Quarterly Report — Small Business — Form 10-QSB Filing Table of Contents
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Check
whether the issuer (1) has filed all reports required to be filed by Section
13
or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
such shorter period that the registrant was required to file such reports),
and
(2) has been subject to such filing requirements for the past 90
days.
Yes
x
No o
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
Yes
o
No
x
State
the
number of shares outstanding of each of the issuer’s classes of common
equity:
Common
stock; $.001 par value; authorized-
500,000,000
shares; As of January 14, 2008 128,200,986 shares issued and
outstanding
Transitional
Small Business Disclosure Format (check one):
Yes
o
No x
Net increase
(decrease) in net assets from operations
$
-0-
$
(1,008,855
)
Adjustments
to reconcile net income (loss) to
net cash provided by operation activities:
$
(320,088
)
$
(104
)
Change
in accounts payable
$
300,000
$
-
Net cash used by operating activities
$
(20,088)
)
$
(1,008,959
)
Cash flows from investing activities:
Net cash used in investing activities-Loan
Receivable
$
(150,000
)
$
-
Cash flows from finanancing activities
Proceeds from common stock
$
27,715
$
1,618,500
Net cash (used)
provided by financing activities
$
(142,373
)
$
1,618,500
Net increase in cash
$
(162,461
)
$
609,541
Cash at beginning of period
$
189,368
$
-
Cash at end of period
$
26,,907
$
609,541
See
notes
to financial statements
7
Imperiali
Inc.
Notes
To Financial Statements
(Unaudited)
Note
1-Basis of presentation
The
accompanying unaudited financial statements have been prepared in accordance
with the accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form
10-QSB and Item 310 of Regulation S-B. Accordingly, they do not include all
of
the information and footnotes required by accounting principles generally
accepted in the United States of America for annual financial statements. In
the
opinion of management, all adjustments, consisting of normal recurring accruals
considered necessary for a fair presentation, have been included. Operating
results for the three months ended November 30, 2007 are not necessarily
indicative of the results that may be expected for the year ending August 31,2008.
Note
2- Organization: General
Development of the Business
We
were
incorporated in Florida on September 27, 1994 by Daniel J. Imperato under the
name Automated Energy Security Inc.
From
September 1994 through March 1999, the Company provided energy management
services and intelligent security for residential dwellings, commercial
buildings and government facilities. In 1994, the Company purchased all of
the
patented technology, software and patents pending on the Wide Area Energy
Savings System known as “TESS” (Total Energy Security System) from Associated
Data Consultants, Inc. In 1998, after Bell Atlantic (one of our strategic
partners) withdrew from the development of TESS and engaged in litigation with
Associated Data, the Company abandoned our business operations related to
TESS.
In
March
1999, we changed our name to New Millennium Development Group, Inc. and our
business operations to media and telecommunications, focusing on connectivity
solutions, storage, fiber optic cable systems, security and the international
long distance market. Our plan was to spearhead a sub sea fiber optic cable
system connecting 70 countries around the globe. In furtherance of the plan
the
Company entered into Memoranda of Understanding with 30 countries, completed
landing party site and ocean surveys, arranged long-term financing and selected
vendors and subcontractors for fiber optic cable and equipment. During the
process, however, the price of cable systems skyrocketed, forcing us to
reconsider our business plans and projections. The Company retained the services
of an independent consultant who concluded that not only would increasing cable
prices decrease long-term gains, the rapid development of the internet and
Intellectual Property systems would render obsolete the market for fiber optic
cable. Accordingly, in mid 2001 we shifted our focus away from fiber optic
cable
systems and concentrated on Voice over Internet Protocol (VOIP) and related
services including high-speed wireless standard ISP and broadband services;
international calling cards; video conferencing and related IP products.
Failed
corporate history, management infighting, the tragedy of September 11, 2001
and
the general economic downturn especially related to technology, led us to cease
business operations in mid-2002 until mid-2005. However, during this time,
Mr.
Imperato, the Company’s Chairman, at the time, and majority shareholder, worked
to maintain management relationships with previous businesses, associates and
professionals for the eventual resurrection of business operations.
In
November 2005, we changed our name to Imperiali, Inc. and commenced operations
as an investment company. To date, the activities of our principals have largely
been limited to organizational matters and fund raising. We have commenced
the
private placement of up to 10 million of the Company's common shares in an
offering (the "Offering") exempt from the registration requirements of the
Securities Act of 1933 ("1933 Act") pursuant to Section 4(2) thereof and
Regulation D ("Regulation D") thereunder. At August 31, 2007, the Company’s
total assets were $3,699,133 and its net asset value per share (“NAV”) was $.10.
Upon the closing
of the Offering, the Company's common shares will be owned by numerous persons
that are both "accredited investors," as that term is defined in Regulation
D,
and "qualified clients" within the meaning of the Investment Advisers Act of
1940 (the "1940 Act"),
In
January 2008 due to the transaction with Kaiser Himmel (See Note 6) the company
will change it’s name to Kaiser Himmel I.
8
The
Company had been dormant since 2002 and was started up again in the fall of
2005
by Christ Investment Group, LLC, the Company’s business manager and a related
company, which is controlled by the Company’s major shareholder Mr. Daniel
Imperato. On November 18, 2005 the name of the company was changed to Imperiali,
Inc.
Nature
of Business
Imperiali,
Inc. is a team of global expansion and business development company experts
that
are strategically positioned around the globe to identify emerging companies
that wish to align with strategic partners to grow their businesses, and raise
capital for business development and telecommunications
infrastructure.
Imperiali
Inc. is a privately held Business Development Company (BDC) with over 475
shareholders (meets the minimum requirements to enter the public markets).
A BDC
is a special type of Investment Company designated by the Securities and
Exchange Commission (SEC). This network comprises Imperiali Inc.’s Global
Advisory Team. By being able to invest and/or loan capital and advise, Imperiali
Inc. is able to monitor and, in most cases, influence events utilizing the
tools
and leverage that this business model affords; thus endeavoring to mitigate
risk
and safeguard investments, with the idea of creating shareholder value.
Note
3. Summary of Significant Accounting Policies:
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 disclosures of contingent assets and liabilities
at the date of the financial statements and the reported amount
of
revenues and expenses during the reported period. Actual results could
differ from those estimates.
CASH
AND
CASH EQUIVALENTS
The
Company considers all highly liquid investments with an original term
of
three
months or less to be cash equivalents. At November 30, 2007the Company had
cash
equivalents in the amount of approximately $27,000, all in low risk
investments.
ACCOUNTS
RECEIVABLE
The
Company conducts business and extends credit based on the evaluation
of
its
customers' financial condition, generally without requiring collateral.
Exposure to losses on receivables is expected to vary by customer
due to the financial condition of each customer. The Company monitors
credit losses and maintains allowances for anticipated losses considered
necessary under the circumstances. Recoveries of accounts previously
written off are recognized as income in the periods in which the
recoveries are made.
INVENTORY
Inventory
is comprised of finished goods of consumer personal care products
and is stated at lower of cost or market.
9
REVENUE
RECOGNITION
The
Company recognizes revenues when a sales agreement has been executed,
delivery
has occurred, and collectability of the fixed or determinable sales
price is reasonably assured.
PROPERTY
AND EQUIPMENT
Property
and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets. Expenditures
for major betterments and additions are capitalized, while replacement,
maintenance and repairs, which do not extend the lives of the respective
assets are charged to expense currently. Any gain or loss on disposition
of assets is recognized currently in the statement of income
INCOME
TAXES
The
Company is recognized as a corporation under the Internal Revenue Code. As
such,
the corporation must report income and expenses properly on their tax return
and
pay all the related income taxes. As of November 30, 2007the Company has an
approximately $8,200,000 net operating loss carryover which can be used against
future income through 2018. No provisions for income taxes are provided in
these
financial statements since the Company was dormant for the years ending November30, 2007
The
Company accounts for income taxes using SFAS No. 109, "Accounting for
Income
Taxes," which requires recognition of deferred tax liabilities and assets
for expected future tax consequences of events that have been included
in the financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the difference between
the financial statement and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are
expected to reverse. A valuation allowance is recorded for deferred tax
assets if it is more likely than not that some portion or all of the
deferred
tax assets will not be realized.
Effective
December 31, 2006, we adopted FIN 48, “Accounting
for Uncertainty in Income Taxes.”FIN
48
clarifies the accounting for uncertainty in income taxes recognized in financial
statements in accordance with SFAS No. 109, “Accounting
for Income Taxes.”FIN
48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to
be
taken in a tax return. FIN 48 requires that we determine
whether the benefit of our tax positions is more likely than not to be sustained
upon audit, based on the technical merits
of
the tax position. For tax positions that are more likely than not to be
sustained upon audit, we recognize the greatest amount of the benefit that
is
more likely than not to be sustained in our consolidated condensed financial
statements. For tax positions that are not more likely than not to be sustained
upon audit, we do not recognize any portion of the benefit in our condensed
consolidated financial statements. The provisions of FIN 48 also provide
guidance on derecognition, classification, interest and penalties, accounting
in
interim periods, and disclosure. Our policy for interest and penalties under
FIN
48, related to income tax exposures was not impacted as a result of the adoption
of the recognition and measurement provisions of FIN 48. Therefore, we continue
to recognize interest and penalties as incurred within “income
taxes”in
our
condensed consolidated statements of operations, when applicable. There was
no
change to our accumulated deficit as of December 31, 2006 as a result of the
adoption of the recognition and measurement provisions of FIN 48. We did
identify certain potential liabilities that would have met the pre FIN_48_accruals
criteria, discussed above, and therefore recorded the adjustment through our
income tax provision in the current period, as it
was
not
material to any periods impacted.
10
EARNINGS
(LOSS) PER SHARE
Earnings
(loss) per share is computed in accordance with SFAS No. 128, "Earnings
per Share". Basic earnings (loss) per share is computed by dividing
net income (loss), after deducting preferred stock dividends accumulated
during the period, by the weighted-average number of shares of common
stock outstanding during each period. Diluted earnings per share is computed
by dividing net income by the weighted-average number of shares of
common
stock, common stock equivalents and other potentially dilutive securities
outstanding during the period.
ACCOUNTING
FOR STOCK-BASED COMPENSATION
The
Company adopted SFAS No. 123R, "Accounting for Stock-Based Compensation". This
statement requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award (with limited exceptions). That cost will be recognized
over the period during which an employee is required to provide
service.
In
addition, a public entity is required to measure the cost of employee
services
received in exchange for an award of liability instruments based on
its
current fair value. The fair value of that award has been remeasured
subsequently
at each reporting date through the settlement date. Changes in
fair
value during the requisite service period will be recognized as compensation
cost over that period.
RECLASSIFICATIONS
Certain
prior periods' balances have been reclassified to conform to the current
period’s financial statement presentation. These reclassifications had
no
impact on previously reported results of operations or stockholders'
equity.
NOTE
4-
Recently Issued Accounting Pronouncements
In
May
2007, the FASB issued FASB Staff Position (“FSP”) FIN 48-1, or “FSP FIN 48-1,”
which clarifies when a tax position is considered settled under FIN 48. The
FSP
explains that a tax position can be effectively settled on the completion of
an
examination by a taxing authority without legally being extinguished. For tax
positions considered effectively settled, an entity would recognize the full
amount of tax benefit, even if (1) the tax position is not considered more
likely than not to be sustained solely on the basis of its technical merits
and
(2) the statute of limitations remain open. FSP FIN 48-1 should be applied
upon the initial adoption of FIN 48. The impact of our adoption of FIN 48 (as
of
January 1, 2007) is in accordance with this FSP and the implementation has
not resulted in any changes to our consolidated financial
statements.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157, “Fair Value Measurements” (“FAS 157”). This Statement defines fair value as
used in numerous accounting pronouncements, establishes a framework for
measuring fair value in generally accepted accounting principles and expands
disclosure related to the use of fair value measures in financial statements.
The Statement is to be effective for the Company’s financial statements issued
in 2008; however, earlier application is encouraged. The Company is currently
evaluating the timing of adoption and the impact that adoption might have on
its
financial position or results of operations.
11
In
February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities.
SFAS
No. 159 permits entities to choose to measure eligible financial
instruments at fair value. The unrealized gains and losses on items for which
the fair value option has been elected should be reported in earnings. The
decision to elect the fair value options is determined on an instrument by
instrument basis, it should be applied to an entire instrument, and it is
irrevocable. Assets and liabilities
measured at fair value pursuant to the fair value option should be reported
separately in the balance sheet from those instruments measured using another
measurement attribute. SFAS No. 159 is effective as of the beginning of the
first fiscal year that begins after November 15, 2007. The Company is
currently analyzing the potential impact of adoption of SFAS No. 159 to its
financial statements.
Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on the financial statements upon
adoption.
Depreciation
Depreciation
is calculated using straight-line methods over the estimated useful life of
the
equipment, furniture and fixtures.
Concentration
of Credit Risk
The
Company maintains cash accounts in commercial banks. Total cash deposits are
secured by the Federal Deposit Insurance Corporation (FDIC) up to a limit of
$100,000 per company. As of November 30, 2007, some of the Company’s cash
equivalent balances were deposited in accounts with a stock brokerage firm.
The
amount of cash not insured by the FDIC is immaterial.
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 certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
In
May
2005, the FASB issued SFAS No. 154, "Accounting Changes and Error - an amendment
of APB Opinion No. 29." This Statement applies to all voluntary changes in
accounting principle. It also applies to changes required by an accounting
pronouncement in the usual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. Opinion 20
previously required that most voluntary changes in accounting principle be
recognized by including in net income of the period of the change the cumulative
effect of changing to the new accounting principle. This Statement requires
retrospective application to prior period’s financial statements of changes in
accounting principle, unless it is impracticable to determine either the
period-specific effects of the cumulative effect of the change.
This Statement is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The Company does not expect application of SFAS No. 154 to have a material
affect on its financial statements.
12
In
February 2006, the FASB issued SFAS No. 155. This Statement amends FASB
Statements No. 133, Accounting for Derivative Instruments and Hedging
Activities, and No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. This Statement resolves issues
addressed in Statement 133 Implementation Issue No. D1, “Application of
Statement 133 to Beneficial Interests in Securitized Financial Assets.” The
Company does not expect application of SFAS No. 155 to have a material
affect on its financial statements.
In
March
2006, the FASB issued SFAS No. 156. This Statement amends FASB Statement No.
140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, with respect to the accounting for
separately recognized servicing assets and servicing liabilities.
This Statement is effective as of the beginning of its first fiscal
year that begins after September 15, 2006. An entity should apply the
requirements for recognition and initial measurement of servicing assets and
servicing liabilities prospectively to all transactions after the effective
date
of this Statement. The Company does not expect application of SFAS No. 156
to have a material affect on its financial statements.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This
Statement is effective as of the beginning of its first fiscal year that begins
after November 15, 2007. This Statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
(GAAP), and expands disclosures about fair value measurements. This Statement
applies under
other accounting pronouncements that require or permit fair value measurements,
the Board having previously concluded in those accounting pronouncements that
fair value is the relevant measurement attribute. Accordingly, this Statement
does not require any new fair value measurements. However, for some entities,
the application of this Statement will change current practice.
The
Company does not expect application of SFAS No. 157 to have a material
affect 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 amends FASB
Statements No. 87, 88, 106, and 132(R). This Statement is effective as
of the beginning of its first fiscal year that begins after December 15, 2006,
but before June 16, 2007. This Statement improves financial reporting by
requiring an employer to recognize the over funded or under funded status of
a
defined benefit postretirement plan (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 of a business entity or changes in unrestricted net assets
of a not-for-profit organization. The Company does not expect application
of SFAS No. 158 to have a material affect on its financial
statements.
NOTE
5- Investments:
Investments
are carried at Fair Market Value.
Valuation
Policies
Valuation
of Portfolio Investments
As
a
Business Development Company, our business plan calls for us to invest primarily
in illiquid securities issued by private companies (“Private Investments”) (we
are required to invest at least an aggregate of 70% of our assets Private
Investments and in companies listed on the OTCBB). Private Investments are
generally subject to restrictions on resale and generally have no established
trading market. The Company values our Private Investments at fair value as
determined in good faith by our Board of Directors in accordance with our
valuation policy. That policy calls for the determination of fair value at
“the
amount for which an investment could be sold in an orderly disposition over
a
reasonable period of time between willing parties other than in a forced or
liquidation sale.” Our valuation policy may require subjective judgments. Our
determination of fair value may possibly differ materially from the value
realized on an actual sale. Our valuation policy is intended to provide a
consistent basis for establishing
the fair value of the portfolio. The Company will record unrealized depreciation
on investments when we believe that an asset has been impaired and full
collection for the loan or realization of an equity security is doubtful.
Conversely, the Company will record unrealized appreciation if we have a clear
indication that the underlying portfolio company appreciates and, therefore,
our
security has appreciated. Under this valuation policy, the Company sets
valuations based on policies consistent with Section 2(a) of the 1940 Act.
The
value of investments in public securities is determined using quoted market
prices discounted for restrictions on resale.
13
Equity
Securities
Equity
interests in portfolio companies for which there is no liquid public market
are
valued based on the enterprise value of the portfolio company, which is
determined using accepted accounting factors, including net cash flow from
operations of the portfolio company, and other pertinent factors such as recent
offers to purchase a portfolio company’s securities or other liquidation events.
The determined fair values are generally discounted to account for restrictions
on resale and minority control positions.
The
value
of our equity interests in public companies for which market quotations are
readily available is based upon the closing public market price for the last
day
up to and including the balance sheet date. Securities that carry certain
restrictions on sale are typically valued at a discount from the public market
value of the security.
Dividend
income, if any, is recorded on cumulative preferred equity securities on an
accrual basis to the extent that such amounts are expected to be collected
and
on common equity, securities on the record date for private companies or on
the
ex-dividend date for publicly traded companies.
See
Note
6 in relation to the Kaiser Himmel transaction. As part of the transaction
the
Company acquired 13.4 million shares of Sprint Nextel stock. For financial
statement purposes this stock is not recorded on the balance sheet. The company
will record the shares upon the second transaction being closed and the company
obtaining power of attorney over the Kaiser Himmel account.
Loans
and Debt Securities
It
is our
loan policy to only invest in secured and properly collateralized
loans.
For
loans
and debt securities, to the extent that the Company invests in them, fair value
generally approximates cost unless the borrower’s condition or external factors
lead to a determination of fair value at a lower amount. When the Company
receives nominal cost warrants or free equity securities (“nominal cost
equity”), we allocate our cost basis in our investment between the debt
securities and the nominal cost equity at the time of origination. At that
time,
the original issue discount basis of the nominal cost equity is recorded by
increasing the cost basis in the equity and decreasing the cost basis in the
related debt securities.
Interest
income is recorded on an accrual basis to the extent that such amounts are
expected to be collected. For loans and debt securities with contractual
payment-in-kind interest, which represents contractual interest accrued and
added to the loan balance that generally becomes due at maturity, we will not
accrue payment-in-kind interest if the portfolio company valuation indicates
that the payment-in-kind interest is not collectible. Loan origination fees,
original issue discount, and market discount are capitalized and then amortized
into interest income using the effective interest method.
The
weighted average yield on loans and debt securities is computed as the (a)
annual stated interest rate earned plus the annual amortization of loan
origination fees, original issue discount and market discount earned on accruing
loans and debt securities, divided by (b) total loans and debt securities at
value. The weighted average yield is computed as of the balance sheet date.
Prepayment premiums are recorded on loans when received.
14
See
Note
6 in relation to the Kaiser Himmel transaction in that the transaction consists
of an initial loan of $380,000 and a total loan in subsequent periods for
$3,000,000
Portfolio
Valuation Process
Our
methodology includes the examination of, among other things, the underlying
investment performance, financial condition, and market-changing events that
affect valuation. Because of the type of investments that the Company makes
and
the nature of our business, this valuation process requires an analysis of
various factors consistent with the provisions of section (2) of the 1940
Act.
Our
process for determining the fair value for a private finance investment is
applied consistently across our portfolio. The process is as follows.
·
First,
the Company determines the portfolio company’s enterprise value as if the
Company were to sell it in a “current sale.” In our valuation process, the
Company uses the AICPA’s definition of “current sale,” which means an
“orderly disposition over a reasonable period of time between willing
parties other than in a forced or liquidation
sale.”
·
The
Company then evaluates the amount of our debt and the position of
our debt
in the portfolio company’s capital structure.
·
If
the enterprise value of the portfolio company is in excess of the
amount
of our last dollar of investment capital given our priority in the
capital
structure, the fair value of our investment will be considered to
be our
cost or perhaps, given the structure of our particular security,
greater
than cost if we are to share in equity appreciation.
·
If
the enterprise value of the portfolio company is less than our last
dollar
of investment capital in the capital structure, then our investment
has
declined in value and the Company needs to reduce the fair value
of our
investment and incur a charge to our earnings by recognizing unrealized
depreciation.
Determining
the enterprise value of a portfolio company, as if that portfolio company were
to be sold in a “current sale,” is a very complex process, where we must analyze
the historical and projected financial results of the portfolio company and
analyze the public trading market and private merger and acquisition market
to
determine appropriate purchase price multiples. In addition, a reasonable
discount to the value of our securities must also be reflected when the Company
may have restrictions such as vesting periods for warrants or other factors.
We
also take into account the collectability of non-cash interest to determine
if
the Company will continue to accrue such interest.
Specific
Considerations
The
valuation of illiquid private securities is inherently subjective, and as a
result, the Company intends to exercise good judgment in our valuation process.
Specifically, we will exercise care to assure that the Company has considered
the position of the portfolio company today and the position of our security
today given the data we have available. We will also exercise care to assure
that the process is not too mechanical; however, there are some specific
considerations to be addressed in our valuation process. The ultimate goal
is a
reasonable estimate of fair value determined in good faith.
Typically,
in the private equity business, companies are bought and sold based upon
multiples of EBITDA, cash flow, revenues and in limited instances book value.
In
determining a multiple to use for valuation purposes, we will look to private
M&A statistics, reported public trading multiples and industry practices. In
determining the right multiple, we intend to consider not only the fact that
our
portfolio company may be private relative to a peer group, but also the size
and
scope of our portfolio company and its specific strengths and weaknesses. In
some cases, when a portfolio company is at EBITDA breakeven or slightly below
but has excellent future prospects, we believe the best valuation methodology
may be a discounted cash flow analysis based
upon future projections. If a portfolio company is distressed, we believe a
liquidation analysis may provide the best indication of enterprise
value.
15
Discounts
on common equity securities.
When
determining the value of common equity securities or warrants to purchase such
securities, we intend to consider what type of discount to apply to the value
of
the security if the Company is in a minority position, has restrictions on
resale, has specific concerns about the receptivity of the M&A market to a
specific portfolio company at a certain time and other factors. Generally,
we
find that the Company should apply larger discounts when we are new to an
investment, and therefore, we have not yet developed an exit strategy. As an
investment in the portfolio matures, we intend to consider whether or not the
Company should begin to reduce discounts, especially if we are generally aware
that either we or a controlling shareholder group has begun to develop an exit
strategy.
When
we
have begun to develop an exit strategy of the Company is the controlling
shareholder, the discount imposed should generally be less than in the case
of a
minority position. We may still contemplate the need to discount for the current
state of the M&A market or restrictions imposed on us due to our
relationship with management of the portfolio company or other capital
providers.
NOTE
6- Portfolio
The
Board
of Directors at a meeting on May 15, 2006 adopted a resolution creating a series
of Five Million (5,000,000) shares of voting Preferred Stock designated as
Series B Preferred Stock issued to Daniel J. Imperato for past management
services. Each share of Series B preferred stock shall be convertible into
(3)
shares of Common Stock at the sole discretion of Daniel J. Imperato. This
agreement was executed May 30, 2006 and was effective June 26, 2006.
As
part
of the past management services, Imperiali, Inc. acquired Imperiali Organization
LLC as of February 15, 2006. Imperiali Organization has one unit in the LLC,
which represents 100% ownership. Through the ownership of Imperiali
Organization, LLC, Imperiali Inc. acquired all the assets of Imperiali
Organization, LLC, including an internet search engine project and all the
telecom projects associated with the previous New Millennium Development Group
projects.
On
the
August 31, 2006 financial statements management valued one project within
Imperiali Organization LLC - an internet search engine project called I1Connect
for $3.5 million dollars.
On
the
May 31, 2007 management revalued the I1Connect project. The internet search
engine was fully operational. Based on comparison of other comparable companies,
management revalued the I1Connect project at $40,000,000.
Management
devised a plan to combine I1Connect and a global media public relations firm
which was acquired by Imperiali, Inc. The combined subsidiary was set up in
July
2007 as I1Connect, Inc. Imperiali, Inc. owns 40,000,000 shares of I1Connect,
Inc. The company has issued a Private Placement Memorandum. The last share
of
I1connect sold at $1 per share under the private placement or a $40,000,000
valuation.
Additionally,
Imperiali, Inc reentered the telecommunications business. The telecommunications
project is now a going concern. Imperiali, Inc. valued the telecom project
at
$30,000,000 as of May 31, 2007. The asset included the previous New Millennium
Development Group assets that Bank of America had valued, on a global basis,
at
approximately 5 billion dollars.
16
Imperiali,
Inc. subsequently set up a company I1Telecommunications, Inc. for the purpose
of
acquiring some of the telecom projects of Imperiali Organization, LLC.
Imperiali, Inc. owns 30 million shares of I1Telecommunications, Inc. Management
has entered into a partnership agreement with a South American
telecommunications company and has entered into Memorandums
of Understanding with other telecommunications partners. Management now believes
that the combined future potential of Imperiali Telecom, Inc is at least 5%
of
the total value of the original projects or $250,000,000. The projects must
be
funded to proceed forward with the business plan to realize the $250,000,000
valuation.
Management
has subsequently formed a subsidiary company from the film project, entitled
I1Films, Inc. Imperiali, Inc. owns 5,000,000 shares of I1Films. Management
is in
the process of obtaining an independent valuation and has not established a
value of I1Films, Inc.
The
Company is also in the process of searching for a third party independent
valuation for both I1Connect and I1Telecom. As of the date of this audit, the
Company has not done a complete independent valuation.
Imperiali
Organization LLC has also been invited to participate in $70 billion of
infrastructure projects around the world. Imperiali management realized that
the
management portion did not fit the structure of the Business Development
Company, so the management portion of the agreement was sold for $220 million
to
a London company. This transaction was not booked because there is a high degree
of uncertainty if the note would be paid or converted to equity or if the
projects would be successful. The value of the contract was based on a
percentage of the projects anticipated to be constructed and a standard supply
management agreement.
On
November 19, 2007, the Company
entered
into an initial subscription agreement between the Company and Kaiser Himmel
Corp. (“KHC”) .
Pursuant
to the agreement, the parties are to provide for, among other things, the
following:
Consideration
thereof for the agreement 10,000,000 shares of Imperiali Inc. common stock
shall
be issue to KHC in exchange the Company receipt shall consist of: 1.6 million
(one million six hundred thousand) shares of Sprint Nextel Corp. Common Stock
(NYSE:S) which is held in the name of KHC at Bank of America of which has a
restriction until October 2008.
Based
upon the purchase of these shares of the Company, KHC et al. will advise Bank
of
America that upon the expiration of the Restriction Legend on the securities,
these 1.6 million shares will be directly transferred to Imperiali Inc.’s Stock
Brokerage Account. Furthermore, KHC agrees to notify Bank of America to
incorporate this subscription agreement within its custodial agreement with
Bank
of America for its equity holdings in Sprint Nextel Corp (NYSE:S). This payment
is non-cancellable, and Bank of America will be noticed that said transfer
is to
occur on October 2008. Account numbers and legal documents will be completed
pertaining to proof of funds. As of November 30, 2007the Company has not
carried the value of the shares on the financial statements. The stock will
be
valued upon the deliverance of a power of attorney to the company to manage
KHC
brokerage account.
Upon
signing this subscription agreement, the Company will loan a total of
$380,000.00 (three hundred and eighty thousand dollars) to KHC at the current
prime interest rate plus 1% (one percent) due and payable October 2008. $150,000
(one hundred fifty thousand dollars) will be transferred upon both parties
signing this agreement and the balance within 30 days.
On
November 22, 2007the Company and KHC entered into a second agreement. As per
the agreement the Company agrees to issue 70,000,000 shares of Imperiali Inc.
common stock in exchange for 11.8 million shares of Sprint Nextel Common stock
held by KHC at a Bank of America brokerage account. The transaction is
non-cancellable and expected to close February 28, 2008. In the two transactions
with KHC the Company acquired 13.4 million shares of Sprint
Nextel Stock at a value of $199,326,000.
In
addition as part of the second agreement the Company agrees to loan an
additional $3,000,000 to KHC at the current prime interest rate plus 1% (one
percent) due and payable.
17
Upon
closing of both of these transactions KHC will control 62.5% of the
Company.
Note
8:
Guaranteed Commitments: The Company leases approximately 688 square feet of
space at 777 S Flagler Drive, Suite 800W, West Palm Beach, Florida USA 33401.
The office space is used for sales, administrative offices, and customer
support. In addition the company has offices in New York, New York and
Washington, D.C.
Note
9.
Employee Compensation Plans – The Company has no Defined Benefit or Defined
Contribution Pension Plans.
Note
10.
Stock Option Plans – The Company has no Stock Option Plans.
NOTE
11–
Related Party Transaction
In
January 2008, the Company's Chief Executive Officer, Daniel Imperato was issued
10,000,000 shares of common stock for advances and costs due to the Company
to
support operations, provide working capital and compensation from October 2005
to the current year. In addition included in accounts payable is $300,000 of
accrual expenses owned to Mr. Imperato for travel and miscellaneous
expenses.
18
ITEM
2.
MANAGEMENT’S
DISCUSSION and ANALYSIS or PLAN of
OPERATIONS.
The
following discussion should be read in conjunction with our unaudited financial
statements and notes thereto.
Forward-Looking
Statements
This
quarterly report contains forward-looking statements and information relating
to
us that are based on the beliefs of our management as well as assumptions made
by, and information currently available to, our management. When used in this
report, the words “anticipate”, “believe”, “estimate”, “expect”, “intend”,
“plan” and similar expressions, as they relate to us or our management, are
intended to identify forward-looking statements. These statements reflect
management’s current view of us concerning future events and are subject to
certain risks, uncertainties and assumptions, including among many others:
a
general economic downturn; a downturn in the securities markets; federal or
state laws or regulations having an adverse effect on proposed transactions
that
we desire to effect; Securities and Exchange Commission regulations which affect
trading in the securities of “penny stocks,”; and other risks and uncertainties.
Should any of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described in this report as anticipated, estimated or expected. All
forward-looking statements attributable to us are expressly qualified in their
entirety by the forgoing cautionary statement.
Overview
Our
investment objective is to generate both current income and capital appreciation
to deliver superior, risk adjusted returns to investors through investment
in
the debt and equity securities of privately and publicly held micro-cap
companies (market capitalization below $50 million) that are based in the U.S.
and that offer products and services that can be successfully expanded, marketed
and sold in commercially viable international markets. Our principals’
experience combines economic and financial analysis with expertise in business
strategy and planning, market and demand forecasting, policy analysis, and
technology development strategy. They have worked on a variety of matters,
such
as mergers and acquisitions, new product introductions, strategy and capital
investment decisions, the outcomes of which often have significant implications
or consequences for the parties involved. We will offer our portfolio companies
a wide array of services such as strategy development, performance improvement,
corporate portfolio analysis, market demand and new product strategies,
evaluation of intellectual property and other assets and competition analysis.
Matters such as these often require independent analysis, and as a result,
companies (such as our portfolio companies) must outsource this work to outside
experts. We expect that our portfolio companies will turn to us because we
can
provide qualified economic and financial experts to address a wide variety
of
matters.
Plan
of Operation
We
were
incorporated in Florida on September 27, 1994 by Daniel J. Imperato under the
name Automated Energy Security Inc.
From
September 1994 through March 1999, the Company provided energy management
services and intelligent security for residential dwellings, commercial
buildings and government facilities. In 1994, the Company purchased all of
the
patented technology, software and patents pending on the Wide Area Energy
Savings System known as “TESS” (Total Energy Security System) from Associated
Data Consultants, Inc. In 1998, after Bell Atlantic (one of our strategic
partners) withdrew from the development of TESS and engaged in litigation with
Associated Data, the Company abandoned our business operations related to
TESS.
In
March
1999, we changed our name to New Millennium Development Group, Inc. and our
business operations to media and telecommunications, focusing on connectivity
solutions, storage, fiber optic cable systems, security and the international
long distance market. Our plan was to spearhead a sub sea fiber optic cable
system connecting 70 countries around the globe. In furtherance of the plan
the
Company entered into Memoranda of Understanding with 30 countries, completed
landing party site and ocean surveys, arranged long-term financing and selected
vendors and subcontractors for fiber optic cable and equipment. During the
process, however, the price of cable systems skyrocketed, forcing us to
reconsider our business plans and projections. The Company retained the services
of an independent consultant who concluded that
not
only would increasing cable prices decrease long-term gains, the rapid
development of the internet and Intellectual Property systems would render
obsolete the market for fiber optic cable. Accordingly, in mid 2001 we shifted
our focus away from fiber optic cable systems and concentrated on Voice over
Internet Protocol (VOIP) and related services including high-speed wireless
standard ISP and broadband services; international calling cards; video
conferencing and related IP products.
19
Failed
corporate history, management infighting, the tragedy of September 11, 2001
and
the general economic downturn especially related to technology, led us to cease
business operations in mid-2002 until mid-2005. However, during this time,
Mr.
Imperato, the Company’s Chairman, at the time, and majority shareholder, worked
to maintain management relationships with previous businesses, associates and
professionals for the eventual resurrection of business operations.
In
November 2005, we changed our name to Imperiali, Inc. and commenced operations
as an investment company. To date, the activities of our principals have largely
been limited to organizational matters and fund raising. We have commenced
the
private placement of up to 10 million of the Company's common shares in an
offering (the "Offering") exempt from the registration requirements of the
Securities Act of 1933 ("1933 Act") pursuant to Section 4(2) thereof and
Regulation D ("Regulation D") there under. At August 31, 2007, the Company’s
total assets were $3,699,133 and its net asset value per share (“NAV”) was $.10.
Upon the closing of the Offering, the Company's common shares will be owned
by
numerous persons that are both "accredited investors," as that term is defined
in Regulation D, and "qualified clients" within the meaning of the Investment
Advisers Act of 1940 (the "1940 Act"),
In
addition to our internal Company resources, we believe that we will be able
to
provide such advice and assistance by using our extensive international network
of agents and affiliates, located in many countries and regions and spanning
more than five continents. This network, which we refer to as Imperiali Inc.’s
Global Advisory Team, is able to monitor and in some cases influence events,
prudently utilizing the tools and leverage that the portfolio company’s business
model affords, endeavoring to mitigate risks and safeguard investments, with
the
idea of protecting the Company’s shareholders’ interest.
We
have
filed an election with the Securities and Exchange Commission to be regulated
as
a business development company under the 1940 Act and expect that election
to
become effective after the effective date of this Registration Statement. As
a
business development company, we intend to focus primarily on
micro-cap companies with sales of $25-$50 million and a strong domestic
presence, with a key product or service that is globally marketable. Micro-cap
companies (market capitalization below $50 million) are more likely than larger
companies to focus on innovative products and services. Due to the high cost
of
competition on a global scale, these micro-caps are losing market share. They
may not have the advertising dollars to compete, may lack access to long-term
debt financing for expansion and manufacturing and, more generally, they lack
the experience and contacts to access new global markets.
20
We
view
this problem for micro-cap companies to be an opportunity for us to assist
them
with the competitive edge they require, to expand and to grow top-line revenues.
Extending the assistance of Company management personnel by the use of our
Global Advisory Team, we can assist our portfolio companies expand globally,
identify capital and political resources, adapt to local customs and operating
requirements in international markets, access new consumers, new sources of
materials and remote manufacturing options, and generally make the best possible
business decisions.
We
favor
companies that present opportunities for superior performance through internal
growth, product or geographic expansion, the completion of complementary add-on
acquisitions, or industry consolidations. We would prefer to be a majority
investor, without a fixed time horizon for the liquidation of our investments.
We may continue to provide capital for add-on acquisitions that help build
value
after the initial closing.
Once
we
have identified a target portfolio company, we will conduct our due diligence,
and, as appropriate, determine whether to either (i) invest and advise or (ii)
merely advise the portfolio company for a fee. Once we have decided to advise
the portfolio company, we can distribute the portfolio company’s business plan
or other corporate literature to our agents and affiliates in over 70 countries.
Based upon the feedback from the various local agents and their local markets,
we will determine how to proceed to assist the portfolio company in pursuing
and
executing viable growth opportunities and strategies in the countries where
our
business contacts have indicated clear business interest and market viability.
Methods of expansion we may recommend to our portfolio companies include, but
are not limited to, strategic partnering, joint venture, licensing with royalty
agreement, regional distribution networks, regionalized manufacturing, and
entry
into the public markets.
In
addition to investing in and assisting portfolio companies, we will have
opportunities created through our relationship with the Imperiali Organization,
which has contractually agreed to serve as the development team for Imperiali
Inc. The Imperiali Organization has an ongoing series of projects which have
(or
may have) application to the global marketplace. Through an agreement between
Imperiali Organization and the Company, we will have the first right of refusal
on any and all projects created and developed by the Imperiali
Organization.
In
summary, as a business development company Imperiali Inc. looks to globalize
and
grow viable micro-cap companies by investing in them and/or advising them by
utilizing our international teams, residing in many international markets and
who have the intellectual, cultural, financial, political and operational
capabilities, combined with a global vision, to connect growing companies to
the
world’s markets.
This
plan
of operation has been adopted in order to attempt to create value for our
shareholders. For further information on our plan of operation and business,
see
Form 10 filed January 18, 2007.
Results
of Operations
LAST
QUARTER 2006
- During
the quarter ended November 30, 2007, we incurred a net loss of $320,088.
General
and administrative expenses related primarily to rent, salaries, telephone,
other office costs and costs associated with being a reporting
company.
21
Liquidity
and Capital Resources
We
had
cash on hand of $26,907 at November 30, 2007 and had no other assets to meet
ongoing expenses or debts that may accumulate. As of such date, we have
accumulated a deficit of $11,491,510. As of November 30, 2007 we had accrued
expenses totaling $326,614.
We
have
no commitment for any capital expenditure and foresee none. However, we will
incur routine fees and expenses incident to our reporting duties as a reporting
company, and we will incur expenses in finding and investigating possible
acquisitions and other fees and expenses in the event we make an acquisition
or
attempt but are unable to complete an acquisition. Our cash requirements for
the
next twelve months are relatively modest, principally operational accounting
expenses and other expenses relating to making filings required under the
Securities Exchange Act of 1934 (the “Exchange Act”), which should not exceed
$2,500,000 in the fiscal year ending August 31, 2008. Any travel, lodging or
other expenses which may arise related to finding, investigating and attempting
to complete a combination with one or more potential acquisitions could also
amount to thousands of dollars.
We
will
only be able to pay our future debts and meet operating expenses by raising
additional funds, acquiring a profitable company or otherwise generating
positive cash flow. As a practical matter, we are unlikely to generate positive
cash flow by any means other than acquiring a company with such cash flow.
We
believe that management members or shareholders will loan funds to us as needed
for operations prior to completion of an acquisition. Management and the
shareholders are not obligated to provide funds to us, however, and it is not
certain they will always want or be financially able to do so. Our shareholders
and management members who advance money to us to cover operating expenses
will
expect to be reimbursed, either by us or by the company acquired, prior to
or at
the time of completing a combination. We have no intention of borrowing money
to
reimburse or pay salaries to any of our officers, directors or shareholders
or
their affiliates.
Should
existing management or shareholders refuse to advance needed funds, however,
we
would be forced to turn to outside parties to either loan money to us or buy
our
securities. There is no assurance whatsoever that we will be able to raise
necessary funds from outside sources. Such a lack of funds could result in
severe consequences to us, including among others:
•
failure
to make timely filings with the SEC as required by the Exchange Act,
which
also probably would result in suspension of trading or quotation
in our
stock and could result in fines and penalties to us under the Exchange
Act;
•
curtailing
or eliminating our ability to locate and perform suitable investigations
of potential acquisitions; or
•
inability
to complete a desirable acquisition due to lack of funds to pay legal
and
accounting fees and acquisition-related
expenses.
We
hope
to require potential candidate companies to deposit funds with us that we can
use to defray professional
fees and travel, lodging and other due diligence expenses incurred by our
management related to finding and investigating a candidate company and
negotiating and consummating a business combination. There is no assurance
that
any potential candidate will agree to make such a deposit.
Critical
Accounting Policies
Financial
Reporting Release No. 60 of the SEC encourages all companies to include a
discussion of critical accounting policies or methods used in the preparation
of
the financial statements. There are no current business operations or revenue
generating activities that give rise to significant assumptions or
estimates.
22
Our
most
critical accounting policies relate to the accounting and disclosure of related
party transactions. Our financial statements filed as part of this report
include a summary of the significant accounting policies and methods used in
the
preparation of our financial statements.
Risk
Factors that May Affect Future Operating Results
You
should carefully consider the risks described below before making an investment
decision. The risks and uncertainties described below are not the only ones
facing our Company. Additional risks and uncertainties not presently known
to us
or what we currently deem immaterial may also impair our business operations.
If
any of the following risks actually occur, our business, financial condition,
or
results of operations could be materially adversely affected. In such case,
the
trading price of our common stock could decline and you could lose all or part
of your investment. You should also refer to the other information about us
contained in this Form 10, including our financial statements and related
notes.
We
have only a minimal operating history.
Our
operations are subject to all the risks inherent in any new business, including
the risk that the Company will not achieve its investment objective and that
its
net asset value could decline substantially. Although we have identified, on
a
preliminary basis, certain micro-cap companies in which we may be interested
in
investing, the Company anticipates that it will take up to 90 days after the
completion of the Offering to invest substantially all of the net proceeds
received by the Company from the Offering due to the time necessary to complete
our due diligence, evaluate, structure, negotiate, and close suitable
investments. In the interim, the Company will invest in temporary investments,
such as cash and cash equivalents, U.S. government securities and other high
quality debt investments that mature in one year or less from the date of
investment, which will earn yields substantially lower than the interest income
anticipated from investments in portfolio companies. If the expenses of the
Company exceed the return on the temporary investments, the equity capital
of
the Company will be eroded. Additionally, the Company may not be able to pay
any
dividends during this period or such dividends may be substantially lower than
the dividends the Company expects to pay when its portfolio is fully
invested.
Competition
could hurt our business.
Many
entities, including public and private funds, commercial and investment banks,
commercial financing companies, business development companies and insurance
companies will compete with the Company to make the types of investments that it
plans to make in micro-cap companies. Many of these competitors are
substantially larger, have considerably greater financial, technical and
marketing resources than the Company will have and offer a wider array of
financial services. For example, some competitors may have a lower cost of
funds
and access to funding sources that are not available to the Company. In
addition, some 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. Many competitors are not subject to the
regulatory restrictions that the 1940 Act will impose on the Company as a
business development company or the restrictions that the Code will impose
on
the Company as a regulated investment company. Some competitors may make loans
with interest rates that are lower than the rates the Company wishes to offer.
The competitive pressures the Company faces may have a material adverse effect
on our business, financial condition and results of operations. Also, as a
result of this competition, the Company may not be able to take advantage of
attractive investment opportunities from time to time, and can offer no
assurance that it will be able to identify and make investments that are
consistent with our investment objective. We have not finally determined any
potential investments for the Company’s portfolio, although the Company’s
competitors are likely to have identified and begun to pursue potential
investments in which the Company may be interested.
23
Voting
control is centralized in our Board of Directors and
Officers.
Nearly
68% of the Company’s Common Stock is owned directly by our officers and
directors. However upon the closing of the Kaiser Himmel transactions as
discussed in Note 6 Kaiser Himmel will own approximately 63% of the company.
In
addition, Mr. Imperato’s friends and family own nearly an additional
4%.
We
are dependent on a key person.
Daniel
J.
Imperato has principally conducted the development stage activities of the
Company. Although he is not an employee of the Company, the loss of his services
as Chairman could negatively affect the Company. The Company has purchased
“key
man” life insurance on the life of Mr. Imperato.
We
anticipate future capital needs but have no certain source of additional
financing.
Our
capital requirements will be significant. Management believes that the net
proceeds of the Offering should suffice to fund operations and our business
plan
for a period of 12 months if the maximum number of shares is sold. However,
no
assurance can be given that such proceeds will in fact be sufficient to fund
operations for such period. The Company has no commitments for long-term
financing. There can be no assurance that such financing will be available
on
favorable terms or at all.
We
may face leverage risk.
The
Company may borrow money or issue debt securities to leverage its capital
structure. If the Company does so:
•
The
Company’s common shares will be exposed to incremental risk of loss. In
these circumstances, a decrease in the value of the Company’s investments
would have a greater negative impact on the value of its common shares
than if it did not use leverage.
•
Adverse
changes in interest rates could reduce or eliminate the incremental
income
the Company expects to make with the proceeds of any
leverage.
•
The
Company’s ability to pay dividends on its common shares will be restricted
if its asset coverage ratio is not at least 200% and any amounts
used to
service indebtedness would not be available for such
dividends.
•
It
is likely that such securities will be governed by an indenture or
other
instrument containing covenants restricting the Company’s operating
flexibility.
•
The
Company, and indirectly its shareholders, will bear the cost of issuing
and paying interest on such
securities.
We
depend upon key employees to generate revenue.
We
are an
economic and business development firm that will apply analytic techniques
and
industry knowledge to various investments in a broad range of portfolio
companies. Accordingly, our success depends heavily on the efforts, abilities,
business generation capabilities, and project execution capabilities of our
employees. In particular, our employees’ personal relationships with our
portfolio companies are a critical element in obtaining and maintaining
portfolio companies’ investments. If the Company loses the services of any
employee or if our employees fail to generate business or otherwise fail to
perform effectively, that loss or failure could adversely affect our revenues
and results of operations.
24
Much
of our business plan depends on our non-employee experts.
The
Company depends on our relationships with members of our Global Advisory Teams
and our non-employee consultants to execute our business plan. We believe that
these people are highly regarded in their fields and locales and that each
offers a combination of knowledge, experience, and expertise that would be
very
difficult to replace. We also believe that the Company will be able to secure
some investments in portfolio companies and attract other professionals to
join
our team in part because the Company can offer the services of these experts.
Most of these experts can limit their relationships with us at any time for
any
or no reason.
Our
failure to manage growth successfully could adversely affect our revenues and
results of operations
We
anticipate that providing global services will require that we open additional
offices. Opening and managing new offices often requires extensive management
supervision and increases our overall selling, general, and administrative
expenses. Expansion creates new and increased management, investment, and
training responsibilities for our employees. Expansion also increases the
demands on our internal systems, procedures, and controls, and on our
managerial, administrative, financial, marketing, and other resources. Any
failure on our part to manage growth successfully could adversely affect our
revenues and results of operations.
Maintaining
our professional reputation is crucial to our future
success
Our
ability to secure new investments and hire qualified persons as employees
depends heavily on our overall reputation as well as the individual reputations
of our employees, the members of our Global Advisory Teams and our non-employee
consultants. Because we expect that in the future the Company will obtain a
majority of our new investments from existing portfolio companies or from
referrals by those portfolio companies, any portfolio company that is
dissatisfied with our performance on a single matter could seriously impair
our
ability to secure new investments. Given the frequently high-profile nature
of
the matters on which the Company will work, any factor that diminishes our
reputation or the reputations of any of our employees, the members of our Global
Advisory Teams and our non-employee consultants could make it substantially
more
difficult for us to compete successfully for both new investments and qualified
persons to hire as employees.
Our
investments may result in professional liability
Our
services will typically involve difficult analytical assignments and carry
risks
of professional and other liability. Many of our investments will involve
matters that could have a severe impact on a portfolio company’s business, cause
the portfolio company to lose significant amounts of money, or prevent the
portfolio company from pursuing desirable business opportunities. Accordingly,
if a portfolio company is dissatisfied with our performance, that company could
threaten or bring litigation in order to recover damages or to contest its
obligation to pay our fees. Litigation alleging that we performed negligently
or
otherwise breached our obligations to a portfolio company could expose us to
significant liabilities and tarnish our reputation.
Our
common stock has no prior trading market or liquidity, and the Company cannot
assure you that any trading market will develop.
Prior
to
the date of this Registration Statement, there has not been any established
trading market for our common stock. If the Company can qualify, we will attempt
to register our shares for trading on the American Stock Exchange, although
the
Company cannot assure you as to the timing of that application or the likelihood
of it being accepted. If the application is accepted, we cannot predict the
extent to which investor interest will lead to the development of an active,
liquid trading market. Active trading markets generally result in lower price
volatility and more efficient execution of buy and sell orders for
investors.
25
The
Company has filed a notice of intent to elect business development company
status that, once effective, will require us to comply with significant
regulatory requirements.
The
Company filed notice with the Securities and Exchange Commission of our intent
to elect in good faith, within 90 days from the date of such filing but after
the effective date of this Registration Statement, to be regulated as a Business
Development Company under the 1940 Act and be subject to Sections 54 through
65
of said Act. Being subject to the business development company provisions
requires us to meet significant numbers of regulatory and financial requirements
as discussed in Item 1(c) -- Regulation of the Company. 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.
If
the
Company does not remain a business development company, the Company might be
regulated as a closed-end investment company under the 1940 Act, which would
decrease our operating flexibility. The Company cannot assure you that the
Company will successfully retain our business development company
status.
The
Company’s election to be and qualification to be treated as a regulated
investment company presents tax risks.
To
maintain its qualification as a regulated investment company under the Code,
which is required in order for the Company to distribute its income without
tax
at the Company level, the Company must meet certain income source, asset
diversification and annual distribution requirements. Satisfying these
requirements may require the Company to take actions it would not otherwise
take, such as selling investments at unattractive prices to satisfy
diversification, distribution or source of income requirements. In addition,
while the Company is authorized to borrow funds in order to make distributions,
under the 1940 Act it is not permitted to make distributions to shareholders
while its debt obligations and other senior securities are outstanding unless
certain “asset coverage” tests are met. If the Company fails to qualify as a
regulated investment company for any reason and becomes or remains subject
to
corporate income tax, the resulting corporate taxes could substantially reduce
its net assets, the amount of income available for distribution and the amount
of its distributions. Such a failure would have a material adverse effect on
the
Company and its shareholders.
For
U.S.
federal income tax purposes, the Company will include in income certain amounts
that it has not yet received in cash, such as original issue discount, which
may
arise if the Company invests in zero coupon securities, deferred interest
securities or certain other securities, or if the Company receives warrants
in
connection with the making of a loan or possibly in other circumstances. Such
original issue discount, which could but is not expected to be significant
relative to the Company’s overall investment activities, generally will be
included in income before the Company receives any corresponding cash payments.
The Company also may be required to include in income certain other amounts
that
the Company will not receive in cash.
Since
in
certain cases the Company may recognize income before or without receiving
cash
representing such income, it may have difficulty making distributions in the
amounts necessary to satisfy the requirements for maintaining regulated
investment company status and for avoiding income and excise taxes. Accordingly,
the Company may have to sell some of its investments at times we would not
consider advantageous, raise additional debt or equity capital or reduce new
investment originations to meet these distribution requirements. If the Company
is not able to obtain cash from other sources, the Company may fail to qualify
as a regulated investment company and thus be subject to corporate-level income
tax. Such a failure would have a material adverse effect on the Company and
its
shareholders.
26
BUSINESS
DEVELOPMENT COMPANY RISKS
Investing
in small and growth stage companies is inherently risky.
Investments
in micro-cap companies and 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,
including:
•
These
companies may have limited financial resources and may be unable
to meet
their obligations under their securities that the Company holds,
which may
be accompanied by a deterioration in the value of any
collateral.
•
They
typically 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.
•
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 the portfolio company and, in turn, on the
Company.
•
They
generally have less predictable operating results, may from time
to time
be parties to litigation, may be engaged in rapidly changing businesses
with products subject to a substantial risk of obsolescence, and
may
require substantial additional capital to support their operations,
finance expansion or maintain their competitive
position.
•
They
may cease to be treated as private companies for purposes of the
regulatory restrictions applicable to the Company, in which case
the
Company may not be able to invest additional amounts in
them.
•
Little
public information exists about these companies. The greater difficulty
in
making a fully informed investment decision raises the risk of misjudging
the credit quality of the company, and the Company may lose money
on its
investments.
Investing
in small and growth stage companies presents valuation
difficulties.
A
large
percentage of the Company’s portfolio investments will be in the form of
securities that are not publicly traded. The fair value of securities and other
investments that are not publicly traded may not be readily determinable. The
Company will value these securities at least quarterly at fair value as
determined in good faith by the Board of Directors, possibly with the assistance
of an independent valuation firm. However, because fair valuations, and
particularly fair valuations of private securities and private companies, are
inherently uncertain, may fluctuate over short periods of time and are often
based to a large extent on estimates, comparisons and qualitative evaluations
of
private information, the Company’s determinations of fair value may differ
materially from the values that would have been determined if a ready market
for
these securities existed. This could make it more difficult for investors to
accurately value the Company’s portfolio investments and could lead to
under-valuation or over-valuation of its common shares.
Portfolio
companies are likely to need additional funding.
The
Company expects 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
the existing investors. The availability of capital is generally a function
of
capital market conditions that are beyond the control of any portfolio company.
The Company 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 those 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.
Business
development companies’ investments are generally illiquid.
The
Company expects to make the majority of our investments in micro-cap companies
and growth stage companies. Substantially all of the securities of such
portfolio companies will be subject to legal and other restrictions on resale
or
will otherwise be less liquid than publicly traded securities. The illiquidity
of these investments may make it difficult for the Company to sell such
investments if the need arises. In addition, if the Company is required to
liquidate all or a portion of its portfolio quickly, it may realize
significantly less than the value at which it has previously recorded such
investments. In addition, the Company may face other restrictions on its ability
to liquidate an investment in a portfolio company to the extent that it has
material non-public information regarding such portfolio
company.
27
Business
development companies generally require substantial amounts of time to realize
the benefits from investments.
The
Company anticipates that there will be a significant period of time ranging
from
one to three years before the Company has obtained funding and completed the
initial selection of portfolio companies for our first round of equity
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. 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.
The
Company has not made any commitments to any prospective portfolio
companies.
Because
the Company has not made any commitments to any prospective portfolio company,
investors will not have an opportunity to carefully evaluate any of the
portfolio companies that the Company may eventually invest in and such
evaluation will be entirely dependent upon our management for selecting and
negotiating with these portfolio companies. The Company cannot assure you that
we will successfully negotiate a transaction with a portfolio
company.
Portfolio
companies may be more sensitive to economic recessions or
downturns.
Many
of
the Company’s portfolio companies may be susceptible to economic slowdowns or
recessions and may be unable to repay loans or pay dividends during these
periods. Therefore, the Company’s non-performing assets are likely to increase
and the value of its portfolio is likely to decrease during these periods.
Adverse economic conditions also may decrease the value of collateral securing
some of the Company’s loans and the value of its equity investments. Economic
slowdowns or recessions could lead to financial losses in its portfolio and
a
decrease in revenues, net income and assets. Unfavorable economic conditions
also could increase funding costs, limit access to the capital markets or result
in a decision by lenders not to extend credit to the Company. These events
could
prevent the Company from increasing investments and harm its operating
results.
A
portfolio company’s failure to satisfy financial or operating covenants could
lead to defaults and, potentially, termination of its loans and foreclosure
on
its secured assets, which could trigger cross-defaults under other agreements
and jeopardize the portfolio company’s ability to meet its obligations under the
debt or equity securities that the Company holds. The Company may need to incur
additional expenses to seek recovery upon default or to negotiate new terms
with
a defaulting portfolio company. In addition, if one of the Company’s portfolio
companies were to go bankrupt, even though the Company may have structured
its
interest as senior debt, depending on the facts and circumstances, including
the
extent to which the Company actually provided significant managerial assistance
to that portfolio company, a bankruptcy court might re-characterize the
Company’s debt holding and subordinate all or a portion of our claim to that of
other creditors.
Our
investment decisions may present industry, sector and issuer
risk.
The
Company may, from time to time, invest a substantial portion of its assets
in
the securities of issuers in any single industry or sector of the economy or
in
only a few issuers. The Company cannot predict the industries or sectors in
which its investment strategy may cause it to concentrate and cannot predict
the
level of its diversification among issuers, although over time the Company
anticipates investing in a minimum of 15 to 20 issuers to ensure it satisfies
diversification requirements for qualification as a regulated investment company
for U.S. federal income tax purposes. Concentration of the Company’s assets in
an industry or sector may present more risks than if it were broadly diversified
over numerous industries and sectors of the economy. A downturn in an industry
or sector in which the Company is concentrated would have a larger impact on
us
than on a company that does not concentrate in industry or sector. As a result
of investing a greater portion of the Company’s assets in the securities of a
smaller number of issuers, the Company would be classified as a non-diversified
company under the 1940 Act. The Company may be more vulnerable to events
affecting a single issuer or industry and therefore subject to greater
volatility than a company whose investments are more broadly diversified.
Accordingly, an investment in the Company may present greater risk than an
investment in a diversified company. Furthermore, we have not made and do not
intend to make any determination as to the allocation of assets among different
classes of securities. Consequently, at any point in time the Company may be
highly concentrated in a single type of asset and events which affect a
particular asset class disproportionately could have an equally disproportionate
effect on the Company.
28
There
may be changes in laws or regulations governing portfolio
companies.
The
Company’s portfolio companies will be subject to regulation by laws at the
local, state and federal level and, to the extent that we are successful in
expanding our portfolio companies’ operations globally, the laws of foreign
countries as well. These laws and regulations, as well as their interpretation,
may be changed from time to time. Any change in these laws or regulations,
or
any failure to comply with them by the Company’s portfolio companies, could have
a material adverse affect on the Company’s business.
29
ITEM
3.CONTROLS
and PROCEDURES.
Within
90
days of the filing of this Form 10-QSB, an evaluation was carried out by Daniel
Imperato, our Chief Executive Officer, of the effectiveness of our disclosure
controls and procedures. Disclosure controls and procedures are procedures
that
are designed with the objective of ensuring that information required to be
disclosed in our reports filed under the Securities Exchange Act of 1934, such
as this Form 10-QSB, is recorded, processed, summarized and reported within
the
time period specified in the Securities and Exchange Commission’s rules and
forms. Based on that evaluation, Mr. Imperato concluded that as of November30, 2007, and as of the date that the evaluation of the effectiveness of our
disclosure controls and procedures was completed, our disclosure controls and
procedures were effective to satisfy the objectives for which they are
intended.
There
were no changes in our internal control over financial reporting identified
in
connection with the evaluation performed that occurred during the fiscal quarter
covered by this report that has materially affected or is reasonably likely
to
materially affect, our internal control over financial reporting.
PART
II.OTHER
INFORMATION
ITEM
6.EXHIBITS
and REPORTS on FORM 8-K.
(a)
EXHIBITS.
The following exhibits are filed as part of this
report.
31
Certification
of Chief Executive Officer filed pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32
Certification
of Chief Executive Officer, furnished pursuant to 18 U.S.C. Section
1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
(b)
REPORTS
ON FORM 8-K. None
30
SIGNATURES
In
accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this Report on Form 10-QSB to be signed on its behalf by
the
undersigned, thereunto duly authorized.
