and motivate qualified employees and establish and maintain our technologies, products, and services on an ongoing basis. There can be no assurance that we will be successful in addressing such risks and implementing our business strategy.
As a result of our lack of operating history, and the other risks described herein, we are unable to accurately forecast our revenues. Our future expense levels are based predominately on our operating plans and estimates of future revenues, and to a large extent are fixed. We may be unable to adjust spending in a timely manner to compensate for revenues that do not materialize. Accordingly, any significant shortfall in revenues or lack of revenue would likely have an immediate material adverse effect on our business, operating results and financial condition.
Our ability to generate revenues will depend upon many factors. We will be required to build our business by implementing operational systems, hiring additional employees, developing and implementing a marketing and sales strategy and implementing our technology applications. Our expenses will initially exceed our revenues and no assurances can be made that we will become profitable or provide positive cash flows.
We cannot assure you that we will be successful in selling the common shares or, if sold, at what price. We have limited assets without the sale of these common shares and we cannot assure you that we will attain our investment objective.
As of the date of filing of our Form 10-Q, we have minimal cash or other assets and net worth from which to invest in successful portfolio companies to insure our success. Our success will depend, in part, upon raising the necessary funds to fund investments.
Restrictions imposed upon the resale of our capital stock may require you to hold your stock for an indefinite period of time.
None of the securities to be issued based upon future sales will be registered under the Securities Act. The common stock to be sold is intended to be exempt from registration pursuant to Regulation E which permits, in conformity therewith, issuance of shares without restriction on further transfer. While we do not anticipate such an adverse decision or determination on the part of the Securities and Exchange Commission, the SEC has the right, even after permitting the offering to become effective, to enjoin the sale of securities or determine that such sales are not exempt under Regulation E. While we will make every effort to insure our compliance with the requirements under Regulation E, there can be no assurance of such exemption; as the SEC does not, as a matter of policy, affirmatively indicate the effectiveness of the notification under Regulation E.
ITEM 2:
ITEM 2: PROPERTIES
We rent an office located at 3960 Howard Hughes Parkway, Suite 500 in Las Vegas, Nevada and pay $250.00 a month for rent, on a month to month basis.
ITEM 3:
ITEM 3: LEGAL PROCEEDINGS
There is no current or pending litigation, claims or counter claims involving us as a Defendant.
While acting as General Partner to Shocker 100 Index, LP ("Shocker"), we initiated litigation against Robert Taccia, Alex Tandy, Vincenzo Arcobelli, and Tony Cammarano ("Taccia Group"). Shocker's claim is that the Taccia Group did not perform under contractual obligations. Shocker is asking for return of 1,200,000 shares of Mircotrakgps common stock, return of $50,000 cash loaned to American Beauty College of Ft. Worth, Texas, and attorney's fees. The lawsuit was recently filed and no outcome can be estimated. No counterclaim has been made against us in this action and we do not believe that there exists any claim or counterclaim which might be made against us. In the fourth quarter of 2005, we sold our interest in Shocker to another entity owned by the President.
ITEM 4:
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth quarter.
PART II
ITEM 5:
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET
Our Common Stock is not currently traded on any exchange.
NUMBER OF SHAREHOLDERS AND TOTAL OUTSTANDING SHARES
As of December 31, 2006, there were 10,505,000 shares of Common Stock outstanding held by thirty-seven (37) shareholders of record and one (1) business trust.
DIVIDENDS
We have paid no cash dividends to date and do not anticipate paying any cash dividends on our Common Stock in the foreseeable future. We intend to retain our earnings, if any, to finance the expansion of its business, to make additional investments and/or acquisitions and for other general corporate purposes. Any payment of future dividends will be at the discretion of the Board of Directors and will depend upon, among other factors, our earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions with respect to the payment of dividends and other considerations the Board of Directors deems relevant.
PREFERRED SHARES
None authorized.
OPTIONS
As of December 31, 2005, there were 3,555,000 outstanding options to purchase common stock held by two (2) individuals and one (1) business trust. None of the options were exercised by the end of their term and all expired on December 31, 2006.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This information statement contains forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential", "continue" or the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. There are a number of factors that could cause our actual results to differ materially from those indicated by such forward-looking statements.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, we do not assume responsibility for the accuracy and completeness of such forward-looking statements. We are under no duty to update any of the forward-looking statements after the date of this information statement to conform such statements to actual results. Management's discussion and analysis should be read in conjunction with our financial statements and the notes herein.
OUR PLAN OF OPERATION FOR THE NEXT TWELVE MONTHS - ------------------------------------------------
MANAGEMENT'S ANALYSIS OF BUSINESS
OUR ABILITY TO DEVELOP OUR BUSINESS PLAN IS CONTINGENT UPON OUR ABILITY TO RAISE SUFFICIENT FUNDS TO INVEST IN PORTFOLIO COMPANIES AND TO COVER OUR OPERATING OVERHEAD REQUIREMENTS.
We will have significant relative flexibility in selecting and structuring our investments. We will not be subject to many of the regulatory limitations that govern traditional lending institutions such as banks. We will seek to structure our investments so as to take into account the uncertain and potentially variable financial performance of our portfolio companies. This should enable our portfolio companies to retain access to committed capital at different stages in their development and eliminate some of the uncertainty surrounding their capital allocation decisions. We will calculate rates of return on invested capital based on a combination of up-front commitment fees, current and deferred interest rates and residual values, which may take the form of common stock, warrants, equity appreciation rights or future contract payments. We believe that this flexible approach to structuring investments will facilitate positive, long-term relationships with our portfolio companies and enable us to become a preferred source of capital to them. We also believe our approach should enable debt financing to develop into a viable alternative capital source for funding the growth of target companies that wish to avoid the dilutive effects of equity financings for existing equity holders.
Longer Investment Horizon - We will not be subject to periodic capital return requirements. These requirements, which are standard for most private equity and venture capital funds, typically require that these funds return to investors the initial capital investment after a pre-agreed time, together with any capital gains on such capital investment. These provisions often force such
funds to seek the return of their investments in portfolio companies through mergers, public equity offerings or other liquidity events more quickly than they otherwise might, which can result in a lower overall return to investors and adversely affect the ultimate viability of the affected portfolio companies.
Because we may invest in the same portfolio companies as these funds, we are subject to these risks if these funds demand a return on their investments in the portfolio companies. We believe that our flexibility to take a longer-term view should help us to maximize returns on our invested capital while still meeting the needs of our portfolio companies.
Established Deal Sourcing Network - We believe that, through our management and directors, we have solid contacts and sources from which to generate investment opportunities. These contacts and sources include:
o public and private companies, o investment bankers, o attorneys, o accountants, o consultants, and o commercial bankers.
However, we cannot assure you that such relationships will lead to the origination of debt or other investments.
INVESTMENT CRITERIA
As a matter of policy, we will not purchase or sell real estate or interests in real estate or real estate investment trusts except that we may:
o purchase and sell real estate or interests in real estate in connection with the orderly liquidation of investments, or in connection with foreclosure on collateral; o own the securities of companies that are in the business of buying, selling or developing real estate; or o finance the purchase of real estate by our portfolio companies.
We will limit our investments in more traditional securities (stock and debt instruments) and will not, as a matter of policy:
o sell securities short except with regard to managing the risks associated with publicly-traded securities issued by our portfolio companies;
o purchase securities on margin (except to the extent that we may purchase securities with borrowed money); or
o engage in the purchase or sale of commodities or commodity contracts, including futures contracts except where necessary in working out distressed loans; or in those investment situations where hedging the risks associated with interest rate fluctuations is appropriate, and, in such cases, only after all necessary registrations or exemptions from registration with the Commodity Futures Trading Commission have been obtained.
Prospective Portfolio Company Characteristics - We have identified several criteria that we believe will prove important in seeking our investment objective with respect to target companies. These criteria will provide general guidelines for our investment decisions; however, we caution readers that not all of these criteria will be met by each prospective portfolio company in which we choose to invest.
Experienced Management - We will generally require that our portfolio companies have an experienced president or management team. We will also require the portfolio companies to have in place proper incentives to induce management to succeed and to act in concert with our interests as investors, including having significant equity interests. We intend to provide assistance in this area either supervising management or providing management for our portfolio companies.
Products or Services - We will seek companies that are involved in products or services that do not require significant additional capital or research expenditures. In general, we will seek target companies that make innovative use of proven technologies or methods.
Proprietary Advantage - We expect to favor companies that can demonstrate some kind of proprietary sustainable advantage with respect to their competition. Proprietary advantages include, but are not limited to:
o patents or trade secrets with respect to owning or manufacturing its products, and o a demonstrable and sustainable marketing advantage over its competition.
Marketing strategies impose unusual burdens on management to be continuously ahead of its competition, either through some kind of technological advantage or by being continuously more creative than its competition.
Profitable or Nearly Profitable Operations Based on Cash Flow from Operations - We will focus on target companies that are profitable or nearly profitable on an operating cash flow basis. Typically, we would not expect to invest in start-up companies unless there is a clear exit strategy in place.
Potential for Future Growth - We will generally require that a prospective target company, in addition to generating sufficient cash flow to cover its operating costs and service its debt, demonstrate an ability to increase its revenues and operating cash flow over time. The anticipated growth rate of a prospective target company will be a key factor in determining the value that we ascribe to any warrants or other equity securities that we may acquire in connection with an investment in debt securities.
Exit Strategy - Prior to making an investment in a portfolio company, we will analyze the potential for that company to increase the liquidity of its common equity through a future event that would enable us to realize appreciation, if any, in the value of our equity interest. Liquidity events may include:
o an initial public offering, o a private sale of our equity interest to a third party,
o a merger or an acquisition of the portfolio company, or o a purchase of our equity position by the portfolio company or one of its stockholders.
We may acquire warrants to purchase equity securities and/or convertible preferred stock of the eligible portfolio companies in connection with providing financing. The terms of the warrants, including the expiration date, exercise price and terms of the equity security for which the warrant may be exercised, will be negotiated individually with each eligible portfolio company, and will likely be affected by the price and terms of securities issued by the eligible portfolio company to other venture capitalists and other holders. We anticipate that most warrants will be for a term of five to ten years, and will have an exercise price based upon the price at which the eligible portfolio company most recently issued its equity securities or, if a new equity offering is imminent, the price at which such new equity securities will be offered. The equity securities for which the warrant will be exercised generally will be common stock of which there may be one or more classes or convertible preferred stock. Substantially all the warrants and underlying equity securities will be restricted securities under the 1933 Act at the time of the issuance. We will generally negotiate for registration rights with the issuer that may provide:
o "piggyback" registration rights, which will permit us under certain circumstances, to include some or all of the securities owned by us in a registration statement filed by the eligible portfolio company, or o in circumstances, "demand" registration rights permitting us under certain circumstances, to require the eligible portfolio company to register the securities under the 1933 Act, in some cases at our expense. We will generally negotiate net issuance provisions in the warrants, which will allow us to receive upon exercise of the warrant without payment of any cash a net amount of shares determined by the increase in the value of the issuer's stock above the exercise price stated in the warrant.
Liquidation Value of Assets - Although we do not intend to operate as an asset-based lender, the prospective liquidation value of the assets, if any, collateralizing any debt securities that we hold will be an important factor in our credit analysis. We will emphasize both tangible assets, such as:
o accounts receivable, o inventory, and o equipment,
and intangible assets, such as:
o intellectual property, o customer lists, o networks, and o databases.
INVESTMENT PROCESS
Due Diligence - If a target company generally meets the characteristics described above, we will perform initial due diligence, including:
o company and technology assessments, o evaluation of existing management team, o market analysis, o competitive analysis, o evaluation of management, risk analysis and transaction size, o pricing, and o structure analysis.
Much of this work will be done by management and professionals who are well known by management. The criteria delineated above provide general parameters for our investment decisions. We intend to pursue an investment strategy by further imposing such criteria and reviews that best insures the value of our investments. As unique circumstances may arise or be uncovered, not all of such criteria will be followed in each instance but the process provides a guideline by which investments can be prudently made and managed. Upon successful completion of the preliminary evaluation, we will decide whether to deliver a non-binding letter of intent and move forward towards the completion of a transaction.
In our review of the management team, we look at the following:
o Interviews with management and significant shareholders, including any financial or strategic sponsor; o Review of financing history; o Review of management's track record with respect to: o product development and marketing, o mergers and acquisitions, o alliances, o collaborations, o research and development outsourcing and other strategic activities; o Assessment of competition; and o Review of exit strategies.
In our review of the financial conditions, we look at the following:
o Evaluation of future financing needs and plans; o Detailed analysis of financial performance; o Development of pro forma financial projections; and o Review of assets and liabilities, including contingent liabilities, if any, and legal and regulatory risks.
In our review of the products and services of the portfolio company, we look at the following:
o Evaluation of intellectual property position; o Review of existing customer or similar agreements and arrangements; o Analysis of core technology; o Assessment of collaborations;
o Review of sales and marketing procedures; and o Assessment of market and growth potential.
Upon completion of these analyses, we will conduct on-site visits with the target company's management team. Also, in cases in which a target company is at a mature stage of development and if other matters that warrant such an evaluation, we will obtain an independent appraisal of the target company.
ONGOING RELATIONSHIPS WITH PORTFOLIO COMPANIES
Monitoring - We will continuously monitor our portfolio companies in order to determine whether they are meeting our financing criteria and their respective business plans. We may decline to make additional investments in portfolio companies that do not continue to meet our financing criteria. However, we may choose to make additional investments in portfolio companies that do not do so, but we believe that they will nevertheless perform well in the future.
We will monitor the financial trends of each portfolio company to assess the appropriate course of action for each company and to evaluate overall portfolio quality. Our management team and consulting professionals, who are well known by our management team, will closely monitor the status and performance of each individual company on at least a quarterly and, in some cases, a monthly basis.
We will use several methods of evaluating and monitoring the performance and fair value of our debt and equity positions, including but not limited to the following:
o Assessment of business development success, including product development, financings, profitability and the portfolio company's overall adherence to its business plan; o Periodic and regular contact with portfolio company management to discuss financial position, requirements and accomplishments; o Periodic and regular formal update interviews with portfolio company management and, if appropriate, the financial or strategic sponsor; o Attendance at and participation in board meetings; o Review of monthly and quarterly financial statements and financial projections for portfolio companies.
Managerial Assistance - As a business development company, we will offer, and in many cases may provide, significant managerial assistance to our portfolio companies. This assistance will typically involve:
o monitoring the operations of our portfolio companies, o participating in their board and management meetings, o consulting with and advising their officers, and o providing other organizational and financial guidance.
INVESTMENT AMOUNTS
The amount of funds committed to a portfolio company and the ownership percentage received will vary depending on the maturity of the portfolio company, the quality and completeness of the portfolio company's management team, the perceived business opportunity, the capital required compared to existing capital, and the potential return. Although investment amounts will vary considerably, we expect that the average investment, including follow-on investments, will be between $25,000 and $1,000,000.
COMPETITION
Our primary competitors to provide financing to target companies will include private equity and venture capital funds, other equity and non-equity based investment funds and investment banks and other sources of financing, including traditional financial services companies such as commercial banks and specialty finance companies. Many of these entities have substantially greater financial and managerial resources than we will have. We believe that our competitive advantage with regard to quality target companies relates to our ability to negotiate flexible terms and to complete our review process on a timely basis. We cannot assure you that we will be successful in implementing our strategies.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of Operations section discusses our condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed financial statements and the reported amounts of revenues and expenses during the reporting periods. On an on-going basis, we will evaluate our estimates and judgments, including those related to revenue recognition, valuation of investments in portfolio companies, accrued expenses, financing operations, contingencies and litigation. We will base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources, such as the investments in portfolio companies.
RESULTS OF OPERATIONS
Year ended December 31, 2006 as compared to the year ended December 31, 2005 -
We filed a notification on Form N54a with the SEC to elect to become a BDC on February 14, 2006. Prior to that time we operated as a business consulting company.
As of December 31, 2006, we have not established any revenue from our investments in portfolio companies. We realized $40,000 in consulting revenue in
2006 before we began operating as a BDC. We had $310,215 in consulting income in 2005. The decline in revenue is primarily due to our change in business.
During 2006, we had total expenses of $52,716 after becoming a BDC and $46,376 before becoming a BDC, a total of $99,092. In 2005, we had net expenses of $251,702 or $152,610 more than in 2006. The decline in expenses is primarily the result of eliminating the $96,000 consulting expense for 2005.
We sold investments in 2005 for $15,600 and recognized a gain of $8,100 before we became a business development company. This amount is included in net expenses since it occurred before we became a BDC.
Income tax expense attributed to operations amounted to ($380) in 2006 as compared to $12,371 in 2005. The 2006 tax expense included an under-accrual of $10,605 from 2005 relating to a change in the effective rate which resulted from our being a member of a controlled group for Federal income tax purposes.
We recognized unrealized depreciation of $46,512 from our investments in portfolio companies in 2006. We recorded a valuation allowance equal to the expected deferred tax benefit from the unrealized loss. We used a different accounting method in 2005.
Year ended December 31, 2005 as compared to the year ended December 31, 2004 -
We realized $310,215 in consulting revenue in 2005 and had $479,210 in consulting income in 2004. Our consulting revenue fluctuated primarily due to the size of contracts we obtained and the number of contracts. Generally, expenses tended to fluctuate at similar rates.
During 2005, we had total expenses of $251,702 and in 2004 we had expenses of $460,998 or $209,296 more than in 2005. The decline in expenses is primarily the result of lower revenues which corresponded to a reduction of $42,390 in consulting expense, a reduction of $85,818 in professional fees and a reduction of $87,228 in other general and administrative expenses.
We sold investments in 2005 and 2004 and recognized a gain of $8,100 and a loss of $875, respectively, before we became a business development company. This amount is included in net expenses since it occurred before we became a BDC.
Income tax expense attributed to operations amounted to 12,371 in 2005 as compared to $3,451 in 2004. Our net income before income taxes was $40,311 lower in 2004 than in 2005.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2006, we had total assets of $42,423 as compared to total assets of $131,198 at December 31, 2005. During 2006, cash decreased $55,313 to $5,066 and investments decreased $45,512 from $66,112 to $20,600, which represents the majority of the decline in total assets of $88,775.
Liabilities have increased $16,449 during 2006 from $11,353 at year-end 2005 to $27,802 as of December 31, 2006; this change is the result of our paying the federal income taxes payable balance at December 31, 2005, and borrowing $25,000 from Shocker during 2006.
Accordingly, net assets decreased from $119,845 to $14,621 during the year ended December 31, 2006. The decrease in net assets is primarily due to operating losses of $58,712 and an increase in unrealized depreciation of investments in the amount of $46,512 during the year ended December 31, 2006.
NET ASSET VALUE
As a Business Development Company, certain of our activities and disclosures are made in reference to Net Asset Value which is the value of our portfolio assets less debt and preferred stock. This may be viewed, simply and generalized, as the value of our assets to our common shareholders. As of the date of the financial information in this report, the value of our portfolio of assets including investments in equity securities, receivables and cash is $41,423 and from this, are subtracted liabilities and debts of $27,802. There are no shares of preferred stock outstanding but the rights of preferred stockholders would be included if there were. The Net Asset Value is therefore $13,621. The Net Asset Value per Share is $.0014.
OFF BALANCE SHEET ARRANGEMENTS
o None.
CONTRACTUAL OBLIGATIONS
o None.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market rates and prices. We are primarily exposed to equity price risk. The following is a discussion of our equity market risk.
Equity price risk arises from exposure to securities that represent an ownership interest in our portfolio companies. The value of our equity securities and our other investments are based on quoted market prices or our Board of Directors' good faith determination of their fair value (which is based, in part, on quoted market prices). Market prices of common equity securities, in general, are subject to fluctuations, which could cause the amount to be realized upon sale or exercise of the instruments to differ significantly from the current reported value. The fluctuations may result from perceived changes in the underlying economic characteristics of our portfolio companies, the relative price of alternative investments, general market conditions and supply and demand imbalances for a particular security.
Basis of presentation
The preparation of financial statements in conformity with Generally Accepted Accounting Principles 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 the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INTERIM CAPITAL CORP.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM....................48
STATEMENTS OF NET ASSETS...................................................49
STATEMENTS OF OPERATIONS...................................................50
STATEMENTS OF CASH FLOWS...................................................51
STATEMENTS OF CHANGES IN NET ASSETS........................................52
SCHEDULE OF INVESTMENTS....................................................53
NOTES TO FINANCIAL STATEMENTS..............................................54-61
MOORE & ASSOCIATES, CHARTERED ACCOUNTANTS AND ADVISORS PCAOB REGISTERED
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Interim Capital Corp. Las Vegas, Nevada
We have audited the accompanying statements of net assets of Interim Capital Corp. including the schedule of investments as of December 31, 2006 and 2005 and the related statements of operations, cash flows and changes in net assets for the three years ended December 31, 2006. These financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards of the Public Company Accounting Oversight Board (PCAOB). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and schedules of investments referred to above present fairly, in all material respects, the financial position of Interim Capital Corp. as of December 31, 2006 and 2005, and the results of its operations, cash flows and changes in net assets for the three years ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.
Moore & Associates, Chartered
/s/ Moore & Associates, Chartered
February 14, 2007
See accompanying notes to financial statements.
See accompanying notes to financial statements.
See accompanying notes to financial statements.
See accompanying notes to financial statements.
See accompanying notes to financial statements.
INTERIM CAPITAL CORP. NOTES TO FINANCIAL STATEMENTS
1. GENERAL ORGANIZATION AND BUSINESS
Interim Capital Corp. (the Company) was incorporated under the laws of the state of Nevada on November 12, 2002. The Company was formed to assist emerging companies in capital formation.
Beginning February 15, 2006, the accompanying financial statements reflect the separate accounts of Interim Capital Corp., and the related results of operations. In accordance with Article 6 of Regulation S-X under the Securities Act of 1933 and Securities Exchange Act of 1934, the Company does not consolidate portfolio company investments in which the Company has a controlling interest.
Prior to February 15, 2006, the accompanying financial statements included the accounts of the Company presented as an operating company. The board of directors of the Company valued the securities which the Company owned on February 15, 2006, at their cost, which was equal to their market value at the time. Accordingly, there was no cumulative effect recognition in the accompanying financial statements upon becoming an investment company.
Although the nature of the Company's operations and its reported financial position, results of operations, and its cash flows are dissimilar for the periods prior to and subsequent to its becoming an investment company, its financial position for the years ended December 31, 2006 and 2005 and its operating results, cash flows and changes in net assets for each of the years ended December 31, 2006 (separated as indicated above), 2005 and 2004 are presented in the accompanying financial statements pursuant to Article 6 of Regulation S-X. In addition, the accompanying footnotes, although different in nature as to the required disclosures and information reported therein, are also presented as they relate to each of the above referenced periods.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES
Accounting Basis The basis is accounting principles generally accepted in the United States of America.
Conversion to a Business Development Company The operating results for the period from February 15, 2006, through December 31, 2006, reflect the Company's results as a BDC under the Investment Company Act of 1940, as amended, whereas the operating results for the two years ended December 31, 2005 and 2004, and the period from January 1, 2006 through February 14, 2006, reflect the Company's results prior to operating as a BDC under the Investment Company Act of 1940, as amended. Accounting principles used in the preparation of the financial statements for these two periods are different, and therefore, the results of operations are not directly comparable. The primary differences in accounting principles relate to the carrying value of investments - - see corresponding sections below for further discussions.
On February 15, 2006, the date the Company began operating as a BDC, the board of directors of the Company determined the fair value of its investments was
equal to the original cost. Accordingly, there was no cumulative effect recognition in the accompanying financial statements upon becoming an investment company.
Net Increase (Decrease) in Net Assets from Operations Per Share The net increase (decrease) in net assets from operations per share is calculated by dividing the Company's net earnings (loss) available to common shareholders by the weighted average number of common shares during the period. The diluted earnings (loss) per share is calculated by dividing the Company's net earnings (loss) available to common shareholders by the diluted weighted average number of shares outstanding during the period. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted each period for any potentially dilutive debt or equity
On January 1, 2004 the Company issued 3,555,000 options to purchase common stock at $0.001 per share. These options are considered non-compensatory. The options were not exercised by the end of their term on December 31, 2006 and expired.
Income Taxes The Company has not elected to be a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. Accordingly, the Company will be subject to U.S. federal income taxes on sales of investments for which the fair values are in excess of their tax basis (Note 5).
Income taxes are accounted for using an asset and liability approach for financial reporting. The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the financial statement carrying amount and the tax basis of assets and liabilities and net operating loss and tax credit carry forwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.
Advertising Advertising is expensed when incurred. Advertising expense was $1,625 and $750 for the years ended December 31, 2006 and 2005, respectively.
Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition (Prior to becoming a Business Development Company) Revenue for consulting is recorded when earned. Revenue from investment securities sold is recognized when the securities are sold.
Cash and Cash Equivalents For purposes of the statements of cash flows, the Company considers all highly liquid investments purchased with an original maturity date of three months or less to be cash equivalents. None of the Company's cash is restricted.
Valuation of Investments (As a Business Development Company) As a BDC under the Investment Company Act of 1940, all of the Company's investments must be carried at market value or fair value as determined by management for investments which do not have readily determinable market values. Prior to this conversion, only marketable debt and equity securities and certain derivative securities were required to be carried at market value.
Beginning February 15, 2006, portfolio assets for which market prices are available are valued at those prices. Securities that are traded in the over-the-counter market or on a stock exchange generally will be valued at the prevailing bid price on the valuation date. However, potential future investments by the Company may be acquired through privately negotiated transactions and, therefore, have no readily determinable market values, thus these securities would be carried at fair value as determined by management and outside professionals as necessary under the Company's valuation policy.
Currently, the valuation policy provides for management's review of the management team, financial conditions, and products and services of the portfolio company. In situations that warrant such an evaluation, an independent business valuation may be obtained.
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 management. 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 will record unrealized depreciation on investments when it believes that an investment has become impaired, including where realization of an equity security is doubtful. Conversely, the Company will record unrealized appreciation if the Company believes that the underlying portfolio company has appreciated in value and, therefore, its investment has also appreciated in value, where appropriate.
As a BDC, the Company invests primarily in illiquid securities including equity securities of private companies. The structure of each equity security is specifically negotiated to enable the Company to protect its investment and maximize its returns. The Company generally includes many terms governing ownership parameters, dilution parameters, liquidation preferences, voting rights, and put or call rights. 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 investment performance, financial condition and market changing events that impact valuation.
Comprehensive Income SFAS No. 130, Reporting Comprehensive Income, establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. It requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in financial statements and (b) display the accumulated balance of other comprehensive income separately in the equity section of the balance sheet for all periods presented. The Company's comprehensive income (loss) does not differ from its reported net income (loss).
As a BDC, the Company must report changes in the fair value of its investments outside of its operating income on its statement of operations and reflect the accumulated appreciation or depreciation in the fair value of its investments as a separate component of its stockholders' equity. This treatment is similar to the treatment required by SFAS No. 130.
Reclassifications Certain reclassifications have been made to the 2005 balances to conform with the 2006 financial statement presentation.
Recent Accounting Pronouncements
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140", to simplify and make more consistent the accounting for certain financial instruments. SFAS No. 155 amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", to permit fair value re-measurement for any hybrid financial instrument with an embedded derivative that otherwise would require bifurcation, provided that the whole instrument is accounted for on a fair value basis. SFAS No. 155 amends SFAS No. 140, "Accounting for the Impairment or Disposal of Long-Lived Assets", to allow a qualifying special-purpose entity to hold a derivative financial instrument that pertains to beneficial interest other than another derivative financial instrument. SFAS No. 155 applies to all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006, with earlier application allowed. This standard is not expected to have a significant effect on the Company's future reported financial position or results of operations.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". This statement requires all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable, and permits for subsequent measurement using either fair value measurement with changes in fair value reflected in earnings or the amortization and impairment requirements of Statement No. 140. The subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value eliminates the necessity for entities that manage the risks inherent in servicing assets and servicing liabilities with derivatives to qualify for hedge accounting treatment and eliminates the characterization of declines in fair vale as impairments or direct write-downs. SFAS No. 156 is effective for an entity's first fiscal year
beginning after September 15, 2006. The adoption of this statement is not expected to have any effect on the Company's future reported financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measures". This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, expands disclosures about fair value measurements, and applies under other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 does not require any new fair value measurements. However, the FASB anticipates that for some entities, the application of SFAS No. 157 will change current practice. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, which for the Company would be its fiscal year beginning January 1, 2008. The Company is currently evaluating the impact of SFAS No. 157 but does not expect that it will have a material impact on its financial statements.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans." This Statement requires an employer to recognize the over funded or under funded status of a defined benefit post retirement plant (other than a multiemployer plan) as an asset or liability in its statement of financial position, and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. SFAS No. 158 is effective for fiscal years ending after December 15, 2006. The Company does not expect that the implementation of SFAS No. 158 will have any impact on its financial position and results of operations.
In September 2006, the SEC issued Staff Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements." SAB No. 108 addresses how the effects of prior year uncorrected misstatements should be considered when quantifying misstatements in current year financial statements. SAB No. 108 requires companies to quantify misstatements using a balance sheet and income statement approach and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. SAB No. 108 is effective for periods ending after November 15, 2006. The Company does not expect that the implementation of SAB No. 108 will have any impact on its financial position and results of operations.
3. STOCKHOLDERS' EQUITY
Common Stock During the year 2002 the Company issued to its two founders 1,000 shares of stock each for services rendered. These shares were valued at $1.00 each for a total of $2,000.
On October 10, 2003 the Company purchased from one of its founders his stock (1,000 shares) for $6,000. The Founder was paid $1,000 in 2003 and the remainder paid in 2004.
On December 31, 2005 a shareholder relinquished his shares of common stock to the Company. No value was given to the shareholder for his stock (321,000 shares). These shares have been cancelled by the transfer agent, reducing the number of issued and outstanding shares of common stock at December 31, 2005 from 10,826,000 to 10,505,000 shares.
Sales conducted under Regulation D On December 31, 2004, the Company completed an offering of shares of common stock in accordance with Regulation D, Rule 504 of the Securities Act, and the registration by qualification of the offering in the State of Nevada. The Company sold 3,225,000 shares of common stock, par value $0.001, at a price of $0.02 per share to 38 investors, of which 37 are unaffiliated shareholders of record and one is a trust managed by the Secretary, Jason Freeman. Mr. Freeman disclaims any beneficial ownership in the trust, but does exercise voting control. The 37 non-affiliated shareholders hold 3,125,000 shares of the common stock. The one affiliated shareholder holds 100,000 shares of common stock. The offering was sold for $64,500 in cash. All investors were, at the time of purchase, residents of the State of Nevada or the complete offer and sale of the security was conducted in the State of Nevada as per their guidelines.
This offering was made in reliance upon an exemption from the registration provisions of the Securities Act of 1933, as amended, in accordance with Regulation D, Rule 504 of the Act. In addition, this offering was on a best efforts basis.
4. RELATED PARTY TRANSACTIONS
The officers and directors of the Company are involved in other business activities and may, in the future, become involved in other business opportunities as they become available, The officers and directors may face a conflict in selecting between the Company and their other business interests. The Company has not formulated a policy for the resolution of such conflicts.
During the year ended December 31, 2006, the Company received a non-interest bearing advance from a company related to its principal shareholder.
5. PROVISION FOR INCOME TAXES
The Company provides for income taxes under Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. SFAS No. 109 requires the use of an asset and liability approach in accounting for income taxes. Deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities and the tax rates in effect when these differences are expected to reverse.
SFAS No. 109 requires the reduction of deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. For the years 2003 and prior, In the Company's opinion, it was uncertain whether they will generate sufficient taxable income in the future to fully utilize the net deferred tax asset. Accordingly, a valuation allowance equal to the deferred tax asset has been recorded.
A reconciliation of income tax expense at the statutory federal rate of 34% to income tax expense at the Company's effective tax rate for the period from February 15, 2006 to December 31, 2006, the period from January 1, 2006 to February 14, 2006, and for each of the years ended December 31, 2005 and 2004 is as follows.
At December 31, 2006 and 2005, significant components of the Company's deferred tax assets (benefits) are summarized below.
12/31/2006 12/31/2005 ---------- ----------
Deferred Tax Assets: Marketable securities $ 15,800 $ -- Less Valuation Allowance (15,800) -- ---------- ----------
---------- ----------
Deferred Tax Liabilities -- -- ---------- ----------
Net Deferred Tax Assets $ -- $ -- ========== ==========
Income tax refunds receivable at December 31, 2006, consist of the following:
NOL carryback from 2006 to 2004 $ 3,451 NOL carryback from 2006 to 2005 7,162 -------- Total NOL carrybacks 10,613 Prepaid 2006 income tax 1,910 -------- Income tax refunds receivable $ 12,523 ========
6. OPTIONS
On January 1, 2004 the Company issued options to purchase its common stock to two of its new employees and a business trust.
Number of shares Option Purchase Price ---------------- --------------------- 1,200,000 $0.001 1,200,000 0.001 1,155,000 0.001
These non-compensatory options vested 50% on July 1, 2004 and 100% on December 31, 2004. They expired on December 31, 2006.
7. INVESTMENTS
The Company's investments, all of which are unaffiliated, as of December 31, 2006, are included in the Schedule of Investments.
Prior to February 15, 2006 and becoming a BDC, the Company carried its investments in equity securities at cost. These shares were purchased, for cash, in private transactions . Due to the limited marketability and extremely volatile prices of theses thinly traded securities, the Company felt a reasonable fair market value was not readily available. However, the Company disclosed in the notes to the financial statements the potential unrealized gain or loss based on fair market value, as determined by the most recent close price as quoted on the balance sheet date, if available, otherwise valued at cost.
Investments at December 31, 2006 and December 31, 2005, may be summarized as follows:
Cost Fair Value
Balance, December 31, 2005 $ 66,112 $ 66,112 Acquisition 1,000 1,000 Write-off worthless investment (1,000) (1,000) Investment depreciation -- (46,512) ---------- ---------- Balance, December 31, 2006 $ 66,112 $ 19,600 ========== ==========
Investments are valued at fair value as determined by the board of directors. The values assigned to these securities are based upon available information and may not reflect amounts that could be realized if the Company found it necessary to immediately sell such securities, or amounts that ultimately may be realized. Accordingly, the fair values included in the accompanying schedules of investments may differ from the values that would have been used had a ready market existed for these securities and such difference could be material. Elitegroup Ventures Nevada, Inc. is a recent real estate investment with no trading market that was unable to raise sufficient capital to initiate its business plan. Accordingly, the Company wrote off its investment of $1,000. The three remaining securities were valued at their most recent posted price as of December 31, 2006.
(1) Periods of less than one year are not annualized. There is no market for the common stock. Accordingly, the Company has used the price at which common stock was last sold for all periods presented as the market value.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A: CONTROLS AND PROCEDURES
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officer, as appropriate to allow timely decisions regarding required disclosure.
Evaluation of disclosure and controls and procedures
Based on their evaluation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this annual report on Form 10-KSB the Company's chief executive officer has concluded that the Company's disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and are operating in an effective manner.
Changes in internal controls over financial reporting
There were no changes in the Company's internal controls over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
ITEM 9B: OTHER INFORMATION
None.
PART III
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table includes the names, ages and positions of our directors and executive officers as of December 31, 2006. A summary of the background and experience of each of these individuals immediately follows the table.
The following sets forth certain information with respect to executive officers, directors, key employees and advisors of ICC as of December 31, 2006:
NAME AGE POSITION OFFICER SINCE - ---- --- -------- -------------
Mark Lindberg 39 President, Director 2002 Chief Financial Officer
Jason Freeman 31 Vice President 2003 Director
Mark Lindberg has been President, Chief Financial Officer, a Director, and a stockholder of Interim Capital Corp. since November 2002. Mr. Lindberg is also the Audit Committee Financial Expert for the Company although he is not independent. Since 1996 he has served as an officer and director of several publicly traded companies, many in the start-up or development phase. Between 1991 and 1996, he was an executive with National Health Care Discount, Inc., Dallas, a direct marketer of health care and wellness services. An accounting graduate of Baker University, Baldwin City, Kansas, he began his business career as a tax specialist with the worldwide accounting firm of Deloitte and Touche.
Jason Freeman is Vice President and a Director of the Company and has been instrumental in assisting with investor relations development, business plan/marketing plan development, and strategic business planning for private and public companies. He also has 8 years experience with Marketing & Management in the retail industry. Mr. Freeman has also consulted with various companies, both public and private, on ways to be more efficient in their use of capital and manpower, assisting management and sales staff in mapping out plans and strategies for companies to reach specific goals and thresholds. Mr. Freeman graduated from Texas A & M University at Commerce in 1998.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires our officers and directors, and persons who own more than 10% of a registered class of our equity securities, to file reports of ownership and change in ownership with the SEC. Our officers, directors and greater than 10% stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. We believe that from January 1, 2006 through December 31, 2006, the filing requirements applicable to our officers, directors and greater than 10% stockholders were timely met.
Our board of directors has determined that it does not have an independent financial expert on its Audit Committee. Due to the limited transactions and current circumstances, the board has determined that it is not financially prudent to have an audit committee. Once a merger candidate is discovered or operations for the Company expand, the board will include a financial expert on its Audit Committee.
CODE OF ETHICS
We have adopted a code of ethics for our officers and directors. We will provide to any person without charge, upon written request to our above address, a copy of such code of ethics.
ITEM 11: EXECUTIVE COMPENSATION
The following table sets forth the cash and other compensation we paid during the last three fiscal years to our chief executive officer, president and other individuals who served as executive officers and whose total compensation was $100,000 or more.
Name and Principal Position Year Salary Total - --------------------------- ---- ------ -----
Mark Lindberg 2006 $ 25,000 $ 25,000 President, CEO, CFO and 2005 25,000 25,000 Director 2004 25,000 25,000
Jason Freeman 2006 6,000 6,000 Vice President and Director 2005 6,000 6,000 2004 5,000 5,000
Required columns for bonus, stock awards, option awards, non-entity incentive plan compensation, change in pension value and nonqualified deferred compensation earnings and all other compensation are omitted from the table above as the amounts are all zero.
EMPLOYMENT AGREEMENTS
The Company does not have any current employment agreements with its officers and directors. The company intends to pay its Executives and Directors salaries, wages, or fees commensurate with experience and industry standards in relationship to the success of the company.
(a) Grants of plan-based awards table
There were no grants of plan-based awards during the year for the named individuals.
(b) Outstanding equity awards at fiscal year-end table
There were no outstanding equity awards at fiscal year-end for the named individuals.
(c) Option exercises and stock vested table
There were no option exercises during the year and no stock vested at fiscal year-end for the named individuals. Mr. Freeman had an option for 1,200,000 shares with an exercise price of $.001 which expired on December 31, 2006.
(d) Pension benefits
There are no pension plans.
(e) Nonqualified defined contribution and other nonqualified deferred compensation plans
There are no nonqualified defined contribution or other nonqualified deferred compensation plans.
(f) Potential payments upon termination or changes-in-control
There are no potential payments upon termination or changes-in-control for the named individuals.
(g) Compensation of directors
Mr. Lindberg and Mr. Freeman are the Company's two remaining directors. Ms. Thompson was a director and secretary of the Company until she resigned in June 2006. Directors are not separately compensated as directors and their compensation is included in total compensation in the table above.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information as of December 31, 2006 with respect to the beneficial ownership of the Company's Common Stock by all persons known by the Company to be beneficial owners of more than 5% of any such outstanding classes, and by each director and executive officer, and by all officers and directors as a group. Unless otherwise specified, the named beneficial owner has, to the Company's knowledge, sole voting and investment power. No beneficial owner, as defined by NASD Rule 2720(b)(2), of the Company's Common Stock has any direct or indirect affiliation or association with any NASD member.
Title of Number of % of Class Name of Beneficial Owner (1) Shares Class ----- ---------------------------- ------ -----
Common Mark Lindberg 1,000 .01% Stock President
Common Shocker 200 Index, LP (3) 7,600,000 72.35% Stock Attn: Jason Freeman
Common Jason Freeman -- -- Stock Vice-President
Common BBX Unit Investment Business Trust(2) 100,000 .95% Stock
Common Officers and Directors as a Group 7,701,000 73.31% Stock (2) persons
1. The address of Mark Lindberg, Shocker 200 Index, LP, Jason Freeman, and BBX UIT is c/o Interim Capital Corp., 3960 Howard Hughes Parkway, Suite 500, Las Vegas, Nevada 89109. 2. BBX Unit Investment Business Trust is a trust organized under the laws of Nevada and its general partner is Pecos Financial, LLC, a Texas limited liability company. Jason Freeman is president of Pecos Financial and is deemed to control the Trust for the benefit of the trust unit holders. Jason Freeman is the sole member of Pecos Financial, but does not personally own any interest in the BBX UIT. 3. Shocker 200 Index, LP is a limited partnership whose general partner is also Pecos Financial. Jason Freeman is the sole member of Pecos Financial and is deemed to control the limited partnership for the benefit of the limited partners, but does not personally own any interest in Shocker 200 Index, LP.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
In lieu of cash consideration for the officers and directors, we issued 7,600,000 shares of common stock to ACL Consulting Corp, an entity controlled by the president of the Company, at par value $0.001, for total consideration of $7,600. ACL sold this interest in March 2006 to Shocker 200 Index, LP, whose general partner is Pecos Financial, LLC. Jason Freeman is the sole member of Pecos Financial and is deemed to control the limited partnership for the benefit of the limited partners, but does not personally own any interest in Shocker 200 Index, LP.
The Company issued options to purchase 1,200,000 shares, each, to Chasity Thompson, a former director, and Jason Freeman, at par value $0.001. The Company also issued 1,155,000 options to purchase common stock to the BBX Unit Investment Business Trust at par value $0.001. Jason Freeman is the President of the trustee of the BBX UIT and Pecos Financial, but disclaims any beneficial ownership in the trust. Mr. Freeman does have control over the sale of the UIT's shares in the Company. These options vested 50% on July 1, 2004 and 100% on December 31, 2004. None of the options were exercised by the end of their term and expired on December 31, 2006.
During the year ended December 31, 2006, the Company received a non-interest bearing advance from a company related to its principal shareholder.
We rent an office located at 3960 Howard Hughes Parkway, Suite 500 in Las Vegas, Nevada and pay $200.00 a month for rent on a month to month basis.
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees. The aggregate fees billed for professional services rendered by our current principal accountants for the audit of our annual financial statements and review of our quarterly financial statements through January 20, 2007, were $1,500 and $3,500 for the years ended December 31, 2006 and 2005, respectively.
Audit-Related Fees: None
Tax Fees: The aggregate fees billed for professional services rendered by our current principal accountants for the audit of our annual financial statements and review of our quarterly financial statements were $11,889 and $500 for the years ended December 31, 2004 and 2003, respectively.
All Other Fees: None
PART IV
ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report:
1. Financial Statements - The following financial statements of Interim Capital Corp. are contained in Item 8 of this Form 10-K: o Report of Independent Registered Public Accountant o Statements of Net Assets at December 31, 2006 and 2005 o Statements of Operations - For the fiscal years ended December 31, 2006, 2005 and 2004 o Statements of Cash Flows - For the fiscal years ended December 31, 2006, 2005 and 2004 o Statements of Changes in Net Assets - For the fiscal years ended December 31, 2006, 2005 and 2004 o Schedules of Investments - At December 31, 2006 and o Notes to the Financial Statements o Financial Highlights - For the fiscal years ended December 31, 2006, 2005 and 2004
2. Financial Statement Schedules were omitted, as they are not required or are not applicable, or the required information is included in the Financial Statements.
3. Exhibits - The following exhibits are filed with this report or are incorporated herein by reference to a prior filing, in accordance with Rule 12b-32 under the Securities Exchange Act of 1934.
Exhibit Description - ------- -----------
Exhibit 31 - Certificate of Principal Executive Officer and Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
Exhibit 32 - Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
SIGNATURE
Pursuant to the requirements of Section 3 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DATE: February 14, 2007 INTERIM CAPITAL CORP.
BY: /s/ Mark Lindberg --------------------------- Mark Lindberg President, CEO and CFO
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
February 14, 2007 /s/ Mark Lindberg ------------------------------ Mark Lindberg, President, CEO, CFO and Director
February 14, 2007 /s/ Jason Freeman ------------------------------ Jason Freeman, Vice-President And Director
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This information statement contains forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential", "continue" or the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. There are a number of factors that could cause our actual results to differ materially from those indicated by such forward-looking statements.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, we do not assume responsibility for the accuracy and completeness of such forward-looking statements. We are under no duty to update any of the forward-looking statements after the date of this information statement to conform such statements to actual results. Management's discussion and analysis should be read in conjunction with our financial statements and the notes herein.
OUR PLAN OF OPERATION FOR THE NEXT TWELVE MONTHS - ------------------------------------------------
MANAGEMENT'S ANALYSIS OF BUSINESS
OUR ABILITY TO DEVELOP OUR BUSINESS PLAN IS CONTINGENT UPON OUR ABILITY TO RAISE SUFFICIENT FUNDS TO INVEST IN PORTFOLIO COMPANIES AND TO COVER OUR OPERATING OVERHEAD REQUIREMENTS.
We will have significant relative flexibility in selecting and structuring our investments. We will not be subject to many of the regulatory limitations that govern traditional lending institutions such as banks. We will seek to structure our investments so as to take into account the uncertain and potentially variable financial performance of our portfolio companies. This should enable our portfolio companies to retain access to committed capital at different stages in their development and eliminate some of the uncertainty surrounding their capital allocation decisions. We will calculate rates of return on invested capital based on a combination of up-front commitment fees, current and deferred interest rates and residual values, which may take the form of common stock, warrants, equity appreciation rights or future contract payments. We believe that this flexible approach to structuring investments will facilitate positive, long-term relationships with our portfolio companies and enable us to become a preferred source of capital to them. We also believe our approach should enable debt financing to develop into a viable alternative capital source for funding the growth of target companies that wish to avoid the dilutive effects of equity financings for existing equity holders.
Longer Investment Horizon - We will not be subject to periodic capital return requirements. These requirements, which are standard for most private equity and venture capital funds, typically require that these funds return to investors the initial capital investment after a pre-agreed time, together with any capital gains on such capital investment. These provisions often force such
funds to seek the return of their investments in portfolio companies through mergers, public equity offerings or other liquidity events more quickly than they otherwise might, which can result in a lower overall return to investors and adversely affect the ultimate viability of the affected portfolio companies.
Because we may invest in the same portfolio companies as these funds, we are subject to these risks if these funds demand a return on their investments in the portfolio companies. We believe that our flexibility to take a longer-term view should help us to maximize returns on our invested capital while still meeting the needs of our portfolio companies.
Established Deal Sourcing Network - We believe that, through our management and directors, we have solid contacts and sources from which to generate investment opportunities. These contacts and sources include:
o public and private companies, o investment bankers, o attorneys, o accountants, o consultants, and o commercial bankers.
However, we cannot assure you that such relationships will lead to the origination of debt or other investments.
INVESTMENT CRITERIA
As a matter of policy, we will not purchase or sell real estate or interests in real estate or real estate investment trusts except that we may:
o purchase and sell real estate or interests in real estate in connection with the orderly liquidation of investments, or in connection with foreclosure on collateral; o own the securities of companies that are in the business of buying, selling or developing real estate; or o finance the purchase of real estate by our portfolio companies.
We will limit our investments in more traditional securities (stock and debt instruments) and will not, as a matter of policy:
o sell securities short except with regard to managing the risks associated with publicly-traded securities issued by our portfolio companies;
o purchase securities on margin (except to the extent that we may purchase securities with borrowed money); or
o engage in the purchase or sale of commodities or commodity contracts, including futures contracts except where necessary in working out distressed loans; or in those investment situations where hedging the risks associated with interest rate fluctuations is appropriate, and, in such cases, only after all necessary registrations or exemptions from registration with the Commodity Futures Trading Commission have been obtained.
Prospective Portfolio Company Characteristics - We have identified several criteria that we believe will prove important in seeking our investment objective with respect to target companies. These criteria will provide general guidelines for our investment decisions; however, we caution readers that not all of these criteria will be met by each prospective portfolio company in which we choose to invest.
Experienced Management - We will generally require that our portfolio companies have an experienced president or management team. We will also require the portfolio companies to have in place proper incentives to induce management to succeed and to act in concert with our interests as investors, including having significant equity interests. We intend to provide assistance in this area either supervising management or providing management for our portfolio companies.
Products or Services - We will seek companies that are involved in products or services that do not require significant additional capital or research expenditures. In general, we will seek target companies that make innovative use of proven technologies or methods.
Proprietary Advantage - We expect to favor companies that can demonstrate some kind of proprietary sustainable advantage with respect to their competition. Proprietary advantages include, but are not limited to:
o patents or trade secrets with respect to owning or manufacturing its products, and o a demonstrable and sustainable marketing advantage over its competition.
Marketing strategies impose unusual burdens on management to be continuously ahead of its competition, either through some kind of technological advantage or by being continuously more creative than its competition.
Profitable or Nearly Profitable Operations Based on Cash Flow from Operations - We will focus on target companies that are profitable or nearly profitable on an operating cash flow basis. Typically, we would not expect to invest in start-up companies unless there is a clear exit strategy in place.
Potential for Future Growth - We will generally require that a prospective target company, in addition to generating sufficient cash flow to cover its operating costs and service its debt, demonstrate an ability to increase its revenues and operating cash flow over time. The anticipated growth rate of a prospective target company will be a key factor in determining the value that we ascribe to any warrants or other equity securities that we may acquire in connection with an investment in debt securities.
Exit Strategy - Prior to making an investment in a portfolio company, we will analyze the potential for that company to increase the liquidity of its common equity through a future event that would enable us to realize appreciation, if any, in the value of our equity interest. Liquidity events may include:
o an initial public offering, o a private sale of our equity interest to a third party,
o a merger or an acquisition of the portfolio company, or o a purchase of our equity position by the portfolio company or one of its stockholders.
We may acquire warrants to purchase equity securities and/or convertible preferred stock of the eligible portfolio companies in connection with providing financing. The terms of the warrants, including the expiration date, exercise price and terms of the equity security for which the warrant may be exercised, will be negotiated individually with each eligible portfolio company, and will likely be affected by the price and terms of securities issued by the eligible portfolio company to other venture capitalists and other holders. We anticipate that most warrants will be for a term of five to ten years, and will have an exercise price based upon the price at which the eligible portfolio company most recently issued its equity securities or, if a new equity offering is imminent, the price at which such new equity securities will be offered. The equity securities for which the warrant will be exercised generally will be common stock of which there may be one or more classes or convertible preferred stock. Substantially all the warrants and underlying equity securities will be restricted securities under the 1933 Act at the time of the issuance. We will generally negotiate for registration rights with the issuer that may provide:
o "piggyback" registration rights, which will permit us under certain circumstances, to include some or all of the securities owned by us in a registration statement filed by the eligible portfolio company, or o in circumstances, "demand" registration rights permitting us under certain circumstances, to require the eligible portfolio company to register the securities under the 1933 Act, in some cases at our expense. We will generally negotiate net issuance provisions in the warrants, which will allow us to receive upon exercise of the warrant without payment of any cash a net amount of shares determined by the increase in the value of the issuer's stock above the exercise price stated in the warrant.
Liquidation Value of Assets - Although we do not intend to operate as an asset-based lender, the prospective liquidation value of the assets, if any, collateralizing any debt securities that we hold will be an important factor in our credit analysis. We will emphasize both tangible assets, such as:
o accounts receivable, o inventory, and o equipment,
and intangible assets, such as:
o intellectual property, o customer lists, o networks, and o databases.
INVESTMENT PROCESS
Due Diligence - If a target company generally meets the characteristics described above, we will perform initial due diligence, including:
o company and technology assessments, o evaluation of existing management team, o market analysis, o competitive analysis, o evaluation of management, risk analysis and transaction size, o pricing, and o structure analysis.
Much of this work will be done by management and professionals who are well known by management. The criteria delineated above provide general parameters for our investment decisions. We intend to pursue an investment strategy by further imposing such criteria and reviews that best insures the value of our investments. As unique circumstances may arise or be uncovered, not all of such criteria will be followed in each instance but the process provides a guideline by which investments can be prudently made and managed. Upon successful completion of the preliminary evaluation, we will decide whether to deliver a non-binding letter of intent and move forward towards the completion of a transaction.
In our review of the management team, we look at the following:
o Interviews with management and significant shareholders, including any financial or strategic sponsor; o Review of financing history; o Review of management's track record with respect to: o product development and marketing, o mergers and acquisitions, o alliances, o collaborations, o research and development outsourcing and other strategic activities; o Assessment of competition; and o Review of exit strategies.
In our review of the financial conditions, we look at the following:
o Evaluation of future financing needs and plans; o Detailed analysis of financial performance; o Development of pro forma financial projections; and o Review of assets and liabilities, including contingent liabilities, if any, and legal and regulatory risks.
In our review of the products and services of the portfolio company, we look at the following:
o Evaluation of intellectual property position; o Review of existing customer or similar agreements and arrangements; o Analysis of core technology; o Assessment of collaborations;
o Review of sales and marketing procedures; and o Assessment of market and growth potential.
Upon completion of these analyses, we will conduct on-site visits with the target company's management team. Also, in cases in which a target company is at a mature stage of development and if other matters that warrant such an evaluation, we will obtain an independent appraisal of the target company.
ONGOING RELATIONSHIPS WITH PORTFOLIO COMPANIES
Monitoring - We will continuously monitor our portfolio companies in order to determine whether they are meeting our financing criteria and their respective business plans. We may decline to make additional investments in portfolio companies that do not continue to meet our financing criteria. However, we may choose to make additional investments in portfolio companies that do not do so, but we believe that they will nevertheless perform well in the future.
We will monitor the financial trends of each portfolio company to assess the appropriate course of action for each company and to evaluate overall portfolio quality. Our management team and consulting professionals, who are well known by our management team, will closely monitor the status and performance of each individual company on at least a quarterly and, in some cases, a monthly basis.
We will use several methods of evaluating and monitoring the performance and fair value of our debt and equity positions, including but not limited to the following:
o Assessment of business development success, including product development, financings, profitability and the portfolio company's overall adherence to its business plan; o Periodic and regular contact with portfolio company management to discuss financial position, requirements and accomplishments; o Periodic and regular formal update interviews with portfolio company management and, if appropriate, the financial or strategic sponsor; o Attendance at and participation in board meetings; o Review of monthly and quarterly financial statements and financial projections for portfolio companies.
Managerial Assistance - As a business development company, we will offer, and in many cases may provide, significant managerial assistance to our portfolio companies. This assistance will typically involve:
o monitoring the operations of our portfolio companies, o participating in their board and management meetings, o consulting with and advising their officers, and o providing other organizational and financial guidance.
INVESTMENT AMOUNTS
The amount of funds committed to a portfolio company and the ownership percentage received will vary depending on the maturity of the portfolio company, the quality and completeness of the portfolio company's management team, the perceived business opportunity, the capital required compared to existing capital, and the potential return. Although investment amounts will vary considerably, we expect that the average investment, including follow-on investments, will be between $25,000 and $1,000,000.
COMPETITION
Our primary competitors to provide financing to target companies will include private equity and venture capital funds, other equity and non-equity based investment funds and investment banks and other sources of financing, including traditional financial services companies such as commercial banks and specialty finance companies. Many of these entities have substantially greater financial and managerial resources than we will have. We believe that our competitive advantage with regard to quality target companies relates to our ability to negotiate flexible terms and to complete our review process on a timely basis. We cannot assure you that we will be successful in implementing our strategies.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of Operations section discusses our condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed financial statements and the reported amounts of revenues and expenses during the reporting periods. On an on-going basis, we will evaluate our estimates and judgments, including those related to revenue recognition, valuation of investments in portfolio companies, accrued expenses, financing operations, contingencies and litigation. We will base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources, such as the investments in portfolio companies.
RESULTS OF OPERATIONS
Year ended December 31, 2006 as compared to the year ended December 31, 2005 -
We filed a notification on Form N54a with the SEC to elect to become a BDC on February 14, 2006. Prior to that time we operated as a business consulting company.
As of December 31, 2006, we have not established any revenue from our investments in portfolio companies. We realized $40,000 in consulting revenue in
2006 before we began operating as a BDC. We had $310,215 in consulting income in 2005. The decline in revenue is primarily due to our change in business.
During 2006, we had total expenses of $52,716 after becoming a BDC and $46,376 before becoming a BDC, a total of $99,092. In 2005, we had net expenses of $251,702 or $152,610 more than in 2006. The decline in expenses is primarily the result of eliminating the $96,000 consulting expense for 2005.
We sold investments in 2005 for $15,600 and recognized a gain of $8,100 before we became a business development company. This amount is included in net expenses since it occurred before we became a BDC.
Income tax expense attributed to operations amounted to ($380) in 2006 as compared to $12,371 in 2005. The 2006 tax expense included an under-accrual of $10,605 from 2005 relating to a change in the effective rate which resulted from our being a member of a controlled group for Federal income tax purposes.
We recognized unrealized depreciation of $46,512 from our investments in portfolio companies in 2006. We recorded a valuation allowance equal to the expected deferred tax benefit from the unrealized loss. We used a different accounting method in 2005.
Year ended December 31, 2005 as compared to the year ended December 31, 2004 -
We realized $310,215 in consulting revenue in 2005 and had $479,210 in consulting income in 2004. Our consulting revenue fluctuated primarily due to the size of contracts we obtained and the number of contracts. Generally, expenses tended to fluctuate at similar rates.
During 2005, we had total expenses of $251,702 and in 2004 we had expenses of $460,998 or $209,296 more than in 2005. The decline in expenses is primarily the result of lower revenues which corresponded to a reduction of $42,390 in consulting expense, a reduction of $85,818 in professional fees and a reduction of $87,228 in other general and administrative expenses.
We sold investments in 2005 and 2004 and recognized a gain of $8,100 and a loss of $875, respectively, before we became a business development company. This amount is included in net expenses since it occurred before we became a BDC.
Income tax expense attributed to operations amounted to 12,371 in 2005 as compared to $3,451 in 2004. Our net income before income taxes was $40,311 lower in 2004 than in 2005.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2006, we had total assets of $42,423 as compared to total assets of $131,198 at December 31, 2005. During 2006, cash decreased $55,313 to $5,066 and investments decreased $45,512 from $66,112 to $20,600, which represents the majority of the decline in total assets of $88,775.
Liabilities have increased $16,449 during 2006 from $11,353 at year-end 2005 to $27,802 as of December 31, 2006; this change is the result of our paying the federal income taxes payable balance at December 31, 2005, and borrowing $25,000 from Shocker during 2006.
Accordingly, net assets decreased from $119,845 to $14,621 during the year ended December 31, 2006. The decrease in net assets is primarily due to operating losses of $58,712 and an increase in unrealized depreciation of investments in the amount of $46,512 during the year ended December 31, 2006.
NET ASSET VALUE
As a Business Development Company, certain of our activities and disclosures are made in reference to Net Asset Value which is the value of our portfolio assets less debt and preferred stock. This may be viewed, simply and generalized, as the value of our assets to our common shareholders. As of the date of the financial information in this report, the value of our portfolio of assets including investments in equity securities, receivables and cash is $41,423 and from this, are subtracted liabilities and debts of $27,802. There are no shares of preferred stock outstanding but the rights of preferred stockholders would be included if there were. The Net Asset Value is therefore $13,621. The Net Asset Value per Share is $.0014.
OFF BALANCE SHEET ARRANGEMENTS
o None.
CONTRACTUAL OBLIGATIONS
o None.
ITEM 7A:
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market rates and prices. We are primarily exposed to equity price risk. The following is a discussion of our equity market risk.
Equity price risk arises from exposure to securities that represent an ownership interest in our portfolio companies. The value of our equity securities and our other investments are based on quoted market prices or our Board of Directors' good faith determination of their fair value (which is based, in part, on quoted market prices). Market prices of common equity securities, in general, are subject to fluctuations, which could cause the amount to be realized upon sale or exercise of the instruments to differ significantly from the current reported value. The fluctuations may result from perceived changes in the underlying economic characteristics of our portfolio companies, the relative price of alternative investments, general market conditions and supply and demand imbalances for a particular security.
Basis of presentation
The preparation of financial statements in conformity with Generally Accepted Accounting Principles 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 the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
ITEM 8:
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INTERIM CAPITAL CORP.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM....................48
STATEMENTS OF NET ASSETS...................................................49
STATEMENTS OF OPERATIONS...................................................50
STATEMENTS OF CASH FLOWS...................................................51
STATEMENTS OF CHANGES IN NET ASSETS........................................52
SCHEDULE OF INVESTMENTS....................................................53
NOTES TO FINANCIAL STATEMENTS..............................................54-61
MOORE & ASSOCIATES, CHARTERED ACCOUNTANTS AND ADVISORS PCAOB REGISTERED
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Interim Capital Corp. Las Vegas, Nevada
We have audited the accompanying statements of net assets of Interim Capital Corp. including the schedule of investments as of December 31, 2006 and 2005 and the related statements of operations, cash flows and changes in net assets for the three years ended December 31, 2006. These financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards of the Public Company Accounting Oversight Board (PCAOB). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and schedules of investments referred to above present fairly, in all material respects, the financial position of Interim Capital Corp. as of December 31, 2006 and 2005, and the results of its operations, cash flows and changes in net assets for the three years ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.
Moore & Associates, Chartered
/s/ Moore & Associates, Chartered
February 14, 2007
See accompanying notes to financial statements.
See accompanying notes to financial statements.
See accompanying notes to financial statements.
See accompanying notes to financial statements.
See accompanying notes to financial statements.
INTERIM CAPITAL CORP. NOTES TO FINANCIAL STATEMENTS
1. GENERAL ORGANIZATION AND BUSINESS
Interim Capital Corp. (the Company) was incorporated under the laws of the state of Nevada on November 12, 2002. The Company was formed to assist emerging companies in capital formation.
Beginning February 15, 2006, the accompanying financial statements reflect the separate accounts of Interim Capital Corp., and the related results of operations. In accordance with Article 6 of Regulation S-X under the Securities Act of 1933 and Securities Exchange Act of 1934, the Company does not consolidate portfolio company investments in which the Company has a controlling interest.
Prior to February 15, 2006, the accompanying financial statements included the accounts of the Company presented as an operating company. The board of directors of the Company valued the securities which the Company owned on February 15, 2006, at their cost, which was equal to their market value at the time. Accordingly, there was no cumulative effect recognition in the accompanying financial statements upon becoming an investment company.
Although the nature of the Company's operations and its reported financial position, results of operations, and its cash flows are dissimilar for the periods prior to and subsequent to its becoming an investment company, its financial position for the years ended December 31, 2006 and 2005 and its operating results, cash flows and changes in net assets for each of the years ended December 31, 2006 (separated as indicated above), 2005 and 2004 are presented in the accompanying financial statements pursuant to Article 6 of Regulation S-X. In addition, the accompanying footnotes, although different in nature as to the required disclosures and information reported therein, are also presented as they relate to each of the above referenced periods.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES
Accounting Basis The basis is accounting principles generally accepted in the United States of America.
Conversion to a Business Development Company The operating results for the period from February 15, 2006, through December 31, 2006, reflect the Company's results as a BDC under the Investment Company Act of 1940, as amended, whereas the operating results for the two years ended December 31, 2005 and 2004, and the period from January 1, 2006 through February 14, 2006, reflect the Company's results prior to operating as a BDC under the Investment Company Act of 1940, as amended. Accounting principles used in the preparation of the financial statements for these two periods are different, and therefore, the results of operations are not directly comparable. The primary differences in accounting principles relate to the carrying value of investments - - see corresponding sections below for further discussions.
On February 15, 2006, the date the Company began operating as a BDC, the board of directors of the Company determined the fair value of its investments was
equal to the original cost. Accordingly, there was no cumulative effect recognition in the accompanying financial statements upon becoming an investment company.
Net Increase (Decrease) in Net Assets from Operations Per Share The net increase (decrease) in net assets from operations per share is calculated by dividing the Company's net earnings (loss) available to common shareholders by the weighted average number of common shares during the period. The diluted earnings (loss) per share is calculated by dividing the Company's net earnings (loss) available to common shareholders by the diluted weighted average number of shares outstanding during the period. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted each period for any potentially dilutive debt or equity
On January 1, 2004 the Company issued 3,555,000 options to purchase common stock at $0.001 per share. These options are considered non-compensatory. The options were not exercised by the end of their term on December 31, 2006 and expired.
Income Taxes The Company has not elected to be a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. Accordingly, the Company will be subject to U.S. federal income taxes on sales of investments for which the fair values are in excess of their tax basis (Note 5).
Income taxes are accounted for using an asset and liability approach for financial reporting. The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the financial statement carrying amount and the tax basis of assets and liabilities and net operating loss and tax credit carry forwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.
Advertising Advertising is expensed when incurred. Advertising expense was $1,625 and $750 for the years ended December 31, 2006 and 2005, respectively.
Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition (Prior to becoming a Business Development Company) Revenue for consulting is recorded when earned. Revenue from investment securities sold is recognized when the securities are sold.
Cash and Cash Equivalents For purposes of the statements of cash flows, the Company considers all highly liquid investments purchased with an original maturity date of three months or less to be cash equivalents. None of the Company's cash is restricted.
Valuation of Investments (As a Business Development Company) As a BDC under the Investment Company Act of 1940, all of the Company's investments must be carried at market value or fair value as determined by management for investments which do not have readily determinable market values. Prior to this conversion, only marketable debt and equity securities and certain derivative securities were required to be carried at market value.
Beginning February 15, 2006, portfolio assets for which market prices are available are valued at those prices. Securities that are traded in the over-the-counter market or on a stock exchange generally will be valued at the prevailing bid price on the valuation date. However, potential future investments by the Company may be acquired through privately negotiated transactions and, therefore, have no readily determinable market values, thus these securities would be carried at fair value as determined by management and outside professionals as necessary under the Company's valuation policy.
Currently, the valuation policy provides for management's review of the management team, financial conditions, and products and services of the portfolio company. In situations that warrant such an evaluation, an independent business valuation may be obtained.
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 management. 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 will record unrealized depreciation on investments when it believes that an investment has become impaired, including where realization of an equity security is doubtful. Conversely, the Company will record unrealized appreciation if the Company believes that the underlying portfolio company has appreciated in value and, therefore, its investment has also appreciated in value, where appropriate.
As a BDC, the Company invests primarily in illiquid securities including equity securities of private companies. The structure of each equity security is specifically negotiated to enable the Company to protect its investment and maximize its returns. The Company generally includes many terms governing ownership parameters, dilution parameters, liquidation preferences, voting rights, and put or call rights. 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 investment performance, financial condition and market changing events that impact valuation.
Comprehensive Income SFAS No. 130, Reporting Comprehensive Income, establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. It requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in financial statements and (b) display the accumulated balance of other comprehensive income separately in the equity section of the balance sheet for all periods presented. The Company's comprehensive income (loss) does not differ from its reported net income (loss).
As a BDC, the Company must report changes in the fair value of its investments outside of its operating income on its statement of operations and reflect the accumulated appreciation or depreciation in the fair value of its investments as a separate component of its stockholders' equity. This treatment is similar to the treatment required by SFAS No. 130.
Reclassifications Certain reclassifications have been made to the 2005 balances to conform with the 2006 financial statement presentation.
Recent Accounting Pronouncements
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140", to simplify and make more consistent the accounting for certain financial instruments. SFAS No. 155 amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", to permit fair value re-measurement for any hybrid financial instrument with an embedded derivative that otherwise would require bifurcation, provided that the whole instrument is accounted for on a fair value basis. SFAS No. 155 amends SFAS No. 140, "Accounting for the Impairment or Disposal of Long-Lived Assets", to allow a qualifying special-purpose entity to hold a derivative financial instrument that pertains to beneficial interest other than another derivative financial instrument. SFAS No. 155 applies to all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006, with earlier application allowed. This standard is not expected to have a significant effect on the Company's future reported financial position or results of operations.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". This statement requires all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable, and permits for subsequent measurement using either fair value measurement with changes in fair value reflected in earnings or the amortization and impairment requirements of Statement No. 140. The subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value eliminates the necessity for entities that manage the risks inherent in servicing assets and servicing liabilities with derivatives to qualify for hedge accounting treatment and eliminates the characterization of declines in fair vale as impairments or direct write-downs. SFAS No. 156 is effective for an entity's first fiscal year
beginning after September 15, 2006. The adoption of this statement is not expected to have any effect on the Company's future reported financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measures". This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, expands disclosures about fair value measurements, and applies under other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 does not require any new fair value measurements. However, the FASB anticipates that for some entities, the application of SFAS No. 157 will change current practice. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, which for the Company would be its fiscal year beginning January 1, 2008. The Company is currently evaluating the impact of SFAS No. 157 but does not expect that it will have a material impact on its financial statements.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans." This Statement requires an employer to recognize the over funded or under funded status of a defined benefit post retirement plant (other than a multiemployer plan) as an asset or liability in its statement of financial position, and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. SFAS No. 158 is effective for fiscal years ending after December 15, 2006. The Company does not expect that the implementation of SFAS No. 158 will have any impact on its financial position and results of operations.
In September 2006, the SEC issued Staff Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements." SAB No. 108 addresses how the effects of prior year uncorrected misstatements should be considered when quantifying misstatements in current year financial statements. SAB No. 108 requires companies to quantify misstatements using a balance sheet and income statement approach and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. SAB No. 108 is effective for periods ending after November 15, 2006. The Company does not expect that the implementation of SAB No. 108 will have any impact on its financial position and results of operations.
3. STOCKHOLDERS' EQUITY
Common Stock During the year 2002 the Company issued to its two founders 1,000 shares of stock each for services rendered. These shares were valued at $1.00 each for a total of $2,000.
On October 10, 2003 the Company purchased from one of its founders his stock (1,000 shares) for $6,000. The Founder was paid $1,000 in 2003 and the remainder paid in 2004.
On December 31, 2005 a shareholder relinquished his shares of common stock to the Company. No value was given to the shareholder for his stock (321,000 shares). These shares have been cancelled by the transfer agent, reducing the number of issued and outstanding shares of common stock at December 31, 2005 from 10,826,000 to 10,505,000 shares.
Sales conducted under Regulation D On December 31, 2004, the Company completed an offering of shares of common stock in accordance with Regulation D, Rule 504 of the Securities Act, and the registration by qualification of the offering in the State of Nevada. The Company sold 3,225,000 shares of common stock, par value $0.001, at a price of $0.02 per share to 38 investors, of which 37 are unaffiliated shareholders of record and one is a trust managed by the Secretary, Jason Freeman. Mr. Freeman disclaims any beneficial ownership in the trust, but does exercise voting control. The 37 non-affiliated shareholders hold 3,125,000 shares of the common stock. The one affiliated shareholder holds 100,000 shares of common stock. The offering was sold for $64,500 in cash. All investors were, at the time of purchase, residents of the State of Nevada or the complete offer and sale of the security was conducted in the State of Nevada as per their guidelines.
This offering was made in reliance upon an exemption from the registration provisions of the Securities Act of 1933, as amended, in accordance with Regulation D, Rule 504 of the Act. In addition, this offering was on a best efforts basis.
4. RELATED PARTY TRANSACTIONS
The officers and directors of the Company are involved in other business activities and may, in the future, become involved in other business opportunities as they become available, The officers and directors may face a conflict in selecting between the Company and their other business interests. The Company has not formulated a policy for the resolution of such conflicts.
During the year ended December 31, 2006, the Company received a non-interest bearing advance from a company related to its principal shareholder.
5. PROVISION FOR INCOME TAXES
The Company provides for income taxes under Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. SFAS No. 109 requires the use of an asset and liability approach in accounting for income taxes. Deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities and the tax rates in effect when these differences are expected to reverse.
SFAS No. 109 requires the reduction of deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. For the years 2003 and prior, In the Company's opinion, it was uncertain whether they will generate sufficient taxable income in the future to fully utilize the net deferred tax asset. Accordingly, a valuation allowance equal to the deferred tax asset has been recorded.
A reconciliation of income tax expense at the statutory federal rate of 34% to income tax expense at the Company's effective tax rate for the period from February 15, 2006 to December 31, 2006, the period from January 1, 2006 to February 14, 2006, and for each of the years ended December 31, 2005 and 2004 is as follows.
At December 31, 2006 and 2005, significant components of the Company's deferred tax assets (benefits) are summarized below.
12/31/2006 12/31/2005 ---------- ----------
Deferred Tax Assets: Marketable securities $ 15,800 $ -- Less Valuation Allowance (15,800) -- ---------- ----------
---------- ----------
Deferred Tax Liabilities -- -- ---------- ----------
Net Deferred Tax Assets $ -- $ -- ========== ==========
Income tax refunds receivable at December 31, 2006, consist of the following:
NOL carryback from 2006 to 2004 $ 3,451 NOL carryback from 2006 to 2005 7,162 -------- Total NOL carrybacks 10,613 Prepaid 2006 income tax 1,910 -------- Income tax refunds receivable $ 12,523 ========
6. OPTIONS
On January 1, 2004 the Company issued options to purchase its common stock to two of its new employees and a business trust.
Number of shares Option Purchase Price ---------------- --------------------- 1,200,000 $0.001 1,200,000 0.001 1,155,000 0.001
These non-compensatory options vested 50% on July 1, 2004 and 100% on December 31, 2004. They expired on December 31, 2006.
7. INVESTMENTS
The Company's investments, all of which are unaffiliated, as of December 31, 2006, are included in the Schedule of Investments.
Prior to February 15, 2006 and becoming a BDC, the Company carried its investments in equity securities at cost. These shares were purchased, for cash, in private transactions . Due to the limited marketability and extremely volatile prices of theses thinly traded securities, the Company felt a reasonable fair market value was not readily available. However, the Company disclosed in the notes to the financial statements the potential unrealized gain or loss based on fair market value, as determined by the most recent close price as quoted on the balance sheet date, if available, otherwise valued at cost.
Investments at December 31, 2006 and December 31, 2005, may be summarized as follows:
Cost Fair Value
Balance, December 31, 2005 $ 66,112 $ 66,112 Acquisition 1,000 1,000 Write-off worthless investment (1,000) (1,000) Investment depreciation -- (46,512) ---------- ---------- Balance, December 31, 2006 $ 66,112 $ 19,600 ========== ==========
Investments are valued at fair value as determined by the board of directors. The values assigned to these securities are based upon available information and may not reflect amounts that could be realized if the Company found it necessary to immediately sell such securities, or amounts that ultimately may be realized. Accordingly, the fair values included in the accompanying schedules of investments may differ from the values that would have been used had a ready market existed for these securities and such difference could be material. Elitegroup Ventures Nevada, Inc. is a recent real estate investment with no trading market that was unable to raise sufficient capital to initiate its business plan. Accordingly, the Company wrote off its investment of $1,000. The three remaining securities were valued at their most recent posted price as of December 31, 2006.
(1) Periods of less than one year are not annualized. There is no market for the common stock. Accordingly, the Company has used the price at which common stock was last sold for all periods presented as the market value.
ITEM 9:
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A:
ITEM 9A: CONTROLS AND PROCEDURES
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officer, as appropriate to allow timely decisions regarding required disclosure.
Evaluation of disclosure and controls and procedures
Based on their evaluation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this annual report on Form 10-KSB the Company's chief executive officer has concluded that the Company's disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and are operating in an effective manner.
Changes in internal controls over financial reporting
There were no changes in the Company's internal controls over financial reporting or in other factors 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.
PART III
ITEM 10:
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table includes the names, ages and positions of our directors and executive officers as of December 31, 2006. A summary of the background and experience of each of these individuals immediately follows the table.
The following sets forth certain information with respect to executive officers, directors, key employees and advisors of ICC as of December 31, 2006:
NAME AGE POSITION OFFICER SINCE - ---- --- -------- -------------
Mark Lindberg 39 President, Director 2002 Chief Financial Officer
Jason Freeman 31 Vice President 2003 Director
Mark Lindberg has been President, Chief Financial Officer, a Director, and a stockholder of Interim Capital Corp. since November 2002. Mr. Lindberg is also the Audit Committee Financial Expert for the Company although he is not independent. Since 1996 he has served as an officer and director of several publicly traded companies, many in the start-up or development phase. Between 1991 and 1996, he was an executive with National Health Care Discount, Inc., Dallas, a direct marketer of health care and wellness services. An accounting graduate of Baker University, Baldwin City, Kansas, he began his business career as a tax specialist with the worldwide accounting firm of Deloitte and Touche.
Jason Freeman is Vice President and a Director of the Company and has been instrumental in assisting with investor relations development, business plan/marketing plan development, and strategic business planning for private and public companies. He also has 8 years experience with Marketing & Management in the retail industry. Mr. Freeman has also consulted with various companies, both public and private, on ways to be more efficient in their use of capital and manpower, assisting management and sales staff in mapping out plans and strategies for companies to reach specific goals and thresholds. Mr. Freeman graduated from Texas A & M University at Commerce in 1998.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires our officers and directors, and persons who own more than 10% of a registered class of our equity securities, to file reports of ownership and change in ownership with the SEC. Our officers, directors and greater than 10% stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. We believe that from January 1, 2006 through December 31, 2006, the filing requirements applicable to our officers, directors and greater than 10% stockholders were timely met.
Our board of directors has determined that it does not have an independent financial expert on its Audit Committee. Due to the limited transactions and current circumstances, the board has determined that it is not financially prudent to have an audit committee. Once a merger candidate is discovered or operations for the Company expand, the board will include a financial expert on its Audit Committee.
CODE OF ETHICS
We have adopted a code of ethics for our officers and directors. We will provide to any person without charge, upon written request to our above address, a copy of such code of ethics.
ITEM 11:
ITEM 11: EXECUTIVE COMPENSATION
The following table sets forth the cash and other compensation we paid during the last three fiscal years to our chief executive officer, president and other individuals who served as executive officers and whose total compensation was $100,000 or more.
Name and Principal Position Year Salary Total - --------------------------- ---- ------ -----
Mark Lindberg 2006 $ 25,000 $ 25,000 President, CEO, CFO and 2005 25,000 25,000 Director 2004 25,000 25,000
Jason Freeman 2006 6,000 6,000 Vice President and Director 2005 6,000 6,000 2004 5,000 5,000
Required columns for bonus, stock awards, option awards, non-entity incentive plan compensation, change in pension value and nonqualified deferred compensation earnings and all other compensation are omitted from the table above as the amounts are all zero.
EMPLOYMENT AGREEMENTS
The Company does not have any current employment agreements with its officers and directors. The company intends to pay its Executives and Directors salaries, wages, or fees commensurate with experience and industry standards in relationship to the success of the company.
(a) Grants of plan-based awards table
There were no grants of plan-based awards during the year for the named individuals.
(b) Outstanding equity awards at fiscal year-end table
There were no outstanding equity awards at fiscal year-end for the named individuals.
(c) Option exercises and stock vested table
There were no option exercises during the year and no stock vested at fiscal year-end for the named individuals. Mr. Freeman had an option for 1,200,000 shares with an exercise price of $.001 which expired on December 31, 2006.
(d) Pension benefits
There are no pension plans.
(e) Nonqualified defined contribution and other nonqualified deferred compensation plans
There are no nonqualified defined contribution or other nonqualified deferred compensation plans.
(f) Potential payments upon termination or changes-in-control
There are no potential payments upon termination or changes-in-control for the named individuals.
(g) Compensation of directors
Mr. Lindberg and Mr. Freeman are the Company's two remaining directors. Ms. Thompson was a director and secretary of the Company until she resigned in June 2006. Directors are not separately compensated as directors and their compensation is included in total compensation in the table above.
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 December 31, 2006 with respect to the beneficial ownership of the Company's Common Stock by all persons known by the Company to be beneficial owners of more than 5% of any such outstanding classes, and by each director and executive officer, and by all officers and directors as a group. Unless otherwise specified, the named beneficial owner has, to the Company's knowledge, sole voting and investment power. No beneficial owner, as defined by NASD Rule 2720(b)(2), of the Company's Common Stock has any direct or indirect affiliation or association with any NASD member.
Title of Number of % of Class Name of Beneficial Owner (1) Shares Class ----- ---------------------------- ------ -----
Common Mark Lindberg 1,000 .01% Stock President
Common Shocker 200 Index, LP (3) 7,600,000 72.35% Stock Attn: Jason Freeman
Common Jason Freeman -- -- Stock Vice-President
Common BBX Unit Investment Business Trust(2) 100,000 .95% Stock
Common Officers and Directors as a Group 7,701,000 73.31% Stock (2) persons
1. The address of Mark Lindberg, Shocker 200 Index, LP, Jason Freeman, and BBX UIT is c/o Interim Capital Corp., 3960 Howard Hughes Parkway, Suite 500, Las Vegas, Nevada 89109. 2. BBX Unit Investment Business Trust is a trust organized under the laws of Nevada and its general partner is Pecos Financial, LLC, a Texas limited liability company. Jason Freeman is president of Pecos Financial and is deemed to control the Trust for the benefit of the trust unit holders. Jason Freeman is the sole member of Pecos Financial, but does not personally own any interest in the BBX UIT. 3. Shocker 200 Index, LP is a limited partnership whose general partner is also Pecos Financial. Jason Freeman is the sole member of Pecos Financial and is deemed to control the limited partnership for the benefit of the limited partners, but does not personally own any interest in Shocker 200 Index, LP.
ITEM 13:
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
In lieu of cash consideration for the officers and directors, we issued 7,600,000 shares of common stock to ACL Consulting Corp, an entity controlled by the president of the Company, at par value $0.001, for total consideration of $7,600. ACL sold this interest in March 2006 to Shocker 200 Index, LP, whose general partner is Pecos Financial, LLC. Jason Freeman is the sole member of Pecos Financial and is deemed to control the limited partnership for the benefit of the limited partners, but does not personally own any interest in Shocker 200 Index, LP.
The Company issued options to purchase 1,200,000 shares, each, to Chasity Thompson, a former director, and Jason Freeman, at par value $0.001. The Company also issued 1,155,000 options to purchase common stock to the BBX Unit Investment Business Trust at par value $0.001. Jason Freeman is the President of the trustee of the BBX UIT and Pecos Financial, but disclaims any beneficial ownership in the trust. Mr. Freeman does have control over the sale of the UIT's shares in the Company. These options vested 50% on July 1, 2004 and 100% on December 31, 2004. None of the options were exercised by the end of their term and expired on December 31, 2006.
During the year ended December 31, 2006, the Company received a non-interest bearing advance from a company related to its principal shareholder.
We rent an office located at 3960 Howard Hughes Parkway, Suite 500 in Las Vegas, Nevada and pay $200.00 a month for rent on a month to month basis.
ITEM 14:
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees. The aggregate fees billed for professional services rendered by our current principal accountants for the audit of our annual financial statements and review of our quarterly financial statements through January 20, 2007, were $1,500 and $3,500 for the years ended December 31, 2006 and 2005, respectively.
Audit-Related Fees: None
Tax Fees: The aggregate fees billed for professional services rendered by our current principal accountants for the audit of our annual financial statements and review of our quarterly financial statements were $11,889 and $500 for the years ended December 31, 2004 and 2003, respectively.
All Other Fees: None
PART IV
ITEM 15:
ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report:
1. Financial Statements - The following financial statements of Interim Capital Corp. are contained in Item 8 of this Form 10-K: o Report of Independent Registered Public Accountant o Statements of Net Assets at December 31, 2006 and 2005 o Statements of Operations - For the fiscal years ended December 31, 2006, 2005 and 2004 o Statements of Cash Flows - For the fiscal years ended December 31, 2006, 2005 and 2004 o Statements of Changes in Net Assets - For the fiscal years ended December 31, 2006, 2005 and 2004 o Schedules of Investments - At December 31, 2006 and o Notes to the Financial Statements o Financial Highlights - For the fiscal years ended December 31, 2006, 2005 and 2004
2. Financial Statement Schedules were omitted, as they are not required or are not applicable, or the required information is included in the Financial Statements.
3. Exhibits - The following exhibits are filed with this report or are incorporated herein by reference to a prior filing, in accordance with Rule 12b-32 under the Securities Exchange Act of 1934.
Exhibit Description - ------- -----------
Exhibit 31 - Certificate of Principal Executive Officer and Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
Exhibit 32 - Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
SIGNATURE
Pursuant to the requirements of Section 3 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DATE: February 14, 2007 INTERIM CAPITAL CORP.
BY: /s/ Mark Lindberg --------------------------- Mark Lindberg President, CEO and CFO
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
February 14, 2007 /s/ Mark Lindberg ------------------------------ Mark Lindberg, President, CEO, CFO and Director
February 14, 2007 /s/ Jason Freeman ------------------------------ Jason Freeman, Vice-President And Director