U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended: March 31, 2000
Commission file no.: 000-22151
Incubate This! Inc.
------------------------------------------------
(Name of Small Business Issuer in its Charter)
Colorado 93-0969365
- -------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
265 Sunrise Avenue, Suite 204
Palm Beach, FL 33480 33480
- ------------------------------- -----------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (561) 832-5696
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange
on which registered
None None
- ------------------------------ -----------------------------
Securities to be registered under Section 12(g) of the Act:
Common Stock, $.0001 par value per share
--------------------------------------------------------
(Title of class)
Copies to:
Mintmire & Associates
265 Sunrise Avenue, Suite 204
Palm Beach, FL 33480
(561) 832-5696
Indicate by Check whether the issuer (1) 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
--- ---
State the number of shares outstanding of each of the issuer's
classes of common equity As of May 5, 2000 is: 4,011,527.
Transitional Small Business Disclosure Format (check one); X
---- ----
Incubate This! Inc.
Form 10-QSB Quarterly Report
For the Period Ended March 31, 2000
Part I - FINANCIAL INFORMATION Page
Item 1. Financial Statements 4
Unaudited Balance Sheet at March 31, 2000 4
and December 31, 1999
Unaudited Statements of Operations for the Three 5
Months Ended March 31, 2000 and 1999 and From
Inception (December 8, 1981) through March 31, 2000
Unaudited Statements of Cash Flows for the Three Months 6
Ended March 31, 2000 and 1999 and From Inception
(December 8, 1981) to March 31, 2000
Statement of Stockholders' Equity (Deficit) 8
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
PART II - OTHER INFORMATION 10
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits 17
Signatures 18
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
INDEPENDENT AUDITOR'S REVIEW OF FINANCIAL STATEMENTS
Review Report of Independent
Certified Public Accountant
To the Shareholders and Board of Directors
of Incubate This! Inc.
We have reviewed the accompanying balance sheet of Incubate This! Inc. as of
March 31, 2000, and the related statements of operations, stockholders' equity,
and cash flows for the quarter ending March 31, 2000, in accordance with
statements on Standards for Accounting and Review Services issued by the
American Institute of Certified Public Accountants. All information in these
statements is the representation of the management of Incubate This! Inc..
A review consists principally of inquiries of company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles.
Varma & Associates
Longwood, Florida
May 9, 2000
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
BASIS OF PRESENTATION
The accompanying unaudited financial statements are presented in accordance with
generally accepted accounting principles for interim financial information and
the instructions to Form 10- QSB and item 310 under subpart A of Regulation S-B.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
The accompanying statements should be read in conjunction with the audited
financial statements for the years ended December 31, 1999 and 1998. In the
opinion of management, all adjustments (consisting only of normal occurring
accruals) considered necessary in order to make the financial statements not
misleading, have been included. Operating results for the three months ended
March 31, 2000 are not necessarily indicative of results that may be expected
for the year ending December 31, 2000. The financial statements are presented on
the accrual basis.
4
Incubate This! Inc.
(A Development Stage Company)
BALANCE SHEET
(UNAUDITED) (AUDITED)
March 31, 2000 December 31, 1999
-------------- -----------------
ASSETS
CURRENT ASSETS
Cash in checking $ 62 $ 712
Accrued interest 1,671 180
Demand note - Esteem Solutions, Inc 85,000 85,000
------------ --------------
TOTAL CURRENT ASSETS 86,733 85,892
------------ --------------
OTHER ASSETS
Investment - Europe Investor Direct.com, Limited 250,000 0
Investment - LP Records, Inc. 7,500 0
------------ --------------
TOTAL OTHER ASSETS 257,500 0
------------ --------------
TOTAL ASSETS $ 344,233 $ 85,892
============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 2,950 $ 1,350
Accrued interest 26,696 25,433
Demand note - Giuseppe Coniglione 112,000 112,000
Demand note - Jagerton Research Ltd. 127,300 127,300
------------ --------------
TOTAL CURRENT LIABILITIES 268,946 266,083
------------ --------------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock, $.10 par value,100,000,000 shares
authorized none issued 0 0
Common Stock Class A no par value,
800,000,000 shares authorized, 4,011,530 and 1,153,027
issued and outstanding, respectively 643,834 243,834
Deficit accumulated during Development stage (568,547) (424,025)
------------ --------------
TOTAL STOCKHOLDERS' DEFICIT 75,287 (180,191)
------------ --------------
TOTAL LIABILITIES AND STOCKHOLDERS' $ 344,233 $ 85,892
============ ==============
EQUITY (DEFICIT)
5
Incubate This! Inc.
(A Development Stage Company)
STATEMENTS OF OPERATION
For the Period
Three Months Ended December 8, 1981
March 31, (Inception) to
2000 1999 March 31, 2000
---- ---- --------------
Revenues $ 0 $ 0 $ 0
--------- --------- ----------
OPERATING EXPENSES
Consulting Fees 132,375 0 179,375
Depreciation Expense 0 0 1,443
File & transfer fees 0 0 14,901
Legal & accounting 12,355 594 130,834
Management services 0 0 133,000
Office and printing 20 15 5,039
Public relations 0 0 14,414
Taxes, Franchise 0 0 905
Travel expense 0 0 534
Other expense 0 0 35,168
--------- --------- ----------
TOTAL OPERATING EXPENSES (144,750) (609) 515,613
--------- --------- ----------
NET (LOSS) BEFORE OTHER INCOME AND
(EXPENSE) (144,750) (609) (515,613)
--------- --------- ----------
OTHER INCOME AND (EXPENSES)
Write-off of advances on recission of merger 0 0 (119,110)
Sale of business plan and asset 0 0 74,305
Forgiveness of debt 0 0 13,666
Interest income (expense) 228 (4,293) (21,795)
--------- --------- ----------
TOTAL OTHER INCOME AND (EXPENSES) 228 (4,293) (52,934)
--------- --------- ----------
NET INCOME OR (LOSS) $ (144,522) $ (4,902) $(568,547)
========== ========= ==========
NET (LOSS) PER COMMON SHARE (* less
than $.01 net loss per share) * * N/A
--------- --------- ----------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES 4,011,530 1,153,027 N/A
--------- --------- ----------
6
Incubate This! Inc.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
For the Period
December 8, 1981
For the Three Months Ended (Inception) to
March 31, 2000 March 31, 1999 March 31, 2000
--------------
(Unaudited) (Unaudited)
----------- -----------
CASH FLOWS
FROM OPERATING ACTIVITIES
Net Income (loss) $ (144,522) $ (4,902) $ (568,547)
Adjustments to reconcile net (loss) to
net cash used by operating activities:
Amortization 0 0 750
Depreciation 0 0 1,443
Stock issued for services/expenses 0 0 52,925
Change in operating assets and liabilities:
(Increase) decrease in:
Current assets (1,491) 0 (86,671)
Increase (decrease) in:
Current liabilities 2,863 15,887 268,946
------------ ----------- --------------
NET CASH FLOWS FROM
OPERATING ACTIVITIES (143,150) 10,985 (331,154)
------------ ----------- --------------
CASH PROVIDED (USED) IN INVESTING
ACTIVITIES:
Purchases fixed assets 0 0 (1,443)
Purchase of Investments (257,500) 0 (257,500)
Organization costs 0 0 (750)
------------ ----------- --------------
NET CASH PROVIDED (USED) IN INVESTING
ACTIVITIES (257,500) 0 (259,693)
------------ ----------- --------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds form issuance of common stock 400,000 0 652,344
Proceeds from issuance of class B common stock 0 0 10,000
Deferred offering costs 0 0 (71,435)
------------ ----------- --------------
NET CASH FLOWS FROM
FINANCING ACTIVITIES 400,000 0 590,909
------------ ----------- --------------
NET INCREASE (DECREASE) (650) 10,985 62
IN CASH
CASH, BEGINNING OF PERIOD 712 0 0
------------ ----------- --------------
CASH, END OF PERIOD $ 62 $ 10,985 $ 62
============ =========== ==============
7
Incubate This! Inc.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Three Months Ended
March 31, 2000 (UNAUDITED)
DEFICIT TOTAL
NUMBER ACCUMULATED STOCKHOLDERS'
OF DURING EQUITY
SHARES AMOUNT DEVELOPMENT (DEFICIT)
------ ------ ----------- ---------
Balance, January 1, 2000 11,530 $ 243,834 $ (424,025) $ (180,191)
Common stock issued For cash 400,000 400,000 400,000
Net loss for the Three Months
Ended March 31, 2000 0 0 (144,522) (144,522)
--------- --------- --------- -----------
Balance, March 31, 2000 4,011,530 $ 243,534 $ (568,547) $ 75,287
--------- ========= =========== ===========
8
INCUBATE THIS! INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-----------------------------------------------------------
Incubate This!, Inc. (the Company), formerly known as Pethealth Systems,
Inc. and Triangle, Inc., is a development stage organization formed under the
laws of the State of Colorado on December 8, 1981. Since inception, the company
has been inactive except for recent organizational and initial financing
efforts. The Company's fiscal year end is December 31, and there was no activity
prior to the year ended December 31, 1988.
Accounting Method
- -----------------
The Company records income and expenses on the accrual method.
Organization Costs
- ------------------
Costs incurred in organizing the Company were amortized over a sixty-month
period.
Deferred Offering Costs
- -----------------------
The Company incurred costs in connection with its public offering. When the
offering of the Company's stock was successful in April of 1989, these costs
were charged as a reduction of the proceeds of the offering.
NOTE 2 - RELATED PARTY TRANSACTIONS
- -----------------------------------
On March 26, 1999, the Company's president advanced funds in the form of a
promissory note for $112,000. The note includes accruing interest at 7% per
annum.
In 1997, the Company accrued $10,000 per month for financial consulting and
general administrative support services which were provided to the Company by
Ameristar Group Incorporated. Such agreement was not negotiated at arm's length
due to the relationship between the Company and Mr. Saposnick and Mr. Messina,
former directors and record of beneficial shareholders' of the Company.
In 1997, the Company also received advances of monies for its operating
expenses from Ameristar Group Incorporated, in accordance with an agreement
between the two companies.
On September 25, 1998, a promissory note was signed for $127,300 for monies
due Ameristar Group Incorporated with interest accruing at 12% per annum.
Subsequently, this note was paid for by Jagerton Research Limited in December of
1998, and the Company now owes the liability of $127,300 to Jagerton Research
Limited with interest accruing at 12%.
The Company issued 490,000 shares of common stock on October 6, 1997 for
consideration of consulting services performed for the Company. The 490,000
shares were issued to related parties of the Company at a value equal to the
average bid and ask price for the common stock as reported for the five business
days prior to October 6, 1997. The Company issued 400,000 of the 490,000 shares
under the 1997 Stock Award Plan. On December 11, 1997, 40,000 shares were issued
for consideration of consulting services performed for the Company.
INCUBATE THIS! INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - CAPITALIZATION
- -----------------------
In February of 2000, the Company undertook a Regulation - D 506 offering,
whereby it sold 4,000,000 shares of common stock, no par value, for an aggregate
of $400,000.
In October of 1999, the Company authorized a reverse stock split. The
Company issued 1 share of the Company's common stock for each 100 share blocks
of the Company's issued and outstanding shares.
In December of 1981, the Company authorized 50,000 shares of no par value
common stock. In March of 1988, the Company amended and restated its certificate
of incorporation to authorize 800,000,000 shares of no par value common stock
and 100,000,000 shares of $.10 par value preferred stock. No preferred stock is
issued or outstanding as of September 30,1997.
NOTE 4 - INCENTIVE STOCK OPTION PLAN
- ------------------------------------
Effective March 3, 1988, the Company adopted an incentive stock option plan
for company executives and key employees. The Company has reserved 10,000,000
common shares for issuance pursuant to the plan. The plan provides that no
option may be granted at an exercise price less than the fair market value of
the common shares of the Company on the date of grant and no option can have a
term in excess of ten years. To date, no options have been granted pursuant to
the plan.
NOTE 5 - MERGER AND RELATED RECISION
- ------------------------------------
In August of 1989, the Company consummated an exchange transaction pursuant
to which Triangle acquired all of the outstanding shares of Enterprise Car
Rental, Ltd. d.b.a. Wheels International Rent A Car ("Wheels") in exchange for
326,500,800 shares of no par value common stock. In conjunction with the merger,
Triangle advanced $119,110 to Wheels. Effective September 30, 1989, Triangle and
Wheels consummated a Compromise and Settlement Agreement pursuant to which the
merger was reversed. Wheel's shareholders returned all but 10,000,000 common
shares to Triangle in exchange for their original shares of Wheels to indemnify
and hold harmless Triangle from actions by third parties to Wheels and to secure
performance of obligations of Wheels to cooperate in any legal actions
undertaken by Triangle against third parties of Wheels.
The stockholders' (deficit) in the accompanying financial statements has
been reported as if the merger had not taken place. The 10,000,000 common shares
not returned are recorded as issued in October of 1989 for no consideration. The
advances to Wheels of $119,110 were written off at December 31, 1989. Management
does not anticipate any further contingencies associated with this failed
merger, however, there is no assurance that there will be no further
contingencies.
NOTE 6 - MERGER AND RECISION WITH PETCARE, INC.
- -----------------------------------------------
On January 29, 1997, an Agreement and Plan of Share Exchange ("Agreement")
was entered into by and between the Company and (i)PetCare, Inc., a Delaware
corporation and (ii) the PetCare shareholders. Under the terms of this
Agreement, Triangle, Inc. acquired all of the 3,000,000 issued and outstanding
shares of common stock of
INCUBATE THIS! INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - CONTINUED
- ------------------
PetCare, Inc. in exchange for 600,000,000 shares of the common stock of
Triangle, Inc. It was intended that this transaction shall be a tax-free
exchange of shares.
The Company was unable to raise the capital required to implement the
PetCare, Inc, business plan (acquisition of operating veterinarian hospitals and
consolidation of operations thereof). Therefore, as of July 7, 1997, PetHealth
Systems, Inc. and the former principal shareholders of PetCare, Inc., have
agreed to the cancellation of the Agreement and Plan of Share Exchange.
Upon the cancellation of the original agreement, 2,700,000 of the 3,000,000
shares of the common stock (which the Company originally had issued to the five
principal shareholders of PetCare, Inc.) were returned to the company for
cancellation. No consideration was provided by the company, or any third party,
in connection with such return of shares. The remaining 300,000 shares of common
stock which had been originally issued to minority shareholders of PetCare, Inc.
for services provided to PetCare, Inc. prior to its acquisition by the
registrant, will not be returned to the registrant for cancellation.
NOTE 7 - NAME CHANGED
- ---------------------
During the first quarter of the year 200, the Company changed its name from
Pethealth Systems, Inc. To Incubate This! Inc.
The corporate name has been changed from Triangle, Inc. to PetHealth
Systems, Inc. effective February 10, 1997.
Item 2. Management's Discussion and Analysis of Financial Conditions and Results
of Operations.
Name Change.
On March 1, 2000, the Company changed its name from PetHealth Systems,
Inc., to Incubate This! Inc. The change was effected to mirror the new business
plan and objectives of the Company to operate as a provider of professional
advisory and managment services to its investee companies ("portfolio
companies")and provide early stage venture capital to private and publicly held
companies targeting a wide range of emerging growth opportunities. (See "Part
II, Item 5. Other Information").
Sale of Shares
In February 1999, the Company received funds totaling $400,000.00 from the
sale of 4,000,000 shares of its common stock in a placement to a single investor
currently serving as the sole Officer and Director of the Company. (See "Part
II, Item 2. Changes in Securities and Use of Proceeds").
Asset Acquisitions
In January 2000, the Company purchased 10% of the issued and outstanding
shares of LP Records, Inc. ("LP Records"), in exchange for a total payment of
$7,500.00. LP Records is a production company representing both new and
established musical artists in the United States. Ms. Lilach Perlstein, the
principal owner and sole Officer and Director of LP Records is the sister of
Sharone Perlstein who is the principal owner and sole Officer and Director of
the Company.
In January 2000, the Company also acquired a total of 1,010,000 shares of
the common stock of Europe Investor Direct, Ltd. ("EID") for the total sum of
$250,000.00. EID is a United States and London based company that owns and
operates Europe Investor Direct.com, a subscriber -based financial website
offering a broad range of free and premium investment information, personal
finance products and various other finance products related to the European and
United States markets. The site offers investment research, academic content,
real time news, on-line tools for tracking investment opportunities, challenges
and trends in Europe and the United States. The investment by the Company
represents a fully diluted 8% stake in EID. The current sole Officer and
Director of the Company serves as a Director of EID and owns approximately 35%
of EID. EID also employs Mr. William Luckman, a paid consultant to the Company
as its Managing Director. Mr. Luckman owns approximately 20% of EID. Present
legal counsel to the Company, Donald F. Mintmire, is a Director of EID.
Plan of Operation
The Registrant is currently developing and plannig the execution of a
business plan aimed at developing the Company into a technology incubator. The
registrant intends to raise funds from a private offering of its securities
under Rule 506 of Regulation D in order to execute this plan. There is no
assurance however that the registrant will obtain such equity funding.
During the first quarter of 2000 the Company's general and administrative
expenses were paid through funds raised by the sale of equity for cash in the
amount of $400,000 to the Company's sole officer and director. In 1999, the
registrant's first quarter general and administrative expenses were funded
primarily by advances from Jagerton Research Limited.
9
Results of Operations
The Company did not have any operating income during the Quarterly period
ended March 31, 2000, and has not had any operating income since its inception.
For this quarterly period, the registrant recognized a net loss of $144,522
compared to a net loss of $4,902 for the quarterly period ended March 31, 1999.
The increase in this quarterly loss is primarily due to an increase in
consulting fees, legal and accounting expenses. General and administrative
expenses during the current period were funded by the sale of equity for cash in
the amount of $400,000 to the Company's sole officer and director.
Liquidity and Capital Resources
On March 31, 2000 the Company had no capital resources other than an
insignificant amount of cash, and will rely on advances from related parties to
fund administrative expenses. The registrant intends to raise funds from a
private offering of its securities under Rule 506 of Regulation D in order to
execute its business plan..
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. None.
Item 2. Changes in Securities.
In January 2000, the Company placed a total of
4,000,000 shares of its common stock with Mr. Sharone Perlstein in exchange for
the total sum of $400,000.00. No commissions, fees or other charges were
incurred by the Company in connection with the transaction. Total issued and
outstanding shares immediately following this transaction were 4,011, 527.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
THE COMPANY
Incubate This! Inc. (the "Company") is a US publicly held company
that operates as a provider of professional advisory and management services to
its investee companies ("portfolio companies") and provides early stage venture
capital to private and publicly held companies targeting a wide range of
emerging growth opportunities. Since its change in business strategy and
management ("the reorganization") during the fourth quarter of 1999, the Company
has made three separate investments into early stage companies that participate
in the Online Publishing Agricultural Technology, and Musical industries. These
portfolio companies ("incubator companies") are headquartered in London, Israel
and the United States, respectively. The Company anticipates most of its venture
capital efforts and investments to continue to be made within the regions of
North America, Europe and Israel.
10
The Company is not qualified as a "regulated investment company" for
federal income tax purposes and has no independent investment advisor at this
time.
The Company's executive offices are located 265 Sunrise Ave., Suite 204,
Palm Beach, FL 33480. The Company's telephone number is (561) 832-5696. In
February 2000, the Company changed its name from PetHealth Systems, Inc. to
Incubate This! Inc. to better reflect the new scope of its business.
VENTURE CAPITAL DIVISION
The Company's venture capital arm makes strategic equity investments in
independently managed companies primarily entering the early stages of
development, but which exhibit the unique qualities deemed necessary for
eventual success. The Company's investment decisions are made by its officers,
subject to the Company's investment policies and objectives, and under the
guidance and oversight of its Board of Directors. Historically, the Company has
relied on the efforts of its officers to identify new investment opportunities.
Following the Company's reorganization, new management has sought referrals from
venture capitalists, investment bankers, attorney's, accountants and other
professionals.
PROFESSIONAL SERVICES DIVISION
In order to facilitate the growth of its incubator companies, the Company
offers management and advisory oversight services to its portfolio companies.
Management believes the collaboration between its two businesses could provide
synergistic and competitive advantages to its portfolio companies that can
ultimately improve shareholder value. Acting as a long-term partner,
management's incubator strategy is to integrate its portfolio companies into a
collaborative network that leverages the collective knowledge and resources of
its investment umbrella. As part of this objective, the Company is in the early
stages of forming a unique technology campus located in Israel that will provide
a wide variety of services ranging from general corporate facilities to
strategic and creative consulting. The campus concept is designed to assist
independent Internet companies as well as the Company's portfolio companies with
the development and execution of their business strategies in a more
streamlined, cost effective, and knowledgeable manner. The Company believes that
by providing these services it enables its clients and portfolio companies to
better focus on their core competencies and accelerate the time-to-market of
their products and services.
INVESTMENT CHARACTERISTICS
Since its reorganization, the Company has invested only in the common stock
of privately held portfolio companies. The security interests in these companies
are presently classified as restricted securities under regulations of the
United States Securities & Exchange Commission. The Company does not have a
policy that limits the amount of nor class of securities of portfolio companies.
However, the Company intends to restrict investment into securities with
features void of shareholder voting rights. In addition, management seeks to
obtain governance rights, anti- dilution rights and liquidation preferences
whenever possible in its investments.
The Company believes that equity participation in common stock and
preferred stock issuances offers the potential for higher returns and elevated
performance of its investment portfolio. However, there is no assurance that its
investment strategy will yield a return nor higher return than other securities.
All of the Company's investments are highly illiquid and there can be no
assurance
11
that any market will develop for portfolio company securities. In addition, many
of the Company's portfolio companies have low levels of capitalization with
relatively high negative cash flows. There are no current personal guarantees
held by the Company as related to the Company's investments. Additionally, there
is no assurance that the Company will find opportunities on terms favorable to
the Company.
INVESTMENT OBJECTIVES AND STRATEGIES
Our venture investment strategy is to realize a significant capital return
on our venture investments by making strategic, early-stage equity investments
in companies which we believe will emerge as leaders within their respective
target markets. We seek to accomplish this goal by identifying promising
companies in select industries, investing in those companies, and enhancing the
future success of these companies by employing our expertise when called upon,
and leveraging our relationships. Currently, the Company holds minority equity
interests in its portfolio companies. It is the Company's intent to acquire only
minority interests in future portfolio companies.
The Company seeks long-term growth in the value of its assets and expects
no current income from its portfolio company investments (as opposed to its
professional advisory ad management services). The Company's investments are
made with the intent of liquidation within 2 to 5 years. However, situations may
arise whereby the Company may hold an equity interest for a longer or shorter
period. Under current management, the Company focuses on investments in
privately held companies that target high growth industries, including Internet,
communications, and other technology related businesses operating in a diverse
range of industries. There is no assurance that the Company will be able to
locate investments in companies operating in such emerging growth markets. The
Company concentrates its investment in companies located in Israel and the
United States, but will consider investments in other countries if the eligible
concerns operate in countries deemed favorable.
At present, the Company's existing portfolio companies are expansion stage
businesses that have recently emerged from the startup phase and entered
commercial operations. The Company's investment policy does not restrict
investment into startup stage companies that are consistent with the Company's
investment selection criteria.
INVESTMENT CRITERIA
Within the Company's scope of structuring equity investments, the Company
uses the following criteria in selecting investment opportunities:
Experienced Management. The Company seeks to invest in companies whose
management holds a significant level of interest ownership and who are
deemed to have a high degree of experience, competence, and other
characteristics required to enhance the odds for success.
Strong Growth Prospects. The Company requires prospective investees to
exhibit high growth or the potential to deliver high annual growth
within a short period of time.
Potential Profits. The Company attempts to identify those companies
with the highest potential to deliver high growth and potentially
early profits.
12
Early Development Stage. The Company seeks to invest in companies that
are in the early stages of commercializing their operations and
strategies.
Liquidation/Exit Strategy. An exit strategy of 2 - 5 years is sought
by the Company in order to take profits and reinvest into new
companies. A variety of exit methods is possible and may include an
initial public offering of the portfolio company, a repurchase by such
portfolio company of the Company's interest, a cash buyout by a
competitor, and potentially a purchase of the Company's interest by a
third party such as another financial institution.
INDUSTRY OVERVIEW
The venture capital industry in the United States is extremely advanced,
and has for more than a century served as the energy to fuel America's engine of
innovation. Today, there are thousands of venture capital firms in the U.S. and
in Europe, particularly Germany and the United Kingdom. Over the last decade,
the venture capital market in Israel has experienced strong growth due to the
country's successful initiatives to nurture the development of new technologies.
Whereas there were only a few venture capital firms operated in Israel at the
onset of the 1990s, there are now more than 110 active funds involved in the
Israeli market. According to the latest statistics, Israel is home to an
estimated 2500 start ups, the majority of them high tech, and the country has
averaged 800 new startups per year over the last several years. This yearly
growth in startups is more than all of Europe, and second only to the U.S. The
increased venture capital activity in Israel over the last decade has resulted
in Israel now claiming the highest number of its country stocks traded on the
NASDAQ, second only to Canada.
The rise of the Internet and development of new technologies has created an
explosive demand for seed, venture, mezzanine, and other funds to commercialize
new ideas and technologies. With the promise of astronomical returns, venture
capital firms have stepped up to the opportunity. In the last quarter of 1999,
US venture capitalists showered Internet-related start-ups with $5.2 billion,
almost five times as much as during the same period a year ago, according to
PricewaterhouseCoopers. While the Internet incubator trend is more advanced in
the U.S., Europe intends to catch up. Six months ago, Europe had hardly any
incubators. Today, there are at least 100, most of them based in London. The
recent launch and IPO of Internet incubator, Jellyworks Plc, exhibits just how
much pent up demand there is for such investment vehicles in Europe. Since its
December 99 IPO, the stock has risen more than 3000%.
Historically, the large majority of venture capital firms have remained
private. However, there has been a significant rise in the number of venture
capitalists taking their company or investment holding companies public. The
ability to raise additional venture capital funds through the public markets has
made it attractive to be public. Additionally, investor enthusiasm for higher
growth investments is at record levels, driven by the high returns awarded for
success. Publicly traded venture-backed companies offer the average individual
investor a chance to diversify into promising high technology issues that have
been screened by the intelligence and experience of venture money. VC's are in
many ways, like insiders, for they possess a high level of knowledge that
individual investors simply to not have, as related to the interworkings of
industries and companies.
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Over the last five years, after-market performance of venture-backed
companies has outpaced the broader markets by a substantial degree. Return on
investments in venture-backed companies completing IPOs in 1999 reached
unimaginable levels as some firms' enjoyed returns greater than 500%. The fact
that half of all IPOs in 1999 were venture-backed companies is hard evidence
that the venture capital community is driving economic growth in the United
States and abroad. As well as accelerating the development of business,
incubators also bridge the widening gap between venture capitalists and young
entrepreneurs. It also represents a significant trend that the Company intends
to profit from.
In January 2000, the Venture Economics Group of Thomson Financial
Securities Data reported that 271 U.S. venture-backed companies went public in
1999, representing nearly 50% of all IPOs in the United States during 1999! The
group also reported that Venture-backed companies are raising more dollars and
going public at an earlier age. "The 271 venture-backed companies in 1999 raised
over $23.6 billion for themselves and marked a total post offer valuation at
offering dates of an astounding $136.2 billion. The average offer size for a
venture-backed IPO was up 75% from the previous year to $87.2 million along with
an unprecedented average post offer valuation of $502.7 million--more than twice
as much as the prior year. The median company age of venture- backed IPOs was
4.0 years in 1999, versus 4.5 in 1998 and 5.5 years in 1997."
COMPETITION
We compete against numerous public companies such as CMGI, Inc., Internet
Capital Group, Inc., Rare Medium Group, Inc. and Softbank Corp., as well as
private companies such as Idealab! and Divine Interventures, Inc., that provide
some combination of the same or similar services that we provide. Many of these
competitors have longer operating histories, larger installed client bases,
greater name recognition, more experience and significantly greater financial,
technical, marketing and other resources than we do. We expect that competition
from both private and public companies in our markets will intensify. At any
time, our current and potential competitors could increase their resource
commitments to our markets. Among other adverse consequences, this competition
may diminish our ability to identify, attract and develop relationships with
partner companies. As a result, our business, operating results and financial
condition could be materially and adversely affected.
The individual markets for professional and venture capital services are
intensively competitive and characterized by an increasing number of entrants
because the barriers to entry in these markets are relatively low.
In providing such services, we compete directly against traditional venture
capital and private equity firms and public and private companies with venture
funds. Many of these competitors have significantly greater experience and
financial resources than we have. In addition to these competitors, numerous
public companies, as well as private companies, devote significant resources to
providing capital together with other resources to incubator companies.
Additionally, corporate strategic investors, including Fortune 500 and other
significant companies, are developing incubator strategies and capabilities.
Many of these competitors have significantly greater financial resources and
brand name recognition than we do, and the barriers to entry for companies
seeking to provide capital and other resources to entrepreneurs and their
emerging technology companies are minimal. We expect that competition from both
private and public companies with business models similar to our own will
intensify. Among other adverse
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consequences, this competition may diminish the pool of potential investment
opportunities and raise the cost of making future investments. As a result, our
financial condition, operating results and business could be materially and
adversely affected.
In providing professional and venture capital services, we compete directly
against strategy consulting firms and management consulting firms. In providing
venture capital services, we compete directly with other investment banking and
merchant banking firms which vary in size from small, privately-owned firms to
very large, publicly-held corporations. We also face increasing competition from
other sources, such as commercial banks, insurance companies and consulting
firms offering financial services. The principle competitive factors in the
investment banking and financial services industry include transaction
experience, breadth of services offered, innovation, reputation and price. Many
of our current and potential competitors in the venture development and venture
banking markets have longer operating histories, larger installed clients bases,
greater name recognition, more experience and have significantly greater
financial, technical, marketing and other resources than we do. As a result, our
competitors may be more attractive partners to businesses. In addition, our
competitors may be able to respond more quickly to changes in client needs,
service more clients simultaneously and undertake more extensive marketing
campaigns. We cannot assure you that we will be able to compete successfully
against our current or future competitors or that competitive pressures will not
have a material adverse effect on our business, operating results and financial
condition.
Competition for products and services is intense. As the market for
e-commerce grows, we expect that competition will intensify. Barriers to entry
are minimal, and competitors can offer products and services at a relatively low
cost. Further, our partner companies' competitors may develop products or
services that are superior to, or have greater market acceptance than, the
solutions offered by our partner companies. Many of our partner companies'
competitors have greater brand recognition and greater financial, marketing and
other resources than our partner companies. This may place our partner companies
at a disadvantage in responding to their competitors' pricing strategies,
technological advances, advertising campaigns, strategic partnerships and other
initiatives. If our partner companies are unable to compete successfully, they
will fail and it could have a material adverse effect on our business and
financial condition.
GOVERNMENT REGULATION
Investment Company Act of 1940
We are not currently required to be registered under the Investment Company
Act. Generally, a company must register under the Investment Company Act and
comply with significant restrictions on operations and transactions if: (1) its
investment securities exceed 40% of its total assets, or (2) it holds itself out
as being "primarily engaged" in the business of investing, owning or holding
securities. At this time, less than 40% of our total assets are investment
securities. If, in the future, our investment securities exceed 40% of our total
assets, we believe that we will not be required to register under the Investment
Company Act because we believe that we are "primarily engaged" in a
non-investment company business through our wholly-owned subsidiaries and that
we do not otherwise meet the requirements for registering under the Investment
Company Act. However, if more than 40% of our total assets are investment
securities and we are no longer "primarily engaged" in a non-investment company
business through our wholly-owned subsidiaries, we believe that we will be
"primarily engaged" in a non-investment company business through our
majority-owned subsidiaries and controlled subsidiaries and we will then
promptly file with the
15
Securities and Exchange Commission an exemptive application under Section
3(b)(2) of the Investment Company Act to have the Securities and Exchange
Commission so declare. If we do not receive exemptive relief, then we may be
required to register under the Investment Company Act. Registration under the
Investment Company Act would be inconsistent with our present business strategy
and would have a material and adverse effect on our business, financial
condition and operating results. Moreover, we might be subject to civil and
criminal penalties for failure to register, certain of our contracts might be
voidable and a court-appointed receiver could take control of our company and
liquidate our business.
To avoid regulation under the Investment Company Act, we would have to
attempt to reduce our investment securities to less than 40% of our total
assets. This reduction can be attempted in a number of ways, including the
disposition of investment securities and the acquisition of non-investment
security assets. If we were required to sell investment securities, we may sell
them sooner than we otherwise would. These sales may be at depressed prices, and
we may not realize anticipated benefits from, or may incur losses on, these
investments. Some investments may not be sold due to contractual or legal
restrictions or the inability to locate a suitable buyer. Moreover, we may incur
tax liabilities when we sell assets. We may also be unable to purchase
additional investment securities that may be important to our operating
strategy. If we decide to acquire non-investment security assets, we may not be
able to identify and acquire suitable assets and businesses.
If we are deemed to be, and required to register as, an investment company,
we will be forced to comply with the numerous and burdensome substantive
requirements of the Investment Company Act, including: (a) limitations on our
ability to borrow; (b) limitations on our capital structure; (c) restrictions on
acquisition of equity interests in partner companies; (d) prohibitions on
transactions with affiliates; (e) restrictions on specific investments; and (f)
compliance with reporting, record keeping, voting, proxy disclosure and other
rules and regulations.
If we were forced to comply with the rules and regulations of the
Investment Company Act, our operations would significantly change, and we would
be prevented from successfully executing our business strategy. As a result, our
business, financial condition and operating results would be materially and
adversely affected.
Other Regulations and Legal Uncertainties
Currently, there are few laws or regulations directed specifically at
e-commerce. However, because of the Internet's popularity and increasing use,
new laws and regulations may be adopted. These laws and regulations may cover
issues such as the collection and use of data from web site visitors and related
privacy issues, pricing, content, copyrights, promotions, distribution and
quality of goods and services, registration of domain names and use, and export
and distribution of encryption technology. The enactment of any additional laws
or regulations may impede the growth of the Internet and e-commerce, which could
decrease revenues of our partner companies and place additional financial
burdens on them.
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Item 6. Exhibits
Exhibit Description
2.1 Agreement and Plan of Share Exchange(1)
2.2 Stock Purchase Agreement(3)
3.1 Amendments to Articles of Incorporation(2)
3.2 * Amendments to Articles of Incorporation
4.1 * EID Stock Certificate Representing 1,010,000 shares to Company
10.1 1997 Stock Award Plan(2)
10.2 Incentive Stock Option Plan(2)
10.3 * Purchase Agreement between LP Records and Company
(dated January 21, 2000)
10.4 * Company Letter of Application for Shares.
27 * Financial Date Schedule
- ---------------
(1) Incorporated by reference from exhibits filed with the Form 8-K,
which was filed with the Commission on February 19, 1997.
(2) Incorporated by reference from exhibits filed with the registrant's
Registration Statement on Form S-8, filed February 21, 1997,
registration number 333-22203.
(3) Incorporated by reference from exhibits filed with the Form 8-K,
which was filed with the Commission on November 2, 1999.
(* Filed herewith)
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Signatures
-----------------------
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
there unto duly authorized.
Incubate This ! Inc.
(Registrant)
Date: May 9, 2000 By: /s/ Sharone Perlstein
-----------------------------
Sharone Perlstein, President
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Date Signature Title
May 9, 2000
By: /s/ Sharone Perlstein
------------------------ President, Secretary,
Sharone Perlstein Treasurer, and Director
18