UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 000-50612
INNOCAP, INC.
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(Name of Small Business Issuer in its Charter)
Nevada 01-0721929
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5675B Baldwin Court
Norcross, GA. 30071
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(Address of principal Executive Offices) (Zip Code)
Issuer's Telephone Number: 770-378-4180
Securities registered under Section 12(g) of the Act: Common Stock par
value $.001 per share
Securities registered under Section 12(b) of the Act: None
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
State Issuer's revenues for its most recent year: $-0- as of January 31, 2005.
The number of shares outstanding of each of the Registrant's classes of common
stock, as of March 31, 2005 is 68,000,000 shares, all of one class, $.001 par
value per share. Of this number, 2,000,000 shares were held by non-affiliates*
of the Registrant.
The Company's common stock has not traded on the OTCBB or elsewhere and,
accordingly, there is no aggregate "market value" to be indicated for such
shares. The "value" of the 2,000,000 shares held by non-affiliates, based upon
the book value as of January 31, 2005, is $-0-.
*Affiliates for the purpose of this item refers to the Registrant's officers and
directors and/or any persons or firms (excluding those brokerage firms and/or
clearing houses and/or depository companies holding Registrant's securities as
record holders only for their respective clienteles' beneficial interest) owning
10% or more of the Registrant's common stock, both of record and beneficially.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes__________No_________ NOT APPLICABLE
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are herewith incorporated by reference: NONE
Transitional Small Business Disclosure Format
[ ] Yes [ ] No
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PART I
Item 1. DESCRIPTION OF BUSINESS
Innocap, Inc. is a closed-end management investment company following
our filing, on September 14, 2004, of a notice of election to be regulated as a
business development company under the Investment Company Act of 1940. We were
incorporated on January 23, 2004 and have not conducted any operations to date.
We were organized to provide investors with the opportunity to participate with
a modest amount in venture capital 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 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.
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 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:
o eligible portfolio companies as defined in the 1940 Act and
o 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;
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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.
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, or
the National Association of Securities Dealers' Automated Quotation System,
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.
Strategy
We have significant relative flexibility in selecting and structuring
our investments. We are 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 will enable our
future 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.
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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 Process
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 matter of policy, we will not:
o 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;
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 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.
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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.
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
In order to be sustainable, 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,
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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, will next issue 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:
[] "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
[] in certain 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 states 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.
Due Diligence - If a target company generally meets the characteristics
described above, we will perform initial due diligence, including:
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o company and technology assessments,
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 known to
management.
The criteria delineated below provide general parameters for our
investment decisions, although not all of such criteria will be followed in each
instance. Upon successful completion of this preliminary evaluation, we will
decide whether to deliver a non-binding letter of intent and move forward
towards the completion of a transaction.
Management Team
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 product
development and marketing, mergers and acquisitions, alliances,
collaborations, research and development outsourcing and other
strategic activities;
o Assessment of competition; and
o Review of exit strategies.
Financial Condition
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.
Product or Service Assessment
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
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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 that we believe 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 to 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; and
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
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the 1940 Act. Until we qualify as a registered investment company (RIC), 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
o cash,
o cash items,
o government securities,
o securities of other RICs, and
o 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 $250,000 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.
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Tax Information
The following is a general summary of certain of the United States
Federal income tax laws relating to us and our future investors if any. This
discussion is based on the Internal Revenue Code, regulations, published rulings
and procedures and court decisions as of the date hereof. The tax law, as well
as the implementation thereof, is subject to change, and any such change might
interfere with our ability to ever qualify as a RIC or, if we so qualify, to
maintain such qualification. This discussion does not purport to deal with all
of the United States Federal income tax consequences applicable to us or to all
categories of investors, some of whom may be subject to special rules. In
addition, it does not address state, local, foreign or other taxes to which we
or our investors may be subject, or any proposed changes in applicable tax laws.
Investors should consult their tax advisers with respect to an investment in our
securities.
Taxation of Innocap as an Ordinary Corporation - We anticipate that, in the
future, we will seek to meet the requirements, including diversification
requirements, to qualify for the special pass-through status available to RICs
under the Internal Revenue Code, and thus to be relieved of Federal income tax
on that part of our net investment income and realized capital gains that we
distribute to shareholders. Unless and until we meet these requirements, 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, such income will be
subject to a double layer of tax although corporate shareholders may be entitled
to a dividends-received deduction. We cannot assure you that we will ever meet
the requirements to qualify as a RIC. If we are unable to qualify for treatment
as a RIC, we would not be able to deduct distributions to stockholders, nor
would they be required to be made.
Taxation of Innocap as a RIC. Consequences of Converting from an Ordinary
Corporation to a RIC - In order to qualify as a RIC, we must, at the end of the
first year in which we so qualify, have no accumulated earnings and profits from
years in which we were not taxed as a RIC. To meet this requirement, we must,
before the end of the first year in which we qualify as a RIC, distribute as
dividends all of our accumulated earnings and profits.
RIC Qualification Requirements - To qualify as a RIC, we must distribute to our
shareholders for each taxable year at least 90% of our investment company
taxable income consisting generally of net investment income and net short-term
capital gains and must meet several additional requirements. Among the
requirements are the following:
o We must derive at least 90% of our gross income each taxable year from
dividends, interest, payments with respect to loans of securities and
gains from the sale or other disposition of securities or other income
derived with respect to our business of investing in securities
("Income Requirement");
o We must derive less than 30% of our gross income each taxable year
from gains from the sale or other disposition of securities held for
less than three months;
o We must diversify our assets so 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 or in the securities of two or more issuers
that we control and that are engaged in the same or
similar trades or businesses or related trades or
businesses, and
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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, with each investment in such other
securities 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; and
o We must file an election to be treated as a RIC. If, after initially
qualifying as a RIC, we fail to qualify for treatment as a RIC for a
taxable year, we would be taxed as an ordinary corporation on our
taxable income for that year and all distributions out of our earnings
and profits would be taxable to shareholders as dividends (that is,
ordinary income). In such a case, there may be substantial tax and
other costs associated with re-qualifying as a RIC.
Taxation of Innocap's Shareholders - Dividends paid to shareholders that are
attributable to our net investment income will be taxable to shareholders as
ordinary income. Capital gain distributions are taxable as long-term capital
gains regardless of how long the shareholder has held our shares. It is not
anticipated that a significant portion of our dividends will qualify for the
dividends-received deduction for corporations.
Distributions are generally taxable to shareholders at the time the
distribution is received. However, any distribution declared by Innocap in
October, November or December, made payable to shareholders of record in such a
month and paid the following January, is deemed to have been paid by Innocap and
received by shareholders on December 31 of the year declared. This will prevent
the application of the excise tax to Innocap as a result of the delay in the
payment of the dividends.
If, for any calendar year, Innocap's total distributions exceed its net
investment income and net capital gains, the excess will generally be considered
a tax-free return of capital to a shareholder to the extent of the shareholder's
adjusted basis in its shares and then as capital gain. The amount treated as
tax-free return of capital will reduce the adjusted basis of a shareholder's
shares, thereby increasing the potential gain or reducing the potential loss on
the sale of the shares.
In general, upon the sale or other disposition of shares, the selling
shareholder will recognize a gain or loss equal to the difference between the
amount realized on the sale and the seller's adjusted basis in the shares. Any
loss realized will be disallowed to the extent the seller has acquired (or
entered into a contract to acquire) substantially identical shares within a
period beginning 30 days before the disposition of shares and ending 30 days
after the disposition. In such case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss. Gain or loss realized upon a sale of
shares generally will be treated as a capital gain or loss. The gain or loss
will be a long-term capital gain or loss if the shares were held for more than
one year. In addition, if the shares sold were not held for more than six
months, any loss on the sale will be treated as long-term capital loss to the
extent of any capital gain dividend received by the shareholder with respect to
these shares.
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Innocap is required to withhold amounts on distributions to individuals
and certain other non-corporate shareholders who do not provide Innocap with a
correct taxpayer identification number or who otherwise are subject to backup
withholding.
Federal withholding taxes at a rate of 30%,or a lesser treaty rate, may
apply to distributions to shareholders who are nonresident aliens or foreign
partnerships, trust or corporations. The rules governing United States federal
income taxation of foreign shareholders are complex, and prospective non-U.S.
shareholders should consult with their own tax advisors to determine the impact
of federal, state and local income tax laws with regard to an investment in
shares, including any reporting requirements.
Individuals and certain other shareholders will be required to include
in their gross income an amount of certain Innocap expenses relating to the
production of gross income that are allocable to the shareholder. These
shareholders, therefore, will be deemed to receive gross income from Innocap in
excess of the distributions that they actually receive. These allocated expenses
may be deductible by an individual shareholder as a miscellaneous itemized
deduction, subject to the limitation on miscellaneous itemized deductions not
exceeding 2% of adjusted gross income. Innocap will notify shareholders
following the end of each calendar year of the amounts of dividends and capital
gain distributions paid or deemed paid during the year.
Tax-Exempt Investors. Qualified plans, individual retirement accounts and
investors exempt from taxation under the internal Revenue Code Section 501(c)(3)
are generally exempt from taxation except to the extent that they have unrelated
business taxable income (UBTI),determined in accordance with Internal Revenue
Code Sections 511-514. If Innocap qualifies as a RIC, it is likely that
distributions to a tax-exempt entity shareholder that are treated as dividends
will not be considered UBTI and will therefore be exempt from federal income tax
even if Innocap borrows to acquire its investment assets. Under Section 512(b)
of the Internal Revenue Code, UBTI does not include dividends received by a
tax-exempt entity. As a general rule, the income tax provisions relating to
corporation apply to RICs, unless Subchapter M of the Internal Revenue Code
provides otherwise, and thus Section 512(b) should apply to exclude from UBTI
dividends paid by a RIC to a tax-exempt entity. This conclusion is also
supported by Revenue Ruling 66-106, which applies Section 512(b) to exclude from
UBTI dividends paid to the tax-exempt shareholders of a real estate investment
trust, a conduit entity that invests in real estate and is substantially similar
to a RIC for tax purposes, on the same theory. However, if a tax-exempt entity
borrows money to purchase its shares, a portion of its income from Innocap will
constitute UBTI pursuant to the "debt-financed property rules."
Social clubs, voluntary employee benefit associates [or associations?],
supplemental unemployment benefit trusts, and qualified group legal service
organizations that are exempt from taxation under Internal Revenue Code Sections
501(c)(7), (9), (17) and (20), respectively, are subject to different UBTI
rules, which generally will require them to characterize distributions from
Innocap as UBTI. Dividends distributions by Innocap to a charitable organization
that is a private foundation should constitute investment income for purposes of
the excise tax on net investment income of private foundations imposed by
Section 4940 of the Internal Revenue Code.
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Other Regulatory Matters
We are a business development company under the 1940 Act. The 1940 Act
contains prohibitions and restrictions relating to transactions between business
development companies and their affiliates, including any investment advisers or
sub-advisers, principal underwriters and affiliates of those affiliates or
underwriters and requires that a majority of the directors be persons other than
interested persons, as that term is defined in the 1940 Act. In addition, the
1940 Act provides that we may not change the nature of our business so as to
cease to be, or to withdraw our election as, a business development company
unless approved by a majority of our outstanding voting securities.
We are permitted, under specified conditions, to issue multiple classes
of indebtedness and one class of stock senior to our common stock if our asset
coverage, as defined in the 1940 Act, is at least equal to 200% immediately
after each such issuance. In addition, while any senior securities remain
outstanding, we must make provisions to prohibit any distribution to our
stockholders or the repurchase of such securities or shares unless we meet the
applicable asset coverage ratios at the time of the distribution or repurchase.
We may also borrow amounts up to 5% of the value of our total assets for
temporary or emergency purposes. Regulations governing our operation as a BDC
will affect our ability to, and the way in which we raise additional capital,
which may expose us to risks, including the typical risks associated with
leverage.
Determination of Net Asset Value
The net asset value per share of our outstanding shares of common stock
will be determined quarterly, as soon as practicable after, and as of the end
of, each calendar quarter, by dividing the value of total assets minus total
liabilities by the number of shares outstanding at the date as of which such
determination is made.
In calculating the value of our total assets, we will value securities
that are publicly traded at the closing price on the valuation date for exchange
traded and NASDAQ listed securities or the average of the bid and asked prices
for other securities. Debt and equity securities that are not publicly traded
will be valued at fair value as determined in good faith by a valuation
committee of our board of directors which will be established when we commence
operations based on the recommendation by our investment adviser and under
valuation guidelines adopted by our board of directors, and then approved by our
entire board of directors. Initially, the fair value of these securities will be
their original cost. Debt securities valued at cost would be revalued for
significant events affecting the issuer's performance and equity securities
valued at cost would be revalued if significant developments or other factors
affecting the investment provide a basis for valuing the security at a price
other than cost, such as:
o results of subsequent financing,
o the availability of market quotations,
o the portfolio company's operations and
o changes in market conditions.
For warrants, our cost usually will be a nominal amount, such as $.01
per share. Debt securities with remaining maturities of 60 days or less at the
time of purchase will be valued at amortized cost. Debt securities which are
publicly traded will be valued by using market quotations obtained from pricing
services or dealers. Our valuation guidelines will be subject to periodic review
by our board of directors and may be revised in light of our experience,
regulatory developments or otherwise.
14
Determination of fair values involves subjective judgment and estimates
not susceptible to substantiation by auditing procedures. Accordingly, under
current auditing standards, the notes to our financial statements will refer to
the uncertainty with respect to the possible effect of such valuations, and any
change in such valuations, on our financial statements.
Employees
At March 31, 2005, we had one employee, B. Alva Schoomer. Various
aspects of due diligence of prospective portfolio companies and monitoring the
activities of portfolio companies will be subcontracted to consultants.
Code of Ethics
We will adopt a code of ethics pursuant to Rule 17j-1 under the 1940
Act that establishes procedures for personal investments and restricts certain
personal securities transactions. Personnel subject to each code may invest in
securities for their personal investment accounts, including securities that may
be purchased or held by us, so long as such investments are made in accordance
with the code's requirements. The Code of Ethics will be adopted prior to our
commencing any investment activities.
Item 2. DESCRIPTION OF PROPERTY
We currently operate out of office space located at 5675B Baldwin
Court, Norcross, GA 30071 which is provided to us by our founder at no cost
which serves as our principal address.
Item 3. LEGAL PROCEEDINGS
We are not involved in any litigation.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Part II
Item 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
We became subject to Securities Exchange Act Reporting Requirements as
of April 30, 2004.
There is no current market for the shares of our common stock. No
symbol has been assigned for our securities, and our securities have not been
listed or quoted on any Exchange to date. There can be no assurance that a
symbol will be assigned or that a liquid market will develop in the foreseeable
future. Transfer of our common stock may also be restricted under the securities
or blue sky laws of certain states and foreign jurisdictions. Consequently,
investors may not be able to liquidate their investments and should be prepared
to hold the common stock for an indefinite period of time.
15
We have never paid any cash dividends on shares of our common sock and
do not anticipate that we will pay dividends in the foreseeable future. We
intend to apply any earnings to fund the development of our business. The
purchase of shares of common stock is inappropriate for investors seeking
current or near term income.
As of the close of business on January 31, 2005, there were 11
stockholders of record of our common stock, and 68,000,000 shares were issued
and outstanding.
The foregoing issuances of 68,000,000 shares include:
o 50,000,000 founder shares that were effectuated in reliance upon
exemption from registration provided by Section 4(2) under the
Securities Act of 1933 as amended; and
o 18,000,000 shares issued from our 2004 Non-Statutory Stock Option Plan
(as approved by our Board of Directors on January 27, 2004) and in
accordance with our Form S-8 Registration Statement as filed with the
SEC on June 18, 2004 (SEC File No.: 000-50612).
No underwriter participated in the issuance of our shares, and no
underwriting discounts or commissions were paid to anyone.
The Company has never repurchased any of its equity securities.
Rule 144 Sales
Of the 68,000,000 outstanding shares of common stock at March 31, 2005
held by present stockholders, 55,000,000 are "restricted securities" within the
meaning of Rule 144 under the Securities Act of 1933, as amended.
As restricted shares, these shares may be resold only pursuant to an
effective registration statement or under the requirements of Rule 144 or other
applicable exemptions from registration under the Act and as required under
applicable state securities laws. Rule 144 provides in essence that a person who
has held restricted securities for a prescribed period may, under certain
conditions, sell every three months, in brokerage transactions, a number of
shares that does not exceed 1.0% of a company's outstanding common stock. The
alternative average weekly trading volume during the four calendar weeks prior
to the sale is not available to Company shareholders being that the OTCBB is not
an "automated quotation system" and, accordingly, market based volume
limitations are not available for securities quoted only over the OTCBB. As a
result of revisions to Rule 144 which became effective on or about April 29,
1997, there is no limit on the amount of restricted securities that may be sold
by a non-affiliate (i.e., a stockholder who is not an officer, director or
control person of the Company) after the restricted securities have been held by
the owner for a period of two years. A sale under Rule 144 or under any other
exemption from the Act, if available, or pursuant to subsequent registrations of
shares of common stock of present stockholders, may have a depressive effect
upon the price of the common stock in any market that may develop. All the
55,000,000 restricted shares of common stock were issued in January 2004 and,
accordingly, became available for re-sale pursuant to Rule 144 in January 2005
provided that the Company is current with respect to its 1934 Act reporting
requirements.
16
Blue Sky Considerations
Because our securities have not been registered for resale under the
blue sky laws of any state, the holders of such shares and persons who desire to
purchase them in any trading market that might develop in the future, should be
aware that there may be significant state blue-sky law restrictions upon the
ability of investors to sell the securities and of purchasers to purchase the
securities. Accordingly, investors should consider any secondary market for the
Company's securities to be a limited one.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Certain matters discussed in this annual report on Form 10-KSB are
forward-looking statements. Such forward-looking statements contained in this
annual report involve risks and uncertainties, including statements as to:
o our future operating results,
o our business prospects,
o our contractual arrangements and relationships with third parties,
o the dependence of our future success on the general economy and its
impact on the industries in which we may be involved,
o the adequacy of our cash resources and working capital, and
o other factors identified in our filings with the SEC, press releases
and other public communications.
These forward-looking statements can generally be identified as such because the
context of the statement will include words such as we "believe," "anticipate,"
"expect," "estimate" or words of similar meaning. Similarly, statements that
describe our future plans, objectives or goals are also forward-looking
statements. Such forward-looking statements are subject to certain risks and
uncertainties which are described in close proximity to such statements and
which could cause actual results to differ materially from those anticipated as
of the date of this Form 10-KSB. Shareholders, potential investors and other
readers are urged to consider these factors in evaluating the forward-looking
statements and are cautioned not to place undue reliance on such forward-looking
statements. The forward-looking statements included herein are only made as of
the date of this report and we undertake no obligation to publicly update such
forward-looking statements to reflect subsequent events or circumstances.
17
Operations
We are newly-organized and have not yet entered into any definitive
financing transactions with any portfolio companies. We have no 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. To date, our efforts
have been limited primarily to organizational activities and preparation of
documents to be filed with the SEC. We have no resources and have realized no
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. Innocap will be
wholly dependent for the selection, structuring, closing and monitoring of all
of its investments on the diligence and skill of its management, acting under
the supervision of Innocap's board of directors. None of these individuals has
substantial experience 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 Innocap will attain
our investment objective.
We will not commence operations until we raise capital through the
sales of shares pursuant to Regulation E of the 1933 Act. We will not attempt to
raise funds through a Regulation E offering unless and until we receive a
trading symbol for our securities. We cannot predict the likelihood or timing of
getting such a symbol.
Liquidity
We have not obtained any source of funding. We intend to raise our
initial capital through the sale of shares of our common stock. The offer and
sale of the shares will not be registered under the 1933 Act because their
issuance and sale is exempt from such registration requirements pursuant to
Regulation E of the 1933 Act. Because the first $5,000,000 raised will be from
shares that will be acquired by investors in transactions involving an exempt
public offering pursuant to Regulation E, they will be unrestricted or
free-trading securities and may be freely traded, transferred, assigned, pledged
or otherwise disposed of at the time of issuance.
We cannot make any assurances that we will be successful in selling the
common shares or, if sold, at what price.
Recent Accounting Pronouncements
No new pronouncement issued by the Financial Accounting Standards
Board, the American Institute of Certified Public Accountants or the Securities
and Exchange Commission is expected to have a material impact on Innocap's
financial position or reported results of operations.
Seasonality
We do not yet have a basis to determine whether our consulting business
will be seasonal.
Risk Factors
We are a recently organized development stage company with no resources
or source of revenues.
18
We are newly-organized and have not yet entered into any financing
transactions with any portfolio companies. We have no 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. To date, our efforts have been
limited primarily to organizational activities and preparation of a registration
statement and other regulatory filings. We have no resources and have realized
no 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. Innocap will be
wholly dependent for the selection, structuring, closing and monitoring of all
of its investments on the diligence and skill of its management, acting under
the supervision of Innocap's board of directors. None of these individuals
(currently three persons) has substantial experience 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 Innocap will attain its investment objective.
Investments in Innocap by new shareholders will be diluted immediately.
The present shareholders of Innocap have acquired an interest in
Innocap at a total cost substantially less than the total cost the public
investors will likely pay for their shares. Therefore, the public investors will
bear most of the risk of loss. As of January 23, 2004 (inception date), Innocap
authorized a total of 190,000,000 shares of common stock for issuance and
1,000,000 shares of our preferred stock authorized for issuance. As of March 31,
2005, there were 68,000,000 common shares outstanding, all of which are held by
founders and consultants/professionals in consideration for their services in
developing our business concept and plan as well as related documents. All
shares were considered issued at their par value.
We are required to comply with significant regulatory requirements.
Innocap has filed notice with the Securities and Exchange Commission of
our intent to be regulated as a Business Development Company under the 1940 Act
and be subject to Sections 54 through 65 of said Act. Upon making this election,
Innocap became subject to the provisions of 1940 Act as it applies to BDCs.
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.
If we do not remain a business development company, we might 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.
BDC Risks
Investing in small and growth stage companies is inherently risky.
19
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 investing in companies in an early-stage of development or with little
or no operating history,
o companies operating at a loss or with substantial variations in
operating results from period to period, and
o companies with the need for substantial additional capital to support
expansion or to achieve or maintain a competitive position.
These companies may face intense competition, including competition from
companies with:
o greater financial resources,
o more extensive development, manufacturing, marketing, and service
capabilities, and
o a larger number of qualified managerial and technical personnel.
Although we intend to mitigate our risk exposure by limiting our investments in
early stage companies, we cannot assure you that the portfolio companies in
which we choose to place a majority of our investment capital are not facing the
same risks of companies that are inherent in start-up companies. In addition,
growth stage companies are likely to have a very limited operating history and
thus evaluating their worthiness for investment will be more subjective on their
future potential for growth and cannot be predicated on operating successes.
We will be dependent on the quality and actions of management of portfolio
companies
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 of the portfolio companies will be
controlled by their own management teams. As the portfolio companies have yet to
be identified, investors must rely upon our management to select portfolio
companies that have, or can obtain, the necessary management resources. 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.
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 Innocap 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, including Innocap. The availability
of capital is generally a function of capital market conditions that are beyond
the control of Innocap or any portfolio company. We cannot assure you that
Innocap's 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.
20
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, Innocap 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, Innocap 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. 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.
BDCs generally require substantial amounts of time to realize the benefits from
investments.
We anticipate that there will be a significant period of time ranging
from one to three years before Innocap 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.
Risks of Innocap
We have not obtained any source of funding.
We intend to raise our initial capital through the sales of shares of
our common stock. The offer and sale of the shares will not be registered under
the 1933 Act on the ground that their issuance and sale is exempt from such
registration requirements pursuant to Regulation E of the 1933 Act. Because the
first $5,000,000 raised will be from shares that will be acquired by investors
in transactions involving an exempt public offering pursuant to Regulation E,
they will be unrestricted or free-trading securities and may be freely traded,
transferred, assigned, pledged or otherwise disposed of at the time of issuance.
We cannot assure you that we will be successful in selling the common
shares or, if sold, at what price. We will not be able to make any investments
until and unless we obtain funding.
We have not identified any prospective portfolio companies.
We have not made any commitments to any prospective portfolio company.
Therefore investors will not have an opportunity to carefully evaluate any of
the portfolio companies that we may eventually invest in and such evaluation
will be entirely dependent upon our management for selecting and negotiating
with these portfolio companies. We cannot assure you that we will locate or
successfully negotiate a transaction with a portfolio company.
21
We are likely to incur substantial losses in the first years of operations.
If funding is obtained, it is anticipated that most of such funding,
except for operating cash reserves and funds set aside for follow-on investments
in then-existing portfolio companies, will be expended or committed within two
years, which is expected to be prior to the receipt of any substantial realized
gains by Innocap. Our management anticipates that we and a number of the
portfolio companies will sustain substantial losses in the initial years of
operation. It is possible that these losses may never be recovered. We cannot
assure you that we will ever be profitable.
We are totally reliant on management.
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 Innocap's board of directors. None
of these individuals (currently 2 persons) has substantial experience 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.
We cannot assure you that we will attain our investment objective.
We have broad discretionary use of the proceeds from any funding that we obtain.
Our management has broad discretion with respect to the specific
application of the net proceeds of any funding that we obtain, although
substantially all of the net proceeds from any offering is intended to be
applied for investments in eligible portfolio companies which satisfy Innocap's
investment criteria.
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 Innocap, many of whom will have greater financial and
management resources than Innocap. Furthermore, Innocap must comply with
provisions of the 1940 Act pertaining to BDCs and, if Innocap qualifies as a
RIC, provisions of the Internal Revenue Code pertaining to RICs might restrict
Innocap's flexibility as compared with its 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.
We are unlikely to qualify for the income tax benefits offered to RICs.
22
We will be classified as a non-diversified investment company under the
1940 Act. 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. 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 tax
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 Innocap or that aggregate distributions, if any, will equal or exceed
the shareholders' investment in Innocap. Sales of portfolio company securities
will be the principal source of distributable cash to shareholders. The
directors have absolute discretion in the timing of distributions to
shareholders. Securities acquired by Innocap through equity investments will be
held by Innocap and will be sold or distributed at the sole discretion of the
directors.
We indemnify officers and directors to the maximum extent permitted by Nevada
law.
Our articles of incorporation provide for indemnification of directors,
officers, employees and agents of Innocap to the full extent permitted by Nevada
law and the 1940 Act.
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. In addition, they may not be available to us if there are time
conflicts involving other entities.
Our common stock has no prior trading market or liquidity, and we cannot assure
you that any trading market will develop.
There is no established trading market for our common stock, and there
is currently no market whatsoever for our securities. We will seek to have a
market maker file an application with the NASD on our behalf to quote the shares
of our common stock on the NASD OTC Bulletin Board ("OTCBB"). There can be no
assurance as to whether such market maker's application will be accepted or, if
accepted, the prices at which our common stock will trade if a trading market
develops, of which there can be no assurance. We are not permitted to file such
application on our own behalf. If the application is accepted, we cannot predict
the extent to which investor interest in us 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.
In addition, 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. Either of these factors could adversely affect the liquidity and
trading price of our common stock. Also, the stock market in general has
experienced extreme price and volume volatility that has especially affected the
market prices of securities of many companies. At times, this volatility has
been unrelated to the operating performance of particular companies. These broad
market and industry fluctuations may adversely affect the trading price of the
common stock, regardless of our actual operating performance.
23
The market price of 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, which may adversely
affect our ability to raise capital through future equity financings. These
factors, many over which we have no control and that may not be directly related
to us, include the following:
o significant volatility in the market price and trading volume of
securities of closed-end investment companies, business development
companies or other companies in our sector, 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 BDCs;
o a loss of 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 key personnel;
o potential legal and regulatory matters;
o operating performance of companies comparable to us; and
o general economic trends and other external factors.
Sales of substantial amounts of our common stock in the public market may have
an adverse effect on the market price of our common stock
If a market does develop for our shares of common stock, of which we
can make no assurances, subsequent 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 scenario occurs, it could
impair our ability to raise additional capital through the sale of equity
securities should we desire to do so.
We are authorized to issue up to 190,000,000 shares of common stock,
par value $.001 per share. Our board of directors also has authority, without
action or vote of the shareholders, to issue all or part of the authorized but
unissued shares. Any such issuance will dilute the percentage ownership of
shareholders and may further dilute the book value of the common stock. These
issuances may also serve to enhance existing management's ability to maintain
control of Innocap.
For all of the foregoing reasons and others set forth herein, an
investment in the Company's securities in any market which may develop in the
future involves a high degree of risk. Any person considering an investment in
such securities should be aware of these and other risk factors set forth in
this Form 10-KSB.
24
Item 7. FINANCIAL STATEMENTS
Innocap's financial statements as of January 31, 2005 and the year then
ended start after page 33.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
NONE
Item 8A. CONTROLS AND PROCEDURES
Our founder currently serves as both our chief executive officer and
chief financial officer (collectively, the "Certifying Officer") and is
responsible for establishing and maintaining disclosure controls and procedures
for us. He has concluded (based upon his evaluation of these controls and
procedures as of a date within 90 days of the filing of this report) that our
disclosure controls and procedures are effective to ensure that information
required to be disclosed by us in this report is accumulated and communicated to
management, including our principal executive officers as appropriate, to allow
timely decisions regarding required disclosure.
The Certifying Officer also has indicated that there were no
significant changes in our internal controls or other factors that could
significantly affect such controls subsequent to the date of his evaluation, and
there were no corrective actions with regard to significant deficiencies and
material weaknesses.
Item 8B - OTHER INFORMATION
No event occurred during the fourth quarter of fiscal 2005 that would
have required disclosure in a report on Form 8-K.
PART III
Item 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers and directors are as follows:
Name Age Title
- ---- --- -----
B. Alva Schoomer 71 Chairman, President and CFO
Stephen B. Schneer 73 Director
Raymond C. Holland, Sr. 70 Director
25
B. Alva Schoomer - Founded us in 2004. Dr. Schoomer has been an independent
consultant since 1988 working on projects and engagements that are similar to
those that INNOCAP plans to seek. Prior to 1988, Dr. Schoomer held executive
positions with W.P. Carey & Co., Inc., Innovation Investors (a partnership
underwritten by Shearson Lehman), RAC Information Systems, Inc., Greenwich
Research Associates, A. G. Becker & Co., and the American Stock Exchange. Dr.
Schoomer holds a Ph.D. in chemistry and physics from the California Institute of
Technology. Dr. Schoomer is also the president of BAS Consulting, Inc., a
development stage public company (not yet listed for trading).
Stephen B. Schneer - is an attorney who practices law in New York City. He holds
a JD from Columbia University.
Raymond C. Holland, Sr. - Mr. Holland is the vice-chairman of Triad Securities
Corp., an NASD member firm specializing in providing research, execution and
clearance services to institutional investors and hedge funds. He has held
various executive positions with Triad since 1998. Mr. Holland is a graduate of
Fordham University and attended Pace Graduate School of Business.
Board of Directors
All directors hold office until the completion of their term of office,
which is not longer than three years, or until their successors have been
elected and have qualified. All officers are appointed annually by the board of
directors and, subject to existing employment agreements, serve at the
discretion of the board. Currently, directors receive no compensation.
Committees of the Board of Directors
Concurrent with having sufficient members and resources, the Innocap
board of directors will establish an audit committee, investment committee and a
compensation committee. The audit committee will review the results and scope of
the audit and other services provided by the independent auditors and review and
evaluate the system of internal controls. The investment committee will review
and approve all investments in excess of $50,000 and assist in determining the
carrying values of portfolio investments. The compensation committee will manage
the stock option plan and review and recommend compensation arrangements for the
officers. No final determination has yet been made as to the memberships of
these committees or when we will have sufficient members to establish
committees.
All directors will be reimbursed by Innocap for any expenses incurred
in attending directors' meetings provided that Innocap has the resources to pay
these fees. Innocap will consider applying for officers and directors liability
insurance at such time when it has the resources to do so.
Stock Option Plan
Pursuant to the January 27, 2004 board of directors approval and
subsequent stockholder approval, we adopted our 2004 Non-Statutory Stock Option
Plan whereby Innocap reserved for issuance up to 20,000,000 shares of its common
stock.
26
Management has issued 18,000,000 options under the plan to certain
current members of the management team as well as other persons whom it
considers to be important to its current and proposed business activities. All
options were exercisable at $.001 par value per share for a period of five years
from the date of issuance and have been exercised in full in August 2004.
As previously indicated, the board of directors, on January 27, 2004,
adopted the plan so as to provide a long-term incentive for employees,
non-employee directors, consultants, attorneys and advisors of Innocap and its
subsidiaries, if any. The board of directors believes that Innocap's policy of
granting stock options to such persons will continue to provide it with a
critical advantage in attracting and retaining qualified candidates. In
addition, the plan is intended to provide Innocap with maximum flexibility to
compensate plan participants. We believe that such flexibility will be an
integral part of Innocap's policy to encourage employees, non-employee
directors, consultants, attorneys and advisors to focus on the long-term growth
of stockholder value. The board of directors believes that important advantages
to Innocap are gained by an option program such as:
o the plan which includes incentives for motivating employees of
Innocap, while at the same time promoting a closer identity of
interest between employees,
o non-employee directors,
o consultants,
o attorneys, and
o advisors on the one hand, and the stockholders on the other.
The principal terms of the plan are summarized below, however it is not
intended to be a complete description thereof and such summary is qualified in
its entirety by the actual text of the plan.
Summary Description of the Innocap, Inc. 2004 Non-Statutory Stock Option Plan
The purpose of the plan is to provide directors, officers and employees
of, consultants, attorneys and advisors to Innocap and its subsidiaries, if any,
with additional incentives by increasing their ownership interest in Innocap.
Directors, officers and other employees of Innocap and its subsidiaries are
eligible to participate in the plan. Options in the form of Non-Statutory Stock
Options may also be granted to directors who are not employed by Innocap and
consultants, attorneys and advisors to Innocap providing valuable services to
Innocap and its subsidiaries. In addition, individuals who have agreed to become
an employee of, director of or an attorney, consultant or advisor to Innocap
and/or its subsidiaries are eligible for option grants, conditional in each case
on actual employment, directorship or attorney, advisor and/or consultant
status. The plan provides for the issuance of NSO's only, which are not intended
to qualify as incentive stock options within the meaning of Section 422 of the
Internal Revenue Code, as amended.
The board of directors of Innocap or a compensation committee will
administer the plan with the discretion generally to determine the terms of any
option grant, including the:
o exercise price,
o number of option shares,
o term,
27
o vesting schedule, and
o the post-termination exercise period.
Notwithstanding this discretion:
o the term of any option may not exceed 10 years, and
o an option will terminate as follows:
o if such termination is on account of termination of employment
for any reason other than death, without cause, such options
shall terminate one year thereafter;
o if such termination is on account of death, such options shall
terminate 15 months thereafter; and
o if such termination is for cause (as determined by the board of
directors and/or compensation committee), such options shall
terminate immediately.
Unless otherwise determined by the board of directors or compensation committee,
the exercise price per share of common stock subject to an option shall be equal
to no less than 10% of the fair market value of the common stock on the date
such option is granted. No NSO shall be assignable or otherwise transferable
except by will or the laws of descent and distribution or except as permitted in
accordance with SEC Release No.33-7646 as effective April 7, 1999.
The plan may be amended, altered, suspended, discontinued or terminated
by the board of directors without further stockholder approval, unless such
approval is required by law or regulation or under the rules of the stock
exchange or automated quotation system on which the common stock is then listed
or quoted. Thus, stockholder approval will not necessarily be required for
amendments which might increase the cost of the plan or broaden eligibility
except that no amendment or alteration to the plan shall be made without the
approval of stockholders which would:
o decrease the NSO price (except as provided in paragraph 9 of the plan)
or change the classes of persons eligible to participate in the plan,
or
o extend the NSO period, or
o materially increase the benefits accruing to plan participants, or
o materially modify plan participation eligibility requirements, or
o extend the expiration date of the plan.
Unless otherwise indicated the Plan will remain in effect for a period
of ten years from the date adopted unless terminated earlier by the board of
directors except as to NSOs then outstanding, which shall remain in effect until
they have expired or been exercised.
Executive Compensation
No officer, director or employee has received any cash compensation to
date, and no director, officer or employee has a contract or commitment to
receive annual compensation in excess of $100,000. Each officer and director
will be paid a negotiated percentage of profits for the events that they arrange
or an amount for specific work performed. They will receive no other
compensation from us until we are operating profitably.
28
Conflicts of Interest
None of our key personnel is required to commit full time to our
affairs and, accordingly, these individuals may have conflicts of interest in
allocating management time among their various business activities. In the
course of their other business activities, certain key personnel may become
aware of investment and business opportunities which may be appropriate for
presentation to us, as well as the other entities with which they are
affiliated. As such, they may have conflicts of interest in determining to which
entity a particular business opportunity should be presented.
Each officer and director is, so long as he is an officer or director,
subject to the restriction that all opportunities contemplated by our plan of
operation that come to his attention, either in the performance of his duties or
in any other manner, will be considered opportunities of, and be made available
to us and the companies that he is affiliated with on an equal basis. A breach
of this requirement will be a breach of the fiduciary duties of the officer or
director. If we or the companies to which the officer or director is affiliated
each desire to take advantage of an opportunity, then the applicable officer or
director would abstain from negotiating and voting upon the opportunity.
However, the officer or director may still take advantage of opportunities if we
should decline to do so. Except as set forth above, we have not adopted any
other conflict of interest policy in connection with these types of
transactions.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth information known to us regarding
beneficial ownership of our common stock as of March 31, 2005 by:
o each person known or believed by us to own, directly or beneficially,
more than 5% of our common stock,
o each of our directors, and
o all of our officers and directors as a group.
Except as otherwise indicated, we believe that the beneficial owners of
the common stock listed below, based on information furnished by the owners,
have sole investment and voting power over to the shares.
29
Name and Address of Number of Shares
Beneficial Owner Beneficially Owned 1 Percent of Class
---------------- ------------------ ----------------
.................................................................................................
B. Alva Schoomer
5675 B Baldwin Court
Norcross, GA 30071 12,000,000 17.6
.................................................................................................
Stephen B. Schneer
605 Third Avenue
New York, New York 10158 500,000 .7
.................................................................................................
Raymond C. Holland, Sr.
755 Long Ridge Road
Stamford, CT 06902 500,000 .7
.................................................................................................
Gary B. Wolff
805 Third Avenue
New York, NY10017 12,000,000 17.6
.................................................................................................
Edward A. Heil
PO Box 431
Ridge, NY 11961 20,000,000 29.4
.................................................................................................
K. Ivan F. Gothner
82 Mountain Road
Wilbraham, MA 01095 11,000,000 16.2
.................................................................................................
Doyle S. Elliott
501 Manatee Avenue
Holmes Beach, FL 34217 10,000,000 14.7
.................................................................................................
Officers and Directors
as a group ( 3 members) 13,000,000 19.1
.................................................................................................
Unless otherwise indicated, Innocap believes that all persons named in the table
have sole voting and investment power with respect to all common shares
beneficially owned by them. A person is deemed to be the beneficial owner of
securities which may be acquired by such person within 60 days from the date
indicated above upon the exercise of options, warrants or convertible
securities. Each beneficial owner's percentage ownership is determined by
assuming that options, warrants or convertible securities that are held by such
person (but not those held by any other person) and which are exercisable within
60 days of the date indicated above, have been exercised.
Shareholder Matters
As a Nevada corporation, we are subject to the Nevada Revised Statutes
("NRS" or "Nevada law"). Certain provisions of Nevada law create rights that
might be deemed material to our shareholders. Other provisions might delay or
make more difficult acquisitions of our stock or changes in our control or might
also have the effect of preventing changes in our management or might make it
more difficult to accomplish transactions that some of our shareholders may
believe to be in their best interests.
Directors' Duties. Section 78.138 of the Nevada law allows our directors and
officers, in exercising their powers to further our interests, to consider the
interests of our employees, suppliers, creditors and customers. They can also
consider the economy of the state and the nation, the interests of the community
and of society and our long-term and short-term interests and shareholders,
including the possibility that these interests may be best served by our
continued independence. Our directors may resist a change or potential change in
control if they, by a majority vote of a quorum, determine that the change or
potential change is opposed to or not in our best interest. Our board of
directors may consider these interests or have reasonable grounds to believe
that, within a reasonable time, any debt which might be created as a result of
the change in control would cause our assets to be less than our liabilities,
render us insolvent, or cause us to file for bankruptcy protection
30
Amendments to Bylaws - Our articles of incorporation provide that the power to
adopt, alter, amend, or repeal our bylaws is vested exclusively with the board
of directors. In exercising this discretion, our board of directors could
conceivably alter our bylaws in ways that would affect the rights of our
shareholders and the ability of any shareholder or group to effect a change in
our control; however, the board would not have the right to do so in a way that
would violate law or the applicable terms of our articles of incorporation.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
a. None, except as indicated in Part I, Item 2 as relates to our office
space; and
b. Except for the following issuance of shares and/or options, all since
converted into shares as a result of option exercise as follows:
Position with Number of
Name Issuer Shares Issued
------------------ ------------- -------------
B. Alva Schoomer President 2,000,000
Stephen B. Schneer Director 500,000
Raymond Holland Director 500,000
The options were granted under Innocap's 2004 Stock Incentive
Plan. No underwriter participated in the transactions and no
underwriting discounts or commissions were paid to anyone. The
shares underlying the options were registered on a Form S8
filed on June 18, 2004. All options have been exercised.
PART IV
Item 13. EXHIBITS
a. Exhibits
31.1 Certification of Chief Executive and Chief Financial Officer
32.1 Certification of Chief Executive and Chief Financial Officer
b. Report on Form 8-K
None
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
All fees paid or payable ($8,950) to our principal accounting firm
relate to assurance-related services.
31
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
/s/ B. Alva Schoomer
-----------------------
B. ALVA SCHOOMER Title:
President and CFO
Date: June 8, 2005
/s/ Stephen B. Schneer
-----------------------
STEPHEN B. SCHNEER
Title: Director
Date: June 8, 2005
/s/ Raymond Holland
-----------------------
RAYMOND HOLLAND
Title: Director
Date: June 8, 2005
32
FINANCIAL STATEMENTS
TABLE OF CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM......................F-1
BALANCE SHEET................................................................F-2
STATEMENTS OF OPERATIONS.....................................................F-3
STATEMENT OF STOCKHOLDERS' DEFICIT...........................................F-4
STATEMENTS OF CASH FLOWS.....................................................F-5
NOTES TO FINANCIAL STATEMENTS................................................F-6
33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Innocap, Inc.
Norcross, GA
We have audited the accompanying balance sheet of Innocap, Inc. as of January
31, 2005 and the related statements of operations, stockholders' deficit and
cash flows for the year ended January 31, 2005 and the period from January 23,
2004 (inception) to January 31, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Innocap, Inc. as of January 31,
2005 and the results of its operations and its cash flows for the year ended
January 31, 2005 and the period from January 23, 2004 (inception) to January 31,
2004 in conformity with accounting principles generally accepted in the United
States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 3 to the financial
statements, the Company is newly-formed with, among other things, no significant
operating revenues to date which raises substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 3. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Sherb & Co., LLP
June 7, 2005
New York, NY
F-1
INNOCAP, INC
Balance Sheet
January 31, 2005
ASSETS
CURRENT ASSETS:
Cash $ -
-----------------
TOTAL ASSETS $ -
=================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 40,000
STOCKHOLDERS' DEFICIT:
Preferred stock at $0.001 par value; 1,000,000 shares
authorized, -0- outstanding -
Common stock at $0.001 par value; authorized 190,000,000
shares; 68,000,000 shares issued and outstanding 68,000
Additional paid-in capital 1,600
Accumulated deficit (109,600)
-----------------
Stockholders' Deficit (40,000)
-----------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ -
=================
The accompanying notes are an integral part of these financial statements.
F-2
INNOCAP, INC.
Statements of Operations
Period from
January 23, 2004
Year Ended January (inception) to
31, 2005 January 31, 2004
---------------------- ----------------------
Revenue $ - $ -
---------------------- ----------------------
General and administrative 59,600 -
Organization and related expenses - 50,000
---------------------- ----------------------
Net loss $ (59,600) $ (50,000)
====================== ======================
Basic and diluted loss per share $(.00) $(.00)
====================== ======================
Weighted average number of common shares
outstanding 58,334,247 50,000,000
====================== ======================
The accompanying notes are an integral part of these financial statements.
F-3
INNOCAP, INC
Statement of Stockholders' Deficit
Additional
Common stock Paid-in Accumulated
Shares Amount Capital Deficit Total
------------- ------------- ------------- --------------- ---------
Inception - $ - $ - $ - $ -
Common stock issued for services
at $0.001 per share, January 23,
2004 50,000,000 50,000 - (50,000) -
------------- ------------- ------------- --------------- ---------
Balance, January 31, 2004 50,000,000 50,000 - (50,000) -
Issuance of stock options - - 1,600 - 1,600
Exercise of stock options 18,000,000 18,000 - - 18,000
Net loss - - - (59,600) (59,600)
------------- ------------- ------------- --------------- ----------
Balance, January 31, 2005 68,000,000 $ 68,000 $ 1,600 $ (109,600) $ (40,000)
============= ============= ============= =============== ==========
The accompanying notes are an integral part of these financial statements.
F-4
INNOCAP, INC.
Statements of Cash Flows
Period from
January 23, 2004
Year Ended (inception) to
January 31, 2005 January 31, 2004
-------------------- --------------------
OPERATING ACTIVITIES:
Net Loss $ (59,600) $ (50,000)
Stock-based compensation 1,600 -
Net change in accrued liabilities 40,000 -
Exercise of stock options for services 18,000 -
Organization expenses settled with shares - 50,000
-------------------- --------------------
Net Cash Used by Operating Activities - -
-------------------- --------------------
INCREASE IN CASH AND CASH EQUIVALENTS
- -
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD - -
-------------------- --------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ - $ -
==================== ====================
SUPPLEMENTAL SCHEDULE OF CASH FLOW ACTIVITIES:
Cash Paid For:
Interest $ - $ -
==================== ====================
Income taxes $ - $ -
==================== ====================
The accompanying notes are an integral part of these financial statements.
F-5
Innocap, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
Innocap, Inc. (the "Company") was incorporated under the laws of the
State of Nevada on January 23, 2004. It has filed a notice with the Securities
and Exchange Commission of its intent to elect in good faith to be regulated as
a Business Development Company under the Investment Company Act of 1940 and be
subject to Sections 54 through 65 of said Act.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Accounting Method
The Company's financial statements are prepared using the
accrual method of accounting. The Company has elected a fiscal
year ending on January 31.
b. Provision for Taxes
At January 31, 2005, the Company had net operating loss
carryforwards of $108,000 that may be offset against future
Federal taxable income through 2024. No tax benefit has been
reported with respect to these net operating loss carryforwards
in the accompanying financial statements because the Company
believes that realization is not likely. Accordingly, the
potential tax benefits of the net loss carryforwards are fully
offset by a valuation allowance.
The loss for financial reporting purposes for the year ended
January 31, 2005 differs from the loss for Federal income tax
purposes as follows:
F-6
Loss for financial reporting purposes $ (59,600)
Expenses associated with the issuance of stock
options that are not deductible for Federal
income taxes 1,600
------------------------
Loss for Federal income tax purposes $ (58,000)
========================
Deferred tax assets (liabilities) at January 31, 2004 are
comprised of the following:
Net operating loss carryforwards $ 41,040
Valuation allowance (41,040)
------------------------
Net $ -
========================
If substantial changes in the Company's ownership should occur,
there would be an annual limitation of the amount of net
operating loss carryforwards that could be utilized by the
Company.
c. Cash Equivalents
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents.
d. Estimates
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.
If the Company is successful in raising funds and becoming a
business development company, its principal estimates will
involve the determination of the value of its portfolio
companies.
The net asset value per share of our outstanding shares of
common stock will be determined quarterly, as soon as
practicable after, and as of the end of, each calendar quarter,
by dividing the value of total assets minus total liabilities by
the number of shares outstanding at the date as of which such
determination is made.
F-7
In calculating the value of our total assets, we will value
securities that are publicly traded at the closing price on the
valuation date for exchange traded and NASDAQ listed securities
or the average of the bid and asked prices for other securities.
Debt and equity securities that are not publicly traded will be
valued at fair value as determined in good faith by the
valuation committee of our board of directors based on the
recommendation by our investment adviser and under valuation
guidelines adopted by our board of directors, and then approved
by our entire board of directors. Initially, the fair value of
these securities will be their original cost. Debt securities
valued at cost would be revalued for significant events
affecting the issuer's performance and equity securities valued
at cost would be revalued if significant developments or other
factors affecting the investment provide a basis for valuing the
security at a price other than cost, such as results of
subsequent financing, the availability of market quotations, the
portfolio company's operations and changes in market conditions.
For warrants, our cost usually will be a nominal amount, such as
$.01 per share. Debt securities with remaining maturities of 60
days or less at the time of purchase will be valued at amortized
cost. Debt securities which are publicly traded will be valued
by using market quotations obtained from pricing services or
dealers. Our valuation guidelines are subject to periodic review
by our board of directors and may be revised in light of our
experience, regulatory developments or otherwise.
Determination of fair values involves subjective judgment and
estimates not susceptible to substantiation by auditing
procedures. Accordingly, under current auditing standards, the
notes to our financial statements will refer to the uncertainty
with respect to the possible effect of such valuations, and any
change in such valuations, on our financial statements.
e. Basic Loss Per Common Share
Basic loss per common share has been calculated based on the
weighted average number of shares outstanding during the period
after giving retroactive effect to stock splits.
f. Impact Of New Accounting Standards
In June 2003, the Securities and Exchange Commission ("SEC")
adopted final rules under Section 404 of the Sarbanes-Oxley Act
of 2002 ("Section 404"). Commencing with the Company's Annual
Report for the year ended January 31, 2006, the Company is
required to include a report of management on the Company's
internal control over financial reporting. The internal control
report must include a statement of management's responsibility
for establishing and maintaining adequate internal control over
financial reporting for the Company; of management's assessment
of the effectiveness of the Company's internal control over
financial reporting as of year end; of the framework used by
management to evaluate the effectiveness of the Company's
internal control over financial reporting; and that the
Company's independent accounting firm has issued an attestation
report on management's assessment of the Company's internal
control over financial reporting, which report is also required
to be filed as part of the Annual Report on Form 10-KSB.
F-8
In December 2004, the FASB issued FASB SFAS No. 123 (revised
2004), Share-Based Payment, which is a revision of SFAS No. 123,
Accounting for Stock-Based Compensation . SFAS No. 123(R)
supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees , and amends SFAS No. 95, Statement of Cash Flows.
Generally, the approach in SFAS No. 123(R) is similar to the
approach described in SFAS No. 123. However, SFAS No. 123(R)
requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure is no
longer an alternative. The new standard will be effective for
the Company in the fiscal year ended January 31, 2007. The
Company has not yet assessed the impact of adopting this new
standard.
g. Stock Options and Warrants
As permitted by Statement of Financial Accounting Standards No.
123 Accounting for Stock based Compensation ("SFAS No. 123"),
the Company has elected to measure and record compensation cost
relative to employee stock option and warrant costs in
accordance with Accounting Principles Board ("APB") Opinion 25,
Accounting for Stock Issued to Employees, and related
Interpretations and will make pro forma disclosures of net
income and earnings per share as if the fair value method of
valuing stock options and warrants had been applied. Under APB
Opinion 25. compensation cost is recognized for stock options
and warrants granted to employees when the option or warrant
price is less than the market price of the underlying common
stock on the date of grant. In addition, the Company will
provide pro forma disclosure of stock-based compensation, as
measured under the fair value requirements of SFAS No. 123,
Accounting for Stock-Based Compensation. These pro forma
disclosures will be provided as required under SFAS No 148,
Accounting for Stock-Based Compensation--Transition and
Disclosure.
Options and warrants issued to individuals other than employees
or directors will be accounted for in accordance with SFAS
No.123 which requires recognition of compensation expense for
grants of stock, stock options, and other equity instruments
over the vesting periods of such grants, based on the estimated
grant-date fair values of those grants.
F-9
NOTE 3 -- GOING CONCERN
The Company's financial statements are prepared using generally
accepted accounting principles applicable to a going concern that contemplates
the realization of assets and liquidation of liabilities in the normal course of
business. The Company has not established any source of revenue to cover its
operating costs. The Company will engage in very limited activities without
incurring any liabilities that must be satisfied in cash until a source of
funding is secured and will offer noncash consideration wherever possible. The
Company intends to raise its initial capital through the sale of shares of its
common stock. The offer and sale of the shares will not be registered under the
Securities Act of 1933 because, as a registered business development company,
their issuance and sale is exempt from such registration requirements pursuant
to Regulation E of the 1933 Act. The Company will not commence its offering
unless and until it receives a trading symbol for its securities. There is no
way to predict the likelihood or timing of obtaining a trading symbol. If a
symbol is obtained, there is no way of predicting the likelihood for success of
a Regulation E offering. If the Company is unable to obtain financing or if the
financing it does obtain is insufficient to cover any operating losses it may
incur, it may substantially curtail or terminate its operations or seek other
business opportunities through strategic alliances, acquisitions or other
arrangements that may dilute the interests of existing stockholders.
NOTE 4 - STOCKHOLDERS' DEFICIT
On January 23, 2004, the Board of Directors issued 50,000,000 shares of
common stock for $50,000 in services to the founding shareholders of the
Company.
Preferred Stock
The Company's certificate of incorporation authorizes the issuance of
1,000,000 shares of preferred stock with designations, rights and preferences
determined from time to time by its board of directors. Accordingly, the
Company's board of directors is empowered, without stockholder approval, to
issue shares of preferred stock with voting, liquidation, conversion, or other
rights that could adversely affect the rights of the holders of the common
stock. At January 31, 2004, the Company had no shares of preferred stock issued
and outstanding.
Common Stock
The holders of the Company's common stock:
o Have equal ratable rights to dividends from funds legally available
for payment of dividends when, as and if declared by the board of
directors;
o Are entitled to share ratably in all of the assets available for
distribution to holders of common stock upon liquidation, dissolution
or winding up of our affairs;
o Do not have preemptive, subscription or conversion rights, or
redemption or access to any sinking fund; and
o Are entitled to one noncumulative vote per share on all matters
submitted to stockholders for a vote at any meeting of stockholders.
F-10
Stock Option Plan
Pursuant to a January 27, 2004 Board of Directors approval and
subsequent stockholder approval, the Company adopted its 2004 Non-Statutory
Stock Option Plan (the "Plan") whereby it reserved for issuance up to 20,000,000
shares of its common stock. The purpose of the Plan is to provide directors,
officers and employees of, consultants, attorneys and advisors to the Company
and its subsidiaries with additional incentives by increasing their ownership
interest in the Company. Directors, officers and other employees of the Company
and its subsidiaries are eligible to participate in the Plan. Options in the
form of Non-Statutory Stock Options ("NSO") may also be granted to directors who
are not employed by the Company and consultants, attorneys and advisors to the
Company providing valuable services to the Company and its subsidiaries. In
addition, individuals who have agreed to become an employee of, director of or
an attorney, consultant or advisor to the Company and/or its subsidiaries are
eligible for option grants, conditional in each case on actual employment,
directorship or attorney, advisor and/or consultant status. The Plan provides
for the issuance of NSO's only, which are not intended to qualify as "incentive
stock options" within the meaning of Section 422 of the Internal Revenue Code,
as amended.
The Board of Directors of the Company or a Compensation Committee (once
established) will administer the Plan with the discretion generally to determine
the terms of any option grant, including the number of option shares, exercise
price, term, vesting schedule and the post-termination exercise period.
Notwithstanding this discretion (i) the term of any option may not exceed 10
years and (ii) an option will terminate as follows: (a) if such termination is
on account of termination of employment for any reason other than death, without
cause, such options shall terminate one year thereafter; (b) if such termination
is on account of death, such options shall terminate 15 months thereafter; and
(c) if such termination is for cause (as determined by the Board of Directors
and/or Compensation Committee), such options shall terminate immediately. Unless
otherwise determined by the Board of Directors or Compensation Committee, the
exercise price per share of common stock subject to an option shall be equal to
no less than 10% of the fair market value of the common stock on the date such
option is granted. No NSO shall be assignable or otherwise transferable except
by will or the laws of descent and distribution or except as permitted in
accordance with SEC Release No.33-7646 as effective April 7, 1999.
The Plan may be amended, altered, suspended, discontinued or terminated
by the Board of Directors without further stockholder approval, unless such
approval is required by law or regulation or under the rules of the stock
exchange or automated quotation system on which the common stock is then listed
or quoted. Thus, stockholder approval will not necessarily be required for
amendments which might increase the cost of the Plan or broaden eligibility
except that no amendment or alteration to the Plan shall be made without the
approval of stockholders which would (a) decrease the NSO price (except as
provided in paragraph 9 of the Plan) or change the classes of persons eligible
to participate in the Plan or (b) extend the NSO period or (c) materially
increase the benefits accruing to Plan participants or (d) materially modify
Plan participation eligibility requirements or (e) extend the expiration date of
the Plan. Unless otherwise indicated the Plan will remain in effect for a period
of ten years from the date adopted unless terminated earlier by the board of
directors except as to NSOs then outstanding, which shall remain in effect until
they have expired or been exercised.
F-11
The Company filed a Registration Statement on Form S-8 in June 2004 to
register those 20,000,000 shares of common stock underlying the options in the
Plan
Management issued 18,000,000 of the options covered by the Plan to
certain current members of its management team, as well as other persons whom it
considers to be important to its current and proposed business activities, with
all options exercisable at $.001 per share for a period of five years from date
of issuance. Of the total options issued, 2,000,000 were issued to employees and
16,000,000 were issued to non-employees. The 16,000,000 options issued to
non-employees were valued at their date of grant using the Black-Scholes option
pricing model and resulted in a charge to general and administrative expenses of
$1,600. All options were exercised in August 2004.
Financial Accounting Statement No. 123, Accounting for Stock Based
Compensation, encourages, but does not require companies to record compensation
cost for stock-based employee compensation plans at fair value. The Company has
chosen to continue to account for stock-based employee compensation using the
intrinsic method prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock. The Company has
adopted the "disclosure only" alternative described in SFAS 123 and SFAS 148,
which require pro forma disclosures of net income and earnings per share as if
the fair value method of accounting had been applied.
Pro forma information regarding net income per share is required by
SFAS No. 123, Accounting for Stock-Based Compensation, and has been determined
as if the Company had accounted for its employee stock options under the fair
value method of that statement. The fair value of these options was estimated at
the date of grant using Black-Scholes option pricing model with the following
range of assumptions for the year ended January 31, 2005:
Risk free interest rate 3.0%
Expected dividend yield 0%
Expected lives 5 years
Expected volatility 0%
F-12
For the purpose of pro forma disclosures, the estimated fair value of the
options is amortized over the vesting period.
The Company's pro forma information is as follows:
Pro
Reported Forma
------------------------ ------------------------
Net loss $ (59,600) $ (59,800)
Loss per Share:
-Basic and Diluted $ (0.00) $ (0.00)
NOTE 5 - RELATED PARTY TRANSACTION
The Company engaged four shareholders or entities related to those
shareholders to perform consulting or professional services. These services cost
$48,000 which is included in the accompanying statement of operations for the
year ended January 31, 2005. The balance sheet includes liabilities of $36,000
at January 31, 2005 relating to these services.
F-13