SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to section 12(b) or 12(g) of
The Securities Exchange Act of 1934
Imperiali, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 65-0574887
------------------ ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
777 S. Flagler Drive #800W, West Palm Beach, FL 33401
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number: (561) 805-9494
Securities to be registered under Section 12(b)of the Act:
Title of class Name of each exchange on which
to be so registered each class is to be registered
None None
- ---------------------------- -------------------------------
Securities to be registered under Section 12(g) of the Act:
Common stock, $.001 par value
- --------------------------------------------------------------------------------
(Title of class)
- --------------------------------------------------------------------------------
(Title of class)
TABLE OF CONTENTS
Page
Item 1. Business. 2
Item 1A. Risk Factors. 37
Item 2. Financial Information. 49
Item 3. Properties. 55
Item 4. Security Ownership of Certain Beneficial Owners
and Management. 56
Item 5. Directors and Executive Officers. 57
Item 6. Executive Compensation. 62
Item 7. Certain Relationships and Related Transactions. 63
Item 8. Legal Proceedings. 63
Item 9. Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters. 64
Item 10. Recent Sales of Unregistered Securities. 65
Item 11. Description of Registrant's Securities to be
Registered. 66
Item 12. Indemnification of Directors and Officers. 70
Item 13. Financial Statements and Supplementary Data. 72
Item 14. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure. 73
Item 15. Financial Statements and Exhibits. 73
Index to Exhibits 74
Imperiali, Inc. is filing this Registration Statement on Form 10 under the
Securities Exchange Act of 1934 (the "Registration Statement") on a voluntary
basis to provide current public information to the investment community and to
comply with applicable requirements for the quotation or listing of its
securities on a national securities exchange or other public trading market. In
this Registration Statement, the "Company," "we," "us," and "our" refer to
Imperiali, Inc.
Item 1. Business.
(a) General Development of the Business
-----------------------------------
We were incorporated in Florida on September 27, 1994 by Daniel J. Imperato
under the name Automated Energy Security Inc.
From September 1994 through March 1999, the Company provided energy
management services and intelligent security for residential dwellings,
commercial buildings and government facilities. In 1994, the Company purchased
all of the patented technology, software and patents pending on the Wide Area
Energy Savings System known as "TESS" (Total Energy Security System) from
Associated Data Consultants, Inc. In 1998, after Bell Atlantic (one of our
strategic partners) withdrew from the development of TESS and engaged in
litigation with Associated Data, the Company abandoned our business operations
related to TESS.
In March 1999, we changed our name to New Millennium Development Group,
Inc. and our business operations to media and telecommunications, focusing on
connectivity solutions, storage, fiber optic cable systems, security and the
international long distance market. Our plan was to spearhead a sub sea fiber
optic cable system connecting 70 countries around the globe. In furtherance of
the plan the Company entered into Memoranda of Understanding with 30 countries,
completed landing party site and ocean surveys, arranged long-term financing and
selected vendors and subcontractors for fiber optic cable and equipment. During
the process, however, the price of cable systems skyrocketed, forcing us to
reconsider our business plans and projections. The Company retained the services
of an independent consultant who concluded that not only would increasing cable
prices decrease long-term gains, the rapid development of the internet and IP
systems would render obsolete the market for fiber optic cable. Accordingly, in
mid 2001 we shifted our focus away from fiber optic cable systems and
concentrated on Voice over Internet Protocol (VOIP) and related services
including high-speed wireless standard ISP and broadband services; international
calling cards; video conferencing and related IP products.
2
Failed corporate history, management infighting, the tragedy of September
11, 2001 and the general economic downturn especially related to technology, led
us to cease business operations in mid-2002 until mid-2005. However, during this
time, Mr. Imperato, the Company's Chairman and majority shareholder, worked to
maintain management relationships with previous businesses, associates and
professionals for the eventual resurrection of business operations.
In November 2005, we changed our name to Imperiali, Inc. and commenced
operations as an investment company. To date, the activities of our principals
have largely been limited to organizational matters and fund raising. We have
commenced the private placement of up to 10 million of the Company's common
shares in an offering (the "Offering") exempt from the registration requirements
of the Securities Act of 1933 ("1933 Act") pursuant to Section 4(2) thereof and
Regulation D ("Regulation D") thereunder. Upon the closing of the Offering, the
Company's common shares will be owned by numerous persons that are both
"accredited investors," as that term is defined in Regulation D, and "qualified
clients" within the meaning of the Investment Advisers Act of 1940 (the "1940
Act"),
Our investment objective is to generate both current income and capital
appreciation to deliver superior, risk adjusted returns to investors through
investment in the debt and equity securities of privately and publicly held
micro-cap companies (market capitalization below $50 million) that are based in
the U.S. and that offer products and services that can be successfully expanded,
marketed and sold in commercially viable international markets.
We have filed an election with the Securities and Exchange Commission to be
regulated as a business development company under the 1940 Act and expect to
assume that status following the effective date of this Registration Statement.
As a business development company, we will primarily be engaged in the business
of furnishing capital and making available managerial assistance to companies
that do not have ready access to capital through conventional financial
channels. We refer to the companies in which we invest as "portfolio companies."
Also, as a business development company we will be required to comply with
numerous regulatory requirements. For example, we expect to finance our
investments using debt and equity; however, our ability to use debt is limited
in certain significant respects. See "Regulation as a Business Development
Company."
3
For U.S. federal income tax purposes, we are currently taxed as an ordinary
corporation under Subchapter C of the Internal Revenue code of 1986, as amended
(the "Code"). However, we intend to elect, as soon as practicable after
qualification, to be treated for federal income tax purposes as a regulated
investment company under Subchapter M of the Code. As a regulated investment
company, we generally would not have to pay corporate-level federal income taxes
on any net ordinary income or capital gains that we distribute to our
stockholders as dividends if we meet certain source-of-income, asset
diversification, and income distribution requirements. See "Certain U.S. Federal
Income Tax Considerations." As of the date of this Registration Statement, we
cannot determine when we will be able to qualify as a regulated investment
company.
Our principal executive offices are located at 777 South Flagler Drive,
Suite 800 West, West Palm Beach, Florida 33401 and our telephone number is (561)
805-9494. We maintain a website on the Internet at www.imperali.org. Information
contained on our website is not incorporated by reference into this Registration
Statement and you should not consider information contained on our website to be
part of this Registration Statement.
Ownership of the Company
As of January 1, 2007, there were approximately 500 holders of record of
our common stock. This number does not include an indeterminate number of
shareholders whose shares are held by brokers in street name. Upon the closing
of the Offering, we expect the number of shareholders to have increased.
In exchange for certain services provided by the Imperiali Organization LLC
(a company wholly owned and controlled by Daniel J. Imperato, our Chairman and
majority stockholder) and the right of first refusal to acquire or participate
in websites and projects developed by the Imperiali Organization, we have issued
five million shares of our Series B preferred stock to the Imperiali
Organization. The powers, preferences and rights of the shares of such series
are discussed under Item 10, Recent Sales of Unregistered Securities.
4
Use of Proceeds
Immediately after the closing of the Offering, the Company expects to have
cash resources in excess of $30 million and no indebtedness other than accounts
payable incurred in the ordinary course of the Company's business.
We anticipate that it will take us up to 90 days to invest substantially
all of the proceeds of the Offering in accordance with our investment strategy.
During this period, we intend that a substantial portion of our overall
portfolio will be invested in temporary investments, such as cash and cash
equivalents, which we expect will earn yields substantially lower than the
income that we anticipate receiving in respect of investments in Portfolio
Companies as are described below in Item 1(c).
(b) Financial Information About Segments
------------------------------------
Since the we only recently re-commenced operations, the Company has limited
financial information. The Company's audited financial statements are included
in this Registration Statement.
(c) Narrative Description of Business
---------------------------------
General
We recently changed our name to Imperiali, Inc. and commenced operations as
an economic and business development firm that will apply analytic techniques
and industry knowledge to various investments in a broad range of portfolio
companies. To date, the activities of our principals have largely been limited
to organizational matters and fund raising through the Offering.
Our investment objective is to generate both current income and capital
appreciation to deliver superior, risk adjusted returns to investors through
investment in the debt and equity securities of privately and publicly held
micro-cap companies (market capitalization below $50 million) that are based in
the U.S. and that offer products and services that can be successfully expanded,
marketed and sold in commercially viable international markets. Our principals'
experience combines economic and financial analysis with expertise in business
strategy and planning, market and demand forecasting, policy analysis, and
technology development strategy. They have worked on a variety of matters, such
as mergers and acquisitions, new product introductions, strategy and capital
5
investment decisions, the outcomes of which often have significant implications
or consequences for the parties involved. We will offer our portfolio companies
a wide array of services such as strategy development, performance improvement,
corporate portfolio analysis, market demand and new product strategies,
evaluation of intellectual property and other assets and competition analysis.
Matters such as these often require independent analysis, and as a result,
companies (such as our portfolio companies) must outsource this work to outside
experts. We expect that our portfolio companies will turn to us because we can
provide qualified economic and financial experts to address a wide variety of
matters.
In addition to our internal Company resources, we believe that we will be
able to provide such advice and assistance by using our extensive international
network of agents and affiliates, located in many countries and regions and
spanning more than five continents. This network, which we refer to as Imperiali
Inc.'s Global Advisory Team, is able to monitor and in some cases influence
events, prudently utilizing the tools and leverage that the portfolio company's
business model affords, endeavoring to mitigate risks and safeguard investments,
with the idea of protecting the Company's shareholders' interest.
We have filed an election with the Securities and Exchange Commission to be
regulated as a business development company under the 1940 Act and expect that
election to become effective after the effective date of this Registration
Statement. As a business development company, we intend to focus primarily on
micro-cap companies with sales of $25-$50 million and a strong domestic
presence, with a key product or service that is globally marketable. Micro-cap
companies (market capitalization below $50 million) are more likely than larger
companies to focus on innovative products and services. Due to the high cost of
competition on a global scale, these micro-caps are losing market share. They
may not have the advertising dollars to compete, may lack access to long-term
debt financing for expansion and manufacturing and, more generally, they lack
the experience and contacts to access new global markets.
We view this problem for micro-cap companies to be an opportunity for us to
assist them with the competitive edge they require, to expand and to grow
top-line revenues. Extending the assistance of Company management personnel by
the use of our Global Advisory Team, we can assist our portfolio companies
expand globally, identify capital and political resources, adapt to local
customs and operating requirements in international markets, access new
consumers, new sources of materials and remote manufacturing options, and
generally make the best possible business decisions.
6
We favor companies that present opportunities for superior performance
through internal growth, product or geographic expansion, the completion of
complementary add-on acquisitions, or industry consolidations. We would prefer
to be a majority investor, without a fixed time horizon for the liquidation of
our investments. We may continue to provide capital for add-on acquisitions that
help build value after the initial closing.
Once we have identified a target portfolio company, we will conduct our due
diligence, and, as appropriate, determine whether to either (i) invest and
advise or (ii) merely advise the portfolio company for a fee. Once we have
decided to advise the portfolio company, we can distribute the portfolio
company's business plan or other corporate literature to our agents and
affiliates in over 70 countries. Based upon the feedback from the various local
agents and their local markets, we will determine how to proceed to assist the
portfolio company in pursuing and executing viable growth opportunities and
strategies in the countries where our business contacts have indicated clear
business interest and market viability. Methods of expansion we may recommend to
our portfolio companies include, but are not limited to, strategic partnering,
joint venture, licensing with royalty agreement, regional distribution networks,
regionalized manufacturing, and entry into the public markets.
In addition to investing in and assisting portfolio companies, we will have
opportunities created through our relationship with the Imperiali Organization,
which has contractually agreed to serve as the development team for Imperiali
Inc. The Imperiali Organization has an ongoing series of projects which have (or
may have) application to the global marketplace. Through an agreement between
Imperiali Organization and the Company, we will have the first right of refusal
on any and all projects created and developed by the Imperiali Organization.
In summary, as a business development company Imperiali Inc. looks to
globalize and grow viable micro-cap companies by investing in them and/or
advising them by utilizing our international teams, residing in many
international markets and who have the intellectual, cultural, financial,
political and operational capabilities, combined with a global vision, to
connect growing companies to the world's markets.
7
Due Diligence
We intend to conduct diligence on prospective portfolio companies
consistent with the best practices approach adopted by others in our sector. We
believe that our management personnel, augmented as necessary by members of our
Global Advisory Teams, have the ability and knowledge to conduct appropriate and
extensive due diligence investigations prior to our investing in a prospective
portfolio company. In conducting our due diligence, the Company will use
publicly available information, as well as information derived from former and
current management teams, consultants, competitors and investment bankers and
the direct experience of our management and associates.
Our due diligence will typically include:
o review of historical and prospective financial information;
o on-site visits;
o interviews with management, employees, customers and vendors of
the potential portfolio company;
o review of senior loan documents;
o background checks; and
o research relating to the company's management, industry, markets,
products and services, and competitors.
Upon the completion of due diligence and a decision to proceed with an
investment in a company, our management will present the opportunity to our
Board of Directors, which will determine whether to pursue the potential
investment. Additional due diligence with respect to any investment may be
conducted on our behalf by attorneys and independent accountants prior to the
closing of the investment, as well as other outside advisers, as appropriate.
Managerial Assistance
As a business development company, we will offer, and must provide upon
request, managerial assistance to our portfolio companies. This assistance could
involve, among other things, participating in board and management meetings,
consulting with and advising officers of portfolio companies and providing other
8
organizational and financial guidance or exercising strategic or managerial
influence over such companies. We expect to receive fees for these services.
Company management personnel and our Global Advisory Teams will provide
managerial assistance to those portfolio companies that request this assistance.
Additionally, we have developed relationships with potential service providers
in this process that include legal, accounting, public relations, market makers,
investment banking firms and investors.
Together with members of our Global Advisory Teams and service providers,
we plan to work with our portfolio companies to accomplish the following steps:
(A) Develop a detailed understanding of management's expected
outcomes;
(B) Develop a timetable for the transaction;
(C) Validate proposed transaction terms with select buyers or
sellers;
(D) Perform transactional due diligence;
(E) Prepare an executive summary and presentation materials -
including a financial model;
(F) Pre-screen and contact potential buyers or sellers;
(G) Coordinate principal meetings;
(H) Coach management on how to communicate and negotiate with buyers
and sellers and generally facilitate the interactions between
management and buyers or sellers;
(I) Assist with the preparation of responses to due diligence
requests;
(J) Assist with the negotiation of term sheets with interested
parties; and
(K) Work with management and the investor or lender to complete due
diligence process and negotiate final closing documents.
9
Ongoing Relationships with Portfolio Companies
We will monitor our portfolio companies on an ongoing basis. We will
monitor the financial trends of each portfolio company to determine if it is
meeting its business plans and to assess the appropriate course of action for
each company. We have several methods of evaluating and monitoring the
performance and fair value of the Company's investments, which may include, but
are not limited to, the following:
o Assessment of success of the portfolio company in adhering to its
business plan and compliance with covenants;
o Periodic and regular contact with portfolio company management
and, if appropriate, the financial or strategic sponsor, to
discuss financial position, requirements and accomplishments;
o Comparisons to other companies in the industry;
o Attendance at and participation in board meetings; and
o Review of monthly and quarterly financial statements and
financial projections for portfolio companies.
Valuation Policies
Valuation of Portfolio Investments
As a Business Development Company, our business plan calls for us to invest
primarily in illiquid securities issued by private companies ("Private
Investments")(we are required to invest at least an aggregate of 70% of our
assets Private Investments and in companies listed on the OTCBB). Private
Investments are generally subject to restrictions on resale and generally have
no established trading market. The Company values our Private Investments at
fair value as determined in good faith by our Board of Directors in accordance
with our valuation policy. That policy calls for the determination of fair value
at "the amount for which an investment could be sold in an orderly disposition
over a reasonable period of time between willing parties other than in a forced
or liquidation sale." Our valuation policy is intended to provide a consistent
10
basis for establishing the fair value of the portfolio. The Company will record
unrealized depreciation on investments when we believe that an asset has been
impaired and full collection for the loan or realization of an equity security
is doubtful. Conversely, the Company will record unrealized appreciation if we
have a clear indication that the underlying portfolio company appreciates and,
therefore, our security has appreciated. Under this valuation policy, the
Company does not consider temporary changes in the capital markets, such as
interest rate movements or changes in the public equity markets, in order to
determine whether an investment in a private company has been impaired or
whether a private investment has increased in value. The value of investments in
public securities is determined using quoted market prices discounted for
restrictions on resale.
Equity Securities
Equity interests in portfolio companies for which there is no liquid public
market are valued based on the enterprise value of the portfolio company, which
is determined using various factors, including net cash flow from operations of
the portfolio company and other pertinent factors such as recent offers to
purchase a portfolio company's securities or other liquidation events. The
determined fair values are generally discounted to account for restrictions on
resale and minority control positions.
The value of our equity interests in public companies for which market
quotations are readily available is based upon the closing public market price
for the last day up to and including the balance sheet date. Securities that
carry certain restrictions on sale are typically valued at a discount from the
public market value of the security.
Dividend income, if any, is recorded on cumulative preferred equity
securities on an accrual basis to the extent that such amounts are expected to
be collected and on common equity, securities on the record date for private
companies or on the ex-dividend date for publicly traded companies.
Loans and Debt Securities
For loans and debt securities, to the extent that the Company invests in
them, fair value generally approximates cost unless the borrower's condition or
external factors lead to a determination of fair value at a lower amount. When
the Company receives nominal cost warrants or free equity securities ("nominal
cost equity"), we allocate our cost basis in our investment between the debt
11
securities and the nominal cost equity at the time of origination. At that time,
the original issue discount basis of the nominal cost equity is recorded by
increasing the cost basis in the equity and decreasing the cost basis in the
related debt securities.
Interest income is recorded on an accrual basis to the extent that such
amounts are expected to be collected. For loans and debt securities with
contractual payment-in-kind interest, which represents contractual interest
accrued and added to the loan balance that generally becomes due at maturity, we
will not accrue payment-in-kind interest if the portfolio company valuation
indicates that the payment-in-kind interest is not collectible. Loan origination
fees, original issue discount, and market discount are capitalized and then
amortized into interest income using the effective interest method.
The weighted average yield on loans and debt securities is computed as the
(a) annual stated interest rate earned plus the annual amortization of loan
origination fees, original issue discount and market discount earned on accruing
loans and debt securities, divided by (b) total loans and debt securities at
value. The weighted average yield is computed as of the balance sheet date.
Prepayment premiums are recorded on loans when received.
Portfolio Valuation Process
Our methodology includes the examination of, among other things, the
underlying investment performance, financial condition, and market-changing
events that affect valuation. Because of the type of investments that the
Company makes and the nature of our business, this valuation process requires an
analysis of various factors.
Our process for determining the fair value for a private finance investment
is applied consistently across our portfolio. The process is as follows.
o First, the Company determines the portfolio company's enterprise
value as if the Company were to sell it in a "current sale." In
our valuation process, the Company uses the AICPA's definition of
"current sale," which means an "orderly disposition over a
reasonable period of time between willing parties other than in a
forced or liquidation sale."
12
o The Company then evaluates the amount of our debt and the
position of our debt in the portfolio company's capital
structure.
o If the enterprise value of the portfolio company is in excess of
the amount of our last dollar of investment capital given our
priority in the capital structure, the fair value of our
investment will be considered to be our cost or perhaps, given
the structure of our particular security, greater than cost if we
are to share in equity appreciation.
o If the enterprise value of the portfolio company is less than our
last dollar of investment capital in the capital structure, then
our investment has declined in value and the Company needs to
reduce the fair value of our investment and incur a charge to our
earnings by recognizing unrealized depreciation.
Determining the enterprise value of a portfolio company, as if that
portfolio company were to be sold in a "current sale," is a very complex
process, where we must analyze the historical and projected financial results of
the portfolio company and analyze the public trading market and private merger
and acquisition market to determine appropriate purchase price multiples. In
addition, a reasonable discount to the value of our securities must also be
reflected when the Company may have restrictions such as vesting periods for
warrants or other factors. We also take into account the collectibility of
non-cash interest to determine if the Company will continue to accrue such
interest.
Specific Considerations
The valuation of illiquid private securities is inherently subjective, and
as a result, the Company intend to exercise good judgment in our valuation
process. Specifically, we will exercise care to assure that the Company has
considered the position of the portfolio company today and the position of our
security today given the data we have available. We will also exercise care to
assure that the process is not too mechanical; however, there are some specific
considerations to be addressed in our valuation process. The ultimate goal is a
reasonable estimate of fair value determined in good faith.
Typically, in the private equity business, companies are bought and sold
based upon multiples of EBITDA, cash flow, revenues and in limited instances
13
book value. In determining a multiple to use for valuation purposes, we will
look to private M&A statistics, reported public trading multiples and industry
practices. In determining the right multiple, we intend to consider not only the
fact that our portfolio company may be private relative to a peer group, but
also the size and scope of our portfolio company and its specific strengths and
weaknesses. In some cases, when a portfolio company is at EBITDA breakeven or
slightly below but has excellent future prospects, we believe the best valuation
methodology may be a discounted cash flow analysis based upon future
projections. If a portfolio company is distressed, we believe a liquidation
analysis may provide the best indication of enterprise value.
Discounts on common equity securities.
When determining the value of common equity securities or warrants to
purchase such securities, we intend to consider what type of discount to apply
to the value of the security if the Company is in a minority position, has
restrictions on resale, has specific concerns about the receptivity of the M&A
market to a specific portfolio company at a certain time and other factors.
Generally, we find that the Company should apply larger discounts when we are
new to an investment, and therefore, we have not yet developed an exit strategy.
As an investment in the portfolio matures, we intend to consider whether or not
the Company should begin to reduce discounts, especially if we are generally
aware that either we or a controlling shareholder group has begun to develop an
exit strategy.
When we have begun to develop an exit strategy of the Company is the
controlling shareholder, the discount imposed should generally be less than in
the case of a minority position. We may still contemplate the need to discount
for the current state of the M&A market or restrictions imposed on us due to our
relationship with management of the portfolio company or other capital
providers.
Competition
The Company operates in a highly competitive market for investment
opportunities. A large number of entities compete with us to make the types of
investments that we intend to make. The Company competes with a large number of
private equity and venture capital funds, other equity and non-equity based
investment funds, investment banks and other sources of financing, including
traditional financial services companies such as commercial banks and specialty
finance companies. Many of our competitors are substantially larger and have
14
considerably greater financial, technical and marketing resources than we do.
For example, some competitors may have a lower cost of funds and access to
funding sources that are not available to us. In addition, some of our
competitors may have higher risk tolerances or different risk assessments, which
could allow them to consider a wider variety of investments and establish more
relationships than us. Furthermore, many of our competitors are not subject to
the regulatory restrictions that the 1940 Act will impose on us as a business
development company. As noted in Risk Factors, below, there can be no assurance
that the competitive pressures the Company faces will not have a material
adverse effect on our business, financial condition and results of operations.
Also, as a result of this competition, we may not be able to take advantage of
attractive investment opportunities from time to time, and we can offer no
assurance that the Company will be able to identify and make investments that
are consistent with our investment objective.
Other Investments
In addition to our planned investments in the debt or equity of micro-cap
companies, we may invest, from time-to-time, in other investments, provided that
we maintain at least 70% of our investments in Private Investments or in
companies listed on the OTCBB.
High Yield Bonds.
The Company may invest in high yield bonds, i.e., income securities that
are typically lower grade securities. The Company's investments in high yield
securities may have fixed or variable principal payments and all types of
interest rate and dividend payment and reset terms, including fixed rate,
adjustable rate, zero coupon, contingent, deferred, payment in kind and auction
rate features as well as a broad range of maturities.
Lower grade securities are securities that are rated below investment
grade, such as those rated Ba or lower by Moody's Investors Service, Inc.
("Moody's") or BB or lower by Standard & Poor's Ratings Group, a division of The
McGraw-Hill Companies ("S&P"), or securities comparably rated by other rating
agencies, or unrated securities determined by us to be of comparable quality.
Lower grade securities are commonly referred to as "junk bonds." Securities
rated Ba by Moody's are judged to have speculative elements; their future cannot
be considered as well assured and often the protection of interest and principal
15
payments may be very moderate. Securities rated BB and B by S&P are regarded as
having predominantly speculative characteristics and, while such obligations
have less near-term vulnerability to default than other speculative grade debt,
they face major ongoing uncertainties or exposure to adverse business, financial
or economic conditions which could lead to inadequate capacity to meet timely
interest and principal payments. Securities rated C by Moody's are regarded as
having extremely poor prospects of ever attaining any real investment standing.
Securities rated D by S&P are in default and the payment of interest and/or
repayment of principal is in arrears.
Lower grade securities, though high yielding, are characterized by high
risk. They may be subject to certain risks with respect to the issuing entity
and to greater market fluctuations than certain lower yielding, higher rated
securities. The retail secondary market for lower grade securities may be less
liquid than that of higher rated securities. Adverse conditions could make it
difficult at times for the Company to sell certain securities or could result in
lower prices than those used in calculating the Company's net asset value.
The prices of debt securities generally are inversely related to interest
rate changes; however, the price volatility caused by fluctuating interest rates
of securities also is inversely related to the coupon of such securities.
Accordingly, below investment grade securities may be relatively less sensitive
to interest rate changes than higher quality securities of comparable maturity,
because of their higher coupon. This higher coupon is what the investor receives
in return for bearing greater credit risk. The higher credit risk associated
with below investment grade securities potentially can have a greater effect on
the value of such securities than may be the case with higher quality issues of
comparable maturity, and will be a substantial factor in the Company's relative
share price volatility.
Lower grade securities may be particularly susceptible to economic
downturns. It is likely that an economic recession could severely disrupt the
market for such securities and may have an adverse impact on the value of such
securities. In addition, it is likely that any such economic downturn could
adversely affect the ability of the issuers of such securities to repay
principal and pay interest thereon and increase the incidence of default for
such securities.
16
The ratings of Moody's, S&P and any other rating agencies represent their
opinions as to the quality of the obligations which they undertake to rate.
Ratings are relative and subjective and, although ratings may be useful in
evaluating the safety of interest and principal payments, they do not evaluate
the market value risk of such obligations. Although these ratings may be an
initial criterion for selection of the Company's portfolio investments, we also
will independently evaluate these securities and the ability of the issuers of
such securities to pay interest and principal. To the extent that the Company
invests in lower grade securities that have not been rated by a rating agency,
the Company's ability to achieve its investment objectives will be more
dependent on our credit analysis than would be the case when the Company invests
in rated securities.
Distressed Debt.
The Company may invest in debt securities and other obligations of
distressed companies. Investment in distressed debt is speculative and involves
significant risk, including possible loss of the principal invested. Distressed
debt obligations may be performing or non-performing and generally trade at
prices substantially lower than lower grade securities of companies in similar
industries. Investing in distressed debt is not a principal investment strategy
of the Company.
Equity Securities. The Company may also invest in equity securities,
including common and preferred stocks of issuers selected by our investment
advisory committee (with the approval of our Board of Directors),
notwithstanding that such issuers are not micro-cap companies. In this regard,
whether pertaining to a micro-cap company or not, the following considerations
apply:
Common Stock.
Common stock generally represents an equity ownership interest in an
issuer. Although common stocks have historically generated higher average total
returns than fixed-income securities over the long term, common stocks also have
experienced significantly more volatility in those returns and may under perform
relative to fixed-income securities during certain periods. An adverse event,
such as an unfavorable earnings report, may depress the value of a particular
common stock held by the Company. Also, prices of common stocks are sensitive to
general movements in the stock market and a drop in the stock market may depress
the price of common stocks to which the Company has exposure. Common stock
17
prices fluctuate for several reasons including changes in investors' perceptions
of the financial condition of an issuer or the general condition of the relevant
stock market, or when political or economic events affecting the issuers occur.
In addition, common stock prices may be particularly sensitive to rising
interest rates, as the cost of capital rises and borrowing costs increase.
Preferred Securities.
Traditional preferred securities generally pay fixed or adjustable rate
dividends to investors and generally have"preference" over common stock in the
payment of dividends and the liquidation of a company's assets. This means that
a company must pay dividends on preferred stock before paying any dividends on
its common stock. In order to be payable, distributions on such preferred
securities must be declared by the issuer's board of directors. Income payments
on most traditional preferred securities currently outstanding are cumulative,
causing dividends and distributions to accumulate even if not declared by the
board of directors or otherwise made payable. In such a case all accumulated
dividends must be paid before any dividend on the common stock can be paid.
However, some traditional preferred stocks are non-cumulative, in which case
dividends do not accumulate and need not ever be paid. A portion of the
Company's portfolio may include investments in non-cumulative preferred
securities, whereby the issuer does not have an obligation to make up any
arrearages to its shareholders. Should an issuer of a non-cumulative preferred
stock held by the Company determine not to pay dividends on such stock, the
Company's income would be adversely affected. There is no assurance that
dividends or distributions on the traditional preferred securities in which the
Company may invest will be declared or paid.
The market value of preferred securities may be affected by favorable and
unfavorable changes impacting companies in the utilities and financial services
sectors, which are prominent issuers of preferred securities, and by actual and
anticipated changes in tax laws, such as changes in corporate income tax rates
or the dividends received deduction. Because the claim on an issuer's earnings
represented by traditional preferred securities may become onerous when interest
rates fall below the rate payable on such securities, the issuer may redeem the
securities. Thus, in declining interest rate environments in particular, the
Company's holdings of higher rate-paying fixed rate preferred securities may be
reduced and the Company would be unable to acquire securities of comparable
credit quality paying comparable rates with the redemption proceeds.
18
Foreign Securities.
The Company may invest in foreign securities, which may include securities
denominated in U.S. dollars or in foreign currencies or multinational currency
units. The Company may invest in foreign securities of emerging market issuers,
but investments in such securities are not expected to comprise more than 5% of
the Company's total assets. The Company will consider a company to be a U.S.
company and not a foreign company if it was organized in the U.S. and its
primary business office is in the U.S. Foreign securities markets generally are
not as developed or efficient as those in the United States. Similarly, volume
and liquidity in most foreign securities markets are less than in the United
States and, at times, volatility of price can be greater than in the United
States.
The Company will also be subject to additional risks if it invests in
foreign securities, including possible adverse political and economic
developments, seizure or nationalization of foreign deposits and adoption of
governmental restrictions which might adversely affect or restrict the payment
of principal and interest on the foreign securities to investors located outside
the country of the issuer, whether from currency blockage or otherwise.
Since foreign securities may be purchased with and payable in foreign
currencies, the value of these assets as measured in U.S. dollars may be
affected favorably or unfavorably by changes in currency rates and exchange
control regulations.
Short-Term Debt Securities; Temporary Defensive Position.
The Company anticipates that it will take up to 90 days to invest
substantially all of the net proceeds received by the Company from the Offering
due to the time necessary to identify, evaluate, structure, negotiate, and close
suitable investments in potential portfolio companies. In the interim, the
Company will invest in temporary investments, such as cash and cash equivalents,
U.S. government securities and other high quality debt investments that mature
in one year or less from the date of investment. In addition, during periods in
which we determine that we are temporarily unable to follow the Company's
investment strategy or that it is impractical to do so or pending re-investment
of proceeds received in connection with the sale of a portfolio security or the
issuance of additional securities or borrowing of money by the Company, all or
19
any portion of the Company's assets may be invested in such temporary
investments. Our determination that we are temporarily unable to follow the
Company's investment strategy or that it is impractical to do so will generally
occur only in situations in which a market disruption event has occurred and
where trading in the securities selected through application of the Company's
investment strategy is extremely limited or absent. In such a case, the market
price of the Company's common shares may be adversely affected and we may not
pursue or achieve our investment objective.
Regulation of the Company
The Company has filed an election to be treated as a business development
company under the 1940 Act, which will take effect after this Registration
Statement, becomes effective. The 1940 Act contains prohibitions and a
restriction related to transactions between business development companies and
their affiliates (including any investment advisers or sub-advisers), principal
underwriters and affiliates of those affiliates 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 the Company may
not change the nature of its business so as to cease to be, or to withdraw its
election as, a business development company unless approved by a majority of its
outstanding voting securities.
The Company will be required to provide and maintain a bond issued by a
reputable fidelity insurance company to protect it against larceny and
embezzlement. Furthermore, as a business development company, the Company will
be prohibited from protecting any director or officer against any liability to
the Company's shareholders arising from willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of such
person's office.
The Company will be required to adopt and implement written policies and
procedures reasonably designed to prevent violation of the federal securities
laws, review these policies and procedures annually for their adequacy and the
effectiveness of their implementation, and designate its chief compliance
officer to be responsible for administering the policies and procedures.
The Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") imposes a wide
variety of regulatory requirements on publicly held companies and their
insiders. Many of these requirements will affect the Company. The Company will
continue to monitor compliance with all future regulations that are adopted
20
under the Sarbanes-Oxley Act and will take actions necessary to ensure that it
is in compliance with such laws and regulations.
Under the 1940 Act, a business development company may not acquire any
assets other than assets of the type listed in Section 55(a) of the 1940 Act,
which are referred to as "qualifying assets," unless, at the time the
acquisition is made, qualifying assets represent at least 70% of the company's
total assets. The principal categories of qualifying assets relevant to the
Company's proposed business are the following:
(1) Securities purchased in transactions not involving any public offering
from the issuer of such securities, which issuer (subject to certain limited
exceptions) is an eligible portfolio company, or from any person who is, or has
been during the preceding 13 months, an affiliated person of an eligible
portfolio company, or from any other person, subject to such rules as may be
prescribed by the SEC. An eligible portfolio company is defined in the 1940 Act
as any issuer which:
(a) is organized under the laws of, and has its principal place of
business in, the United States;
(b) is not an investment company (other than a small business
investment company wholly- owned by the business development company) or a
company that would be an investment company but for certain exclusions
under the 1940 Act; and
(c) satisfies any of the following:
A. does not have any class of securities with respect to which a
broker or dealer may extend margin credit (the "no margin securities
test");
B. is controlled by a business development company or a group of
companies including a business development company and the business
development company has an affiliated person who is a director of the
eligible portfolio company; or
C. is a small and solvent company having total assets of not more
than $4 million and capital and surplus of not less than $2 million.
(2) Securities of any eligible portfolio company which the Company
controls.
21
(3) Securities purchased in a private transaction from a U.S. issuer that
is not an investment company or from an affiliated person of the issuer or in
transactions incident thereto, if the issuer is in bankruptcy and subject to
reorganization or if the issuer, immediately prior to the Company's purchase of
the issuer's securities, was unable to meet its obligations as they came due
without material assistance other than conventional lending or financing
arrangements.
(4) Securities of an eligible portfolio company purchased from any person
in a private transaction if there is no ready market for such securities and the
Company already owns 60% of the outstanding equity of the eligible portfolio
company.
(5) Securities received in exchange for or distributed with respect to
securities described in (1) through (4) above, or pursuant to the exercise of
warrants or rights related to such securities.
(6) Cash, cash equivalents, U.S. government securities and other
high-quality debt securities maturing in one year or less from the time of
investment.
With regard to (1) above, an "eligible portfolio company" is defined in the
1940 Act as any company that: (a) is organized under the laws of, and has its
principal place of business in, the United States; (b) with certain exceptions,
is not an investment company or a company that would be an investment company
but for certain exclusions under the 1940 Act; and (c) satisfies one of three
additional criteria. One of the criteria is that the company may not have any
class of securities with respect to which a member of a national securities
exchange, broker or dealer may extend or maintain credit to or for a customer
pursuant to rules and regulations adopted by the Board of Governors of the
Federal Reserve System, or "Federal Reserve Board," under Section 7 of the
Securities Exchange Act of 1934 (the "1934 Act"), or "margin securities." This
provision is referred to herein as the "no margin securities test."
The Company intends to invest in private companies that may have
outstanding privately-placed debt securities (in addition to the securities that
the Company acquires) and the Company intends to treat such investments as
qualifying assets. We believe that these companies will satisfy the no margin
securities test. We note that Regulation T, the Federal Reserve Board regulation
governing the extension of credit by brokers and dealers, identifies securities
that are margin securities. When the provisions of the 1940 Act relating to
22
business development companies were enacted in 1980, margin securities were
limited to (i) securities that were listed on a national securities exchange;
(ii) equity securities that were traded over the counter and listed on the
Federal Reserve Board's "OTC margin stock" list; and (iii) limited categories of
non-listed debt securities that were issued in public offerings by public
companies. Under this standard, a private company (that is, a company that had
not publicly offered any securities and did not file periodic reports under the
1934 Act) that had outstanding privately-placed debt securities would have been
an eligible portfolio company under the no margin securities test.
In 1998, the Federal Reserve Board amended Regulation T to include within
the definition of margin securities any "non-equity security." Non-equity
securities include debt securities. If applied literally, this change would mean
that any company that has issued any debt securities would not be an eligible
portfolio company under the no margin securities test and the Company would be
severely limited in its ability to pursue its strategy.
We do not believe that this result was intended by the Federal Reserve
Board when it amended Regulation T in 1998 or contemplated by Congress when it
enacted the provisions of the 1940 Act relating to business development
companies, and do not believe that the no margin securities test should be
interpreted as causing a private company that had outstanding debt securities to
fail the no margin securities test, notwithstanding the literal language of the
1940 Act and Regulation T. The SEC and the courts may have a different
interpretation of this provision and, accordingly, there can be no assurance
that the Company will be able to pursue its investment objective.
Legislation currently pending in congress, H.R. 436 (the Increased Capital
Access for Growing Business Act), would, if enacted, alter the criteria used to
determine if securities can be treated as qualifying assets. The new criteria,
if enacted, would allow securities to be treated as qualifying assets if (i) the
issuer of the securities does not have any class of equity securities listed for
trading on a national securities exchange or traded through the facilities of a
national securities association or (ii) the aggregate value of the issuer's
outstanding publicly traded equity securities is not more than $250,000,000. The
enactment of this legislation would confirm that private companies with
outstanding debt securities, as well as other types of companies, are eligible
portfolio companies. There can be no assurance that H.R. 436 or similar
23
legislation will be enacted or, if enacted, that it would not be materially
different than the current form of legislation that is pending.
In addition, the SEC has proposed new Rule 2a-46 that is substantially
similar to H.R. 436. The proposed rule, however, does not contain a test based
upon market capitalization. We do not expect that either the proposed rule or
legislation, if adopted, will be adverse to the Company's investment program.
The Company will invest in private companies that may have outstanding
privately-placed debt securities (in addition to the securities that the Company
acquires) and the Company intends to treat such investments as qualifying
assets. Unless H.R. 436 is enacted or the status of private companies with
privately-issued debt securities as eligible portfolio companies is clarified
through SEC rulemaking or other means, there is a risk that the types of
investments that the Company intends primarily to make would not be deemed to be
qualifying assets.
We have received no assurance from the SEC or its staff as to whether or
not they agree with our interpretation that privately-issued debt securities of
private companies are qualifying assets.
A decision by the SEC or a court that conflicts with our interpretation
would have a material adverse effect on the Company's business. For example,
such a decision would make it more difficult for us to identify investment
opportunities and may require the Company to change its investment objective or
policies, or conceivably seek shareholder approval to cease to be regulated as a
business development company. The SEC may also take such other actions against
the Company as it determines to be appropriate.
Such a decision also may require that the Company dispose of investments
made based on our interpretation. Disposing of such investments could have a
material adverse effect on the Company and the Company's shareholders. The
Company may need to dispose of such investments quickly, which would make it
difficult to dispose of such investments on favorable terms. Because these types
of investments will generally be illiquid, the Company may have difficulty in
finding a buyer for these investments and, if it does, it may have to sell them
at a substantial loss.
The 1940 Act also limits our ability to borrow money or issue debt
securities or additional preferred stock so that the resulting leverage does not
24
exceed the Company's net assets attributable to common shares. Compliance with
these requirements may unfavorably limit the Company's investment opportunities
and reduce its ability in comparison to other companies to profit from favorable
spreads between the rates at which we can borrow and the rates at which we can
lend. Although the members of Company management and our advisors have extensive
experience with the types of investments it is anticipated the Company will
make, none of us has prior experience managing a business development company
such as the Company. The Company principals have no experience managing a
registered investment company, although they do have experience providing
significant managerial assistance to operating companies in the form of board
representation and advice concerning financings and other strategic matters.
Under Section 57 of the 1940 Act, the Company cannot, with minor
exceptions, sell securities to, buy securities from, or lend money to, certain
controlling or closely affiliated persons or companies; e.g., directors,
officers, employees of the Company, or members of the investment advisory
committee, or any company that any of these people control. Any such
transactions would be subject to prior SEC approval, and the Company has no
plans to invest in these affiliates. If the Company chooses to invest in such
persons or companies, such decision would be subject to approval by our Board of
Directors.
The Board of Directors could approve the proposed transaction only if the
directors found that the terms of such transaction, including the consideration
to be paid or received, were reasonable and fair to the shareholders of the
Company, and did not involve overreaching on the part of any person concerned;
and that the proposed transaction was consistent with the interests of the
Company's shareholders and consistent with the policies of the Company, as
reflected in such policies reported in reports filed under the 1934 Act and
reports to shareholders. The directors are required to record in their minutes
and preserve in their records, a description of the proposed transaction, their
findings, the information or materials upon which their findings were based, and
the basis for their decision. Furthermore, the approval must be granted by both
a majority of the Company's directors who have no financial interest in the
transaction, and a majority of its independent directors, i.e., directors who
are not interested persons of the Company (as defined in the 1940 Act).
25
Certain U.S. Federal Income Tax Consequences
The following discussion summarizes certain U.S. federal income tax
considerations relating to the Company and an investment in the Company. This
discussion is based on the Code, Treasury Regulations promulgated thereunder,
administrative rulings and pronouncements of the Internal Revenue Service (the
"Service") and judicial decisions, all as in effect on the date hereof and which
are subject to change, possibly with retroactive effect.
The discussion does not purport to describe all of the U.S. federal income
tax consequences applicable to the Company or that may be relevant to a
particular investor in the Company (for purposes of this section, an "Investor")
in view of such Investor's particular circumstances and, except to the extent
provided below, is not directed to Investors subject to special treatment under
the U.S. federal income tax laws, such as banks, dealers in securities,
tax-exempt entities, non-U.S. persons and insurance companies. In addition, this
summary does not discuss any aspect of state, local or foreign tax law and
assumes that Investors will hold their interests in the Company as capital
assets within the meaning of Section 1221 of the Code. The tax treatment of
partners in a partnership (including an entity treated as a partnership for U.S.
federal income tax purposes) that is an Investor in the Company generally
depends on the status of the partner, rather than the partnership, and is not
specifically addressed herein.
Moreover, no advance rulings have been or will be sought from the Service
regarding any matter discussed in this Registration Statement, and counsel to
the Company has not rendered any opinion with respect to any of the U.S. federal
income tax consequences relating to the Company or an investment therein. No
assurance can be given that the Service would not assert, or that a court would
not sustain, a position contrary to any of the tax aspects set forth below.
Accordingly, prospective Investors are urged to consult their own tax advisors
to determine the U.S. federal income tax consequences to them of acquiring,
holding and disposing of interests in the Company, as well as the effects of the
state, local and non-U.S. tax laws.
For purposes of the following discussion, a "U.S. Holder" is an Investor
who is a U.S. person, defined in Section 7701 (a) (30) of the Code to mean: (i)
a citizen or resident of the United States, (ii) a corporation or partnership
created or organized under the laws of the United States or any state thereof,
26
(iii) an estate, the income of which is subject to U.S. federal income taxation
regardless of its source or (iv) a trust (a) the administration over which a
U.S. court can exercise primary supervision and (b) all of the substantial
decisions of which one or more U.S. persons have the authority to control. A
"Non-U.S. Holder" is an Investor who is not a U.S. Holder.
Classification of the Company.
The Company intends to elect to be and to qualify to be treated as, a
regulated investment company under Subchapter M of the Code. For each taxable
year that the Company so qualifies, it will be relieved of U.S. federal income
taxation on that part of its investment company taxable income (consisting
generally of net investment income, net short-term capital gain, and net gains
from certain foreign currency transactions) and net capital gain that it
distributes to the Investors.
In order to qualify as a regulated investment company, the Company must,
among other things, (a) derive in each taxable year at least 90% of its gross
income (including tax-exempt interest) from dividends, interest, payments with
respect to certain securities loans, and gains from the sale or other
disposition of stock, securities or foreign currencies, or other income
(including but not limited to gain from options, futures and forward contracts)
derived with respect to its business of investing in stock, securities or
currencies; and (b) diversify its holdings so that, subject to certain
exceptions and cure periods, at the end of each fiscal quarter (i) at least 50%
of the market value of its total assets is represented by cash and cash items,
U.S. government securities, the securities of other regulated investment
companies and other securities, with other securities limited, in respect of any
one issuer, to an amount not greater than 5% of the value of its total assets
and not more than 10% of the outstanding voting securities of any issuer, and
(ii) not more than 25% of the market value of its total assets is invested in
the securities of any issuer (other than U.S. government securities and the
securities of other regulated investment companies) or of any two or more
issuers that it controls and that are determined to be engaged in the same
business or similar or related trades or businesses.
As a regulated investment company, in any fiscal year with respect to which
the Company distributes at least 90% of the sum of its (i) investment company
taxable income (which includes, among other items, dividends, interest and the
excess of any net short-term capital gains over net long-term capital losses and
other taxable income other than any net capital gain reduced by deductible
27
expenses) determined without regard to the deduction for dividends paid and (ii)
net tax-exempt interest (the excess of its gross tax-exempt interest over
certain disallowed deductions), it (but not its shareholders) generally will not
be subject to U.S. federal income tax on investment company taxable income and
net capital gains that it distributes to shareholders. To the extent that it
retains its net capital gains for investment, the Company will be subject to
U.S. federal income tax. It may choose to retain its net capital gains for
investment and pay the associated federal corporate income tax.
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are subject to a nondeductible 4% excise tax
payable by the Company. To avoid this tax, it must distribute (or be deemed to
have distributed) during each calendar year an amount equal to the sum of:
(1) at least 98% of its ordinary income (not taking into account any
capital gains or losses) for the calendar year;
(2) at least 98% of its capital gains in excess of its capital losses
(adjusted for certain ordinary losses) for a one-year period generally
ending on October 31 of the calendar year (unless an election is made by a
company with a November or December year-end to use the company's fiscal
year); and
(3) any undistributed amounts from previous years on which it paid no
U.S. federal income tax.
While the Company intends to distribute any income and capital gains in the
manner necessary to minimize imposition of the 4% excise tax, sufficient amounts
of its taxable income and capital gains may not be distributed to avoid the
imposition of the tax entirely. In that event, it will be liable for the tax
only on the amount by which it does not meet the foregoing distribution
requirement.
If in any particular taxable year, the Company does not qualify as a
regulated investment company, all of its taxable income (including its net
capital gains) will be subject to tax at regular corporate rates without any
deduction for distributions to shareholders, and distributions will be taxable
to the shareholders as ordinary dividends to the extent of the Company's current
and accumulated earnings and profits.
28
The Company may make certain investments which would subject it to special
provisions of the Code that, among other things, may defer the use of certain
deductions or losses and affect the holding period of securities held by the
Company and the character of the gains or losses realized by it. These
provisions may also require that the Company recognize income or gain without
receiving cash with which to make distributions. In particular, it may recognize
original issue discount if it acquires zero coupon securities, deferred interest
securities or certain other securities, or if it receives warrants in connection
with the making of a loan or possibly in other circumstances. Such original
issue discount, which could be, but is not expected to be, significant relative
to the Company's overall investment activities, generally will be included in
income in the taxable year of accrual and before the Company receives any
corresponding cash payments. The Company may also be required to include in
income certain other amounts that it will not receive in cash.
Since in certain circumstances the Company may recognize income before or
without receiving cash representing such income, it may have difficulty making
distributions in the amounts necessary to satisfy the requirements for
maintaining regulated investment company status and for avoiding income and
excise taxes. Accordingly, it may have to sell some investments at times it
would not otherwise consider advantageous, raise additional debt or equity
capital or reduce new investment originations to meet these distribution
requirements. If it is not able to obtain cash from other sources, the Company
may fail to qualify as a regulated investment company and thereby be subject to
corporate-level income tax.
In the event the Company invests in foreign securities, it may be subject
to withholding and other foreign taxes with respect to those securities. The
Company does not expect to satisfy the requirement to pass through to the
shareholders their share of the foreign taxes paid by the Company.
Taxation of U.S. Holders.
Distributions from the Company's investment company taxable income
(consisting generally of net investment income, net short-term capital gain, and
net gains from certain foreign currency transactions) generally will be taxable
to the Investors as ordinary income. Such distributions that exceed the
Company's earnings and profits generally are treated as a return of capital, and
to the extent such distributions exceed the Investor's basis in its shares of
the Company, will be treated as capital gain.
29
Distributions (or deemed distributions) of the Company's net capital gain,
when designated as such, will be taxable to the Investors as long-term capital
gain. If the Company retains any net capital gain, the Company will be subject
to a tax of 35% on the amount retained. In that event, the Company expects to
designate the retained amount as undistributed capital gain in a notice to the
Investors. In that case, (i) the Investors (x) will be required to include in
income for U.S. federal income tax purposes, as long-term capital gain, their
proportionate shares of such undistributed amount and (y) will be entitled to
credit their proportionate shares of the 35% tax paid by the Company on the
undistributed amount against their U.S. federal income tax liabilities, if any,
and to claim refunds to the extent the credit exceeds those liabilities, and
(ii) the Investor will increase its tax basis in its shares of the Company by an
amount equal to the difference between the amount of undistributed capital gain
included in gross income and the tax deemed paid by the Investor. The Investors
will be notified following the end of each calendar year of the amounts of
dividends and capital gain distributions paid (or deemed paid) that year and
undistributed capital gain designated for that year.
Dividends and other distributions declared by the Company in October,
November, or December of any year and payable to shareholders of record on a
specified date in such a month will be deemed to have been paid by the Company
on December 31st if the distributions are paid by the Company during the
following January. Accordingly, those distributions will be taxed to the
Investors for the year in which that December 31st falls.
The recently enacted Working Families Tax Relief Act of 2004 clarifies that
if the Company's qualified dividend income is less than 95 percent of its gross
income, a shareholder of the Company may only include as qualifying dividend
income that portion of the dividends that may be and are so designated by the
Company as qualifying dividend income.
If an Investor sells or exchanges its shares in the Company, the Investor
will recognize gain or loss equal to the difference between his adjusted basis
in the shares sold and the amount received. Any such gain or loss will be
treated as a capital gain or loss and will be long-term capital gain or loss if
the shares have been held by the Investor for more than one year. Any loss
recognized on a sale or exchange of shares that were held for six months or less
30
will be treated as long-term, rather than short-term, capital loss to the extent
of any capital gain distributions previously received (or deemed to be received)
thereon. A loss realized on a sale or exchange of shares will be disallowed to
the extent those shares are replaced by other shares of the Company within a
period of 61 days beginning 30 days before and ending 30 days after the date of
disposition of the shares. In that event, the basis of the replacement shares
will be adjusted to reflect the disallowed loss.
The recently enacted American Jobs Creation Act of 2004 (the "2004 Jobs
Act"), which was signed by President Bush on October 22, 2004, amends certain
rules relating to regulated investment companies. The 2004 Jobs Act modifies the
90 percent gross income test with respect to income of a regulated investment
company to include net income derived from an interest in certain qualified
"publicly traded partnerships" and modifies the asset diversification test of a
regulated investment company to include a new limitation on the investment by a
regulated investment company in certain qualified publicly traded partnership
interests.
Limitation on Deduction for Certain Expenses.
For individuals, estates and trusts, certain miscellaneous itemized
deductions are deductible under Section 67 of the Code only to the extent that
they exceed 2% of the taxpayer's adjusted gross income for U.S. federal income
tax purposes (generally, gross income less trade or business expenses) .
Moreover, an individual whose adjusted gross income exceeds specified threshold
amounts is required to further reduce the amount of allowable itemized
deductions by the lesser of (i) 3% of the excess of adjusted gross income over
the threshold amount or (ii) 80% of the total amount of otherwise allowable
itemized deductions. Organizational and other expenses will constitute
miscellaneous itemized deductions for these purposes. Investors are urged to
consult their tax advisors regarding their ability to deduct itemized expenses
incurred by the Company.
If a regulated investment company that does not qualify as a "publicly
offered regulated investment company" incurs expenses, other than certain
limited expenses including directors' fees and registration fees, that would be
miscellaneous itemized deductions if incurred directly by an individual, estate
or trust, the limit on such itemized deductions generally will apply to a
shareholder of the regulated investment company as if the shareholder had
31
received a dividend from the regulated investment company in the amount of his
allocable share of such expenses of the regulated investment company and had
paid such expenses directly. A publicly offered regulated investment company is
a regulated investment company whose shares are (1) continuously offered
pursuant to a public offering, (2) regularly traded on an established securities
market or (3) held by at least 500 persons at all times during the taxable year.
Because the Company expects its shares to be held by at least 500 persons at all
times during the taxable year, it believes that it will qualify as a publicly
offered regulated investment company. As such, it does not intend to report such
expenses on the Form 1099-DIV provided by it to affected shareholders and the
Service. There can be no assurance, however, that shares of the Company will, in
fact, be treated as held by at least 500 persons or that such will be the case
indefinitely. If the Company does not qualify as a publicly offered regulated
investment company, it would be required to report on Form 1099-DIV the
"affected regulated investment company expenses," the Investor will be treated
as receiving a dividend in the amount of its share of such Company expenses,
including the Management Fee, and as paying such expenses, and affected
Investors will be required to take into account their allocable share of such
income and expenses. While any such dividend would constitute additional gross
income, the deduction for such expense would be subject to the aforementioned 2%
limitation and the other applicable limitations of the Code, which could
aggravate the situation of a taxpayer subject to these limitations on
deductions.
Taxation of U.S. Holders Exempt from U.S. Income Tax.
Distributions by the Company to a U.S. Holder that is an organization that
is exempt from U.S. income tax will not be taxable to such person and the tax on
unrelated business taxable income will not apply to such person's interest in
the Company's investments, provided, in each case, that such person's investment
in the Company is not debt-financed.
Taxation of Non-U.S. Holders.
Special rules apply to an Investor that is a Non-U.S. Holder. Non-U.S.
Holders are generally subject to U.S. withholding tax at a 30% rate on the gross
amount of interest, dividends and other fixed or determinable annual or
periodical income received from sources within the United States if such income
is not treated as effectively connected with a trade or business within the
United States. The 30% rate may be reduced or eliminated under the provisions of
32
an applicable income tax treaty between the United States and the country in
which the Non-U.S. Holder resides or is organized. The 30% withholding tax does
not apply to interest on certain obligations of U.S. persons allocable to
certain non-U.S. persons "portfolio interest". Moreover, Non-U.S. Holders
generally are not subject to U.S. tax on capital gains if (i) such gains are not
effectively connected with the conduct of a U.S. trade or business of such
non-U.S. person, (ii) a tax treaty is applicable and such gains are not
attributable to a permanent establishment in the United States maintained by
such non-U.S. person, (iii) such Non-U.S. Holder is an individual and is not
present in the United States for 183 or more days during the taxable year
(assuming certain other conditions are met) or (iv) such Non-U.S. Holder is not
a former citizen or resident of the United States.
The 2004 Jobs Act also provides that certain dividends designated by the
Company as "interest-related dividends" that are received by most foreign
investors (generally those that would qualify for the portfolio interest
exemptions of Section 871(h) or Section 881(c) of the Code) in the Company will
be exempt from U.S. withholding tax. Interest-related dividends are those
dividends derived from certain interest income (including bank deposit interest
and short term original issue discount that is currently exempt from the
withholding tax) earned by the Company that would not be subject to U.S. tax if
earned by a foreign person directly. The 2004 Jobs Act further provides that
certain dividends designated by the Company as "short-term capital gain
dividends" that are received by certain foreign investors (generally those not
present in the United States for 183 days or more) will be exempt from U.S.
withholding tax. In general, short-term capital gain dividends are those that
are derived from the Company's short-term capital gains over net long-term
capital losses. These provisions generally apply, with certain exceptions, to
taxable years beginning after December 31, 2004 and before January 1, 2008.
Prospective investors are urged to consult their tax advisors regarding the
specific tax consequences to them related to the 2004 Jobs Act.
Non-U.S. Holders treated as engaged in a U.S. trade or business are
generally subject to U.S. federal income tax at the graduated rates applicable
to U.S. persons on income which is considered to be effectively connected with
such U.S. trade or business. Non-U.S. Holders that are corporations may also be
subject to a 30% branch profits tax on such effectively connected income. The
30% rate applicable to branch profits may be reduced or eliminated under the
33
provisions of an applicable income tax treaty between the United States and the
country in which the Non-U.S. Holder resides or is organized.
Backup Withholding.
The Company is required in certain circumstances to backup withhold on
taxable dividends and certain other payments paid to non-corporate holders of
the Company's common shares who do not furnish the Company with their correct
taxpayer identification number (in the case of individuals, their social
security number) and certain certifications, or who are otherwise subject to
backup withholding. Backup withholding is not an additional tax. Any amounts
withheld from payments made to an Investor may be refunded or credited against
such Investor's U.S. federal income tax liability, if any, provided that the
required information is furnished to the Service.
Tax Shelter Regulations.
In certain circumstances, an Investor who disposes of an interest in a
transaction resulting in the recognition by such Investor of significant losses
in excess of certain threshold amounts may be obligated to disclose its
participation in such transaction (a "reportable transaction") in accordance
with recently issued regulations governing tax shelters and other potentially
tax-motivated transactions (the "Tax Shelter Regulations") . In addition, an
investment in the Company may be considered a "reportable transaction" if, for
example, the Company recognizes certain significant losses in the future.
Investors should consult their tax advisors concerning any possible disclosure
obligation under the Tax Shelter Regulations with respect to the disposition of
their interest in the Company.
Failure to Qualify as a Regulated Investment Company
If, subsequent to our qualification for, and election as, a regulated
investment company, we were unable to continue to qualify for treatment as a
regulated investment company, we would be subject to tax on all of our taxable
income at regular corporate rates. We would not be able to deduct distributions
to stockholders, nor would they be required to be made. Such distributions (if
made in a taxable year beginning on or before December 31, 2008) would be
taxable to our stockholders and provided certain holding period and other
requirements were met, could qualify for treatment as "qualified dividend
income" eligible for the 15% maximum rate to the extent of our current and
34
accumulated earnings and profits. Subject to certain limitations under the Code,
corporate distributees would be eligible for the dividends received deduction.
Distributions in excess of our current and accumulated earnings and profits
would be treated first as a return of capital to the extent of the stockholder's
tax basis, and any remaining distributions would be treated as a capital gain.
To re-qualify as a regulated investment company in a subsequent taxable year, we
would be required to satisfy the regulated investment company qualification
requirements for that year and dispose of any earnings and profits from any year
in which we failed to qualify as a regulated investment company. Subject to a
limited exception applicable to regulated investment companies that qualified as
such under Subchapter M of the Code for at least one year prior to
disqualification and that re-qualify as a regulated investment company no later
than the second year following the non-qualifying year, we could be subject to
tax on any unrealized net built-in gains in the assets held by us during the
period in which we failed to qualify as a regulated investment company that are
recognized within the subsequent 10 years, unless we made a special election to
pay corporate-level tax on such built-in gain at the time of our
re-qualification as a regulated investment company.
Employees
As of January 1, 2007 the Company had ten employees. In the future, we
expect to hire additional investment professionals. We intend to add additional
staff to the extent additional resources are required. None of our employees is
represented by a union. We believe our relationship with our employees is good.
None of the members of our Global Advisory Team will be "employees," but we
may pay certain fees and expenses in connection with services we receive from
them. Additionally, various aspects of due diligence of prospective portfolio
companies and monitoring the activities of portfolio companies will be
subcontracted to consultants.
(d) Financial Information About Geographic Areas
--------------------------------------------
Since the we only recently re-commenced operations, the Company has limited
financial information. The Company's audited financial statements are included
in this Registration Statement.
35
(e) Available Information
---------------------
We will furnish our shareholders with annual reports containing audited
financial statements, quarterly reports, and such other periodic reports as we
determine to be appropriate or as may be required by law. Upon the effectiveness
of this Registration Statement, we will be required to comply with all periodic
reporting, proxy solicitation and other applicable requirements under the 1934
Act.
Our annual reports on Form 10-K, quarterly reports on Form 10-Q and our
current reports on Form 8-K, as well as any amendments to those reports, will be
available free of charge through our website (at www.imperiali.org) as soon as
reasonably practicable after we file them with the SEC.
Shareholders and the public may also read and copy any materials we file
with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW,
Washington, DC 20549. The public may also obtain information on the operation of
the Public Reference Room by calling the SEC at 1 -800-SEC-0330. The SEC
maintains an Internet site that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC and state the address of that site (http://www.sec.gov).
36
Item 1A. Risk Factors.
We have only a minimal operating history.
Our operations are subject to all the risks inherent in any new business,
including the risk that the Company will not achieve its investment objective
and that its net asset value could decline substantially. Although we have
identified, on a preliminary basis, certain micro-cap companies in which we may
be interested in investing, the Company anticipates that it will take up to 90
days after the completion of the Offering to invest substantially all of the net
proceeds received by the Company from the Offering due to the time necessary to
complete our due diligence, evaluate, structure, negotiate, and close suitable
investments. In the interim, the Company will invest in temporary investments,
such as cash and cash equivalents, U.S. government securities and other high
quality debt investments that mature in one year or less from the date of
investment, which will earn yields substantially lower than the interest income
anticipated from investments in portfolio companies. If the expenses of the
Company exceed the return on the temporary investments, the equity capital of
the Company will be eroded. Additionally, the Company may not be able to pay any
dividends during this period or such dividends may be substantially lower than
the dividends the Company expects to pay when its portfolio is fully invested.
Competition could hurt our business.
Many entities, including public and private funds, commercial and
investment banks, commercial financing companies, business development companies
and insurance companies will compete with the Company to make the types of
investments that it plans to make in micro-cap companies. Many of these
competitors are substantially larger, have considerably greater financial,
technical and marketing resources than the Company will have and offer a wider
array of financial services. For example, some competitors may have a lower cost
of funds and access to funding sources that are not available to the Company. In
addition, some competitors may have higher risk tolerances or different risk
assessments, which could allow them to consider a wider variety of investments
and establish more relationships. Many competitors are not subject to the
regulatory restrictions that the 1940 Act will impose on the Company as a
business development company or the restrictions that the Code will impose on
the Company as a regulated investment company. Some competitors may make loans
with interest rates that are lower than the rates the Company wishes to offer.
The competitive pressures the Company faces may have a material adverse effect
37
on our business, financial condition and results of operations. Also, as a
result of this competition, the Company may not be able to take advantage of
attractive investment opportunities from time to time, and can offer no
assurance that it will be able to identify and make investments that are
consistent with our investment objective. We have not finally determined any
potential investments for the Company's portfolio, although the Company's
competitors are likely to have identified and begun to pursue potential
investments in which the Company may be interested.
Voting control is centralized in our Board of Directors and Officers.
Nearly 68% of the Company's Common Stock is owned directly by our officers
and directors. Such ownership could block a change of control of the Company. In
addition, Mr. Imperato's friends and family own nearly an additional 4%.
We are dependent on a key person.
Daniel J. Imperato has principally conducted the development stage
activities of the Company. Although he is not an employee of the Company, the
loss of his services as Chairman could negatively affect the Company. The
Company has purchased "key man" life insurance on the life of Mr. Imperato.
We anticipate future capital needs but have no certain source of additional
financing.
Our capital requirements will be significant. Management believes that the
net proceeds of the Offering should suffice to fund operations and our business
plan for a period of 12 months if the maximum number of shares is sold. However,
no assurance can be given that such proceeds will in fact be sufficient to fund
operations for such period. The Company has no commitments for long-term
financing. There can be no assurance that such financing will be available on
favorable terms or at all.
We may face leverage risk.
The Company may borrow money or issue debt securities to leverage its
capital structure. If the Company does so:
o The Company's common shares will be exposed to incremental risk of
loss. In these circumstances, a decrease in the value of the Company's
investments would have a greater negative impact on the value of its
common shares than if it did not use leverage.
38
o Adverse changes in interest rates could reduce or eliminate the
incremental income the Company expects to make with the proceeds of
any leverage.
o The Company's ability to pay dividends on its common shares will be
restricted if its asset coverage ratio is not at least 200% and any
amounts used to service indebtedness would not be available for such
dividends.
o It is likely that such securities will be governed by an indenture or
other instrument containing covenants restricting the Company's
operating flexibility.
o The Company, and indirectly its shareholders, will bear the cost of
issuing and paying interest on such securities.
We depend upon key employees to generate revenue.
We are an economic and business development firm that will apply analytic
techniques and industry knowledge to various investments in a broad range of
portfolio companies. Accordingly, our success depends heavily on the efforts,
abilities, business generation capabilities, and project execution capabilities
of our employees. In particular, our employees' personal relationships with our
portfolio companies are a critical element in obtaining and maintaining
portfolio companies' investments. If the Company loses the services of any
employee or if our employees fail to generate business or otherwise fail to
perform effectively, that loss or failure could adversely affect our revenues
and results of operations.
Much of our business plan depends on our non-employee experts.
The Company depends on our relationships with members of our Global
Advisory Teams and our non-employee consultants to execute our business plan. We
believe that these people are highly regarded in their fields and locales and
that each offers a combination of knowledge, experience, and expertise that
would be very difficult to replace. We also believe that the Company will be
able to secure some investments in portfolio companies and attract other
professionals to join our team in part because the Company can offer the
services of these experts. Most of these experts can limit their relationships
with us at any time for any or no reason.
39
Our failure to manage growth successfully could adversely affect our revenues
and results of operations
We anticipate that providing global services will require that we open
additional offices. Opening and managing new offices often requires extensive
management supervision and increases our overall selling, general, and
administrative expenses. Expansion creates new and increased management,
investment, and training responsibilities for our employees. Expansion also
increases the demands on our internal systems, procedures, and controls, and on
our managerial, administrative, financial, marketing, and other resources. Any
failure on our part to manage growth successfully could adversely affect our
revenues and results of operations.
Maintaining our professional reputation is crucial to our future success
Our ability to secure new investments and hire qualified persons as
employees depends heavily on our overall reputation as well as the individual
reputations of our employees, the members of our Global Advisory Teams and our
non-employee consultants. Because we expect that in the future the Company will
obtain a majority of our new investments from existing portfolio companies or
from referrals by those portfolio companies, any portfolio company that is
dissatisfied with our performance on a single matter could seriously impair our
ability to secure new investments. Given the frequently high-profile nature of
the matters on which the Company will work, any factor that diminishes our
reputation or the reputations of any of our employees, the members of our Global
Advisory Teams and our non-employee consultants could make it substantially more
difficult for us to compete successfully for both new investments and qualified
persons to hire as employees.
Our investments may result in professional liability
Our services will typically involve difficult analytical assignments and
carry risks of professional and other liability. Many of our investments will
involve matters that could have a severe impact on a portfolio company's
business, cause the portfolio company to lose significant amounts of money, or
prevent the portfolio company from pursuing desirable business opportunities.
Accordingly, if a portfolio company is dissatisfied with our performance, that
40
company could threaten or bring litigation in order to recover damages or to
contest its obligation to pay our fees. Litigation alleging that we performed
negligently or otherwise breached our obligations to a portfolio company could
expose us to significant liabilities and tarnish our reputation.
Our common stock has no prior trading market or liquidity, and the Company
cannot assure you that any trading market will develop.
Prior to the date of this Registration Statement, there has not been any
established trading market for our common stock. If the Company can qualify, we
will attempt to register our shares for trading on the American Stock Exchange,
although the Company cannot assure you as to the timing of that application or
the likelihood of it being accepted. If the application is accepted, we cannot
predict the extent to which investor interest will lead to the development of an
active, liquid trading market. Active trading markets generally result in lower
price volatility and more efficient execution of buy and sell orders for
investors.
The Company has filed a notice of intent to elect business development company
status that, once effective, will require us to comply with significant
regulatory requirements.
The Company filed notice with the Securities and Exchange Commission of our
intent to elect in good faith, within 90 days from the date of such filing but
after the effective date of this Registration Statement, to be regulated as a
Business Development Company under the 1940 Act and be subject to Sections 54
through 65 of said Act. Being subject to the business development company
provisions requires us to meet significant numbers of regulatory and financial
requirements as discussed in Item 1(c) -- Regulation of the Company. Compliance
with these regulations is expensive and may create financial problems for us in
the future. These laws and regulations, as well as their interpretation, may be
changed from time to time. Accordingly, any change in these laws or regulations
could have a material adverse effect on our business.
If the Company does not remain a business development company, the Company
might be regulated as a closed-end investment company under the 1940 Act, which
would decrease our operating flexibility. The Company cannot assure you that the
Company will successfully retain our business development company status.
41
The Company's election to be and qualification to be treated as a regulated
investment company presents tax risks.
To maintain its qualification as a regulated investment company under the
Code, which is required in order for the Company to distribute its income
without tax at the Company level, the Company must meet certain income source,
asset diversification and annual distribution requirements. Satisfying these
requirements may require the Company to take actions it would not otherwise
take, such as selling investments at unattractive prices to satisfy
diversification, distribution or source of income requirements. In addition,
while the Company is authorized to borrow funds in order to make distributions,
under the 1940 Act it is not permitted to make distributions to shareholders
while its debt obligations and other senior securities are outstanding unless
certain "asset coverage" tests are met. If the Company fails to qualify as a
regulated investment company for any reason and becomes or remains subject to
corporate income tax, the resulting corporate taxes could substantially reduce
its net assets, the amount of income available for distribution and the amount
of its distributions. Such a failure would have a material adverse effect on the
Company and its shareholders.
For U.S. federal income tax purposes, the Company will include in income
certain amounts that it has not yet received in cash, such as original issue
discount, which may arise if the Company invests in zero coupon securities,
deferred interest securities or certain other securities, or if the Company
receives warrants in connection with the making of a loan or possibly in other
circumstances. Such original issue discount, which could but is not expected to
be significant relative to the Company's overall investment activities,
generally will be included in income before the Company receives any
corresponding cash payments. The Company also may be required to include in
income certain other amounts that the Company will not receive in cash.
Since in certain cases the Company may recognize income before or without
receiving cash representing such income, it may have difficulty making
distributions in the amounts necessary to satisfy the requirements for
maintaining regulated investment company status and for avoiding income and
excise taxes. Accordingly, the Company may have to sell some of its investments
at times we would not consider advantageous, raise additional debt or equity
capital or reduce new investment originations to meet these distribution
requirements. If the Company is not able to obtain cash from other sources, the
42
Company may fail to qualify as a regulated investment company and thus be
subject to corporate-level income tax. Such a failure would have a material
adverse effect on the Company and its shareholders.
BUSINESS DEVELOPMENT COMPANY RISKS
----------------------------------
Investing in small and growth stage companies is inherently risky.
Investments in micro-cap companies and growth stage companies offer the
opportunity for significant gains. However, each investment involves a high
degree of business and financial risk that can result in substantial losses,
including:
o These companies may have limited financial resources and may be unable
to meet their obligations under their securities that the Company
holds, which may be accompanied by a deterioration in the value of any
collateral.
o They typically have shorter operating histories, narrower product
lines and smaller market shares than larger businesses, which tend to
render them more vulnerable to competitors' actions and market
conditions, as well as general economic downturns.
o They are more likely to depend on the management talents and efforts
of a small group of persons; therefore, the death, disability,
resignation or termination of one or more of these persons could have
a material adverse impact on the portfolio company and, in turn, on
the Company.
o They generally have less predictable operating results, may from time
to time be parties to litigation, may be engaged in rapidly changing
businesses with products subject to a substantial risk of
obsolescence, and may require substantial additional capital to
support their operations, finance expansion or maintain their
competitive position.
o They may cease to be treated as private companies for purposes of the
regulatory restrictions applicable to the Company, in which case the
Company may not be able to invest additional amounts in them.
43
o Little public information exists about these companies. The greater
difficulty in making a fully informed investment decision raises the
risk of misjudging the credit quality of the company, and the Company
may lose money on its investments.
Investing in small and growth stage companies presents valuation difficulties.
A large percentage of the Company's portfolio investments will be in the
form of securities that are not publicly traded. The fair value of securities
and other investments that are not publicly traded may not be readily
determinable. The Company will value these securities at least quarterly at fair
value as determined in good faith by the Board of Directors, possibly with the
assistance of an independent valuation firm. However, because fair valuations,
and particularly fair valuations of private securities and private companies,
are inherently uncertain, may fluctuate over short periods of time and are often
based to a large extent on estimates, comparisons and qualitative evaluations of
private information, the Company's determinations of fair value may differ
materially from the values that would have been determined if a ready market for
these securities existed. This could make it more difficult for investors to
accurately value the Company's portfolio investments and could lead to
under-valuation or over-valuation of its common shares.
Portfolio companies are likely to need additional funding.
The Company expects that many portfolio companies will require additional
financing to satisfy their working capital requirements. The amount of
additional financing needed will depend upon the maturity and objectives of the
particular company. Each round of venture financing, whether from us or other
investors, is typically intended to provide a portfolio company with enough
capital to reach the next major valuation milestone. If the funds provided are
not sufficient, a portfolio company may have to raise additional capital at a
price unfavorable to the existing investors. The availability of capital is
generally a function of capital market conditions that are beyond the control of
any portfolio company. The Company cannot assure you that our management or the
managements of portfolio companies will be able to predict accurately the future
capital requirements necessary for success or those additional funds will be
available to portfolio companies from any source. If funding is not available,
some portfolio companies may be forced to cease operations.
44
Business development companies' investments are generally illiquid.
The Company expects to make the majority of our investments in micro-cap
companies and growth stage companies. Substantially all of the securities of
such portfolio companies will be subject to legal and other restrictions on
resale or will otherwise be less liquid than publicly traded securities. The
illiquidity of these investments may make it difficult for the Company to sell
such investments if the need arises. In addition, if the Company is required to
liquidate all or a portion of its portfolio quickly, it may realize
significantly less than the value at which it has previously recorded such
investments. In addition, the Company may face other restrictions on its ability
to liquidate an investment in a portfolio company to the extent that it has
material non-public information regarding such portfolio company.
Business development companies generally require substantial amounts of time to
realize the benefits from investments.
The Company anticipates that there will be a significant period of time
ranging from one to three years before the Company has obtained funding and
completed the initial selection of portfolio companies for our first round of
equity investments. Venture capital investments typically take from four to
eight years from the date of initial investment to reach a state of maturity at
which liquidation can be considered practical. In light of the foregoing, it is
unlikely that any significant distributions of the proceeds from the liquidation
of equity investments will be made for several years after inception, if at all.
The Company has not made any commitments to any prospective portfolio companies.
Because the Company has not made any commitments to any prospective
portfolio company, investors will not have an opportunity to carefully evaluate
any of the portfolio companies that the Company may eventually invest in and
such evaluation will be entirely dependent upon our management for selecting and
negotiating with these portfolio companies. The Company cannot assure you that
we will successfully negotiate a transaction with a portfolio company.
45
Portfolio companies may be more sensitive to economic recessions or downturns.
Many of the Company's portfolio companies may be susceptible to economic
slowdowns or recessions and may be unable to repay loans or pay dividends during
these periods. Therefore, the Company's non-performing assets are likely to
increase and the value of its portfolio is likely to decrease during these
periods. Adverse economic conditions also may decrease the value of collateral
securing some of the Company's loans and the value of its equity investments.
Economic slowdowns or recessions could lead to financial losses in its portfolio
and a decrease in revenues, net income and assets. Unfavorable economic
conditions also could increase funding costs, limit access to the capital
markets or result in a decision by lenders not to extend credit to the Company.
These events could prevent the Company from increasing investments and harm its
operating results.
A portfolio company's failure to satisfy financial or operating covenants
could lead to defaults and, potentially, termination of its loans and
foreclosure on its secured assets, which could trigger cross-defaults under
other agreements and jeopardize the portfolio company's ability to meet its
obligations under the debt or equity securities that the Company holds. The
Company may need to incur additional expenses to seek recovery upon default or
to negotiate new terms with a defaulting portfolio company. In addition, if one
of the Company's portfolio companies were to go bankrupt, even though the
Company may have structured its interest as senior debt, depending on the facts
and circumstances, including the extent to which the Company actually provided
significant managerial assistance to that portfolio company, a bankruptcy court
might re-characterize the Company's debt holding and subordinate all or a
portion of our claim to that of other creditors.
Our investment decisions may present industry, sector and issuer risk.
The Company may, from time to time, invest a substantial portion of its
assets in the securities of issuers in any single industry or sector of the
economy or in only a few issuers. The Company cannot predict the industries or
sectors in which its investment strategy may cause it to concentrate and cannot
predict the level of its diversification among issuers, although over time the
Company anticipates investing in a minimum of 15 to 20 issuers to ensure it
satisfies diversification requirements for qualification as a regulated
46
investment company for U.S. federal income tax purposes. Concentration of the
Company's assets in an industry or sector may present more risks than if it were
broadly diversified over numerous industries and sectors of the economy. A
downturn in an industry or sector in which the Company is concentrated would
have a larger impact on us than on a company that does not concentrate in
industry or sector. As a result of investing a greater portion of the Company's
assets in the securities of a smaller number of issuers, the Company would be
classified as a non-diversified company under the 1940 Act. The Company may be
more vulnerable to events affecting a single issuer or industry and therefore
subject to greater volatility than a company whose investments are more broadly
diversified. Accordingly, an investment in the Company may present greater risk
than an investment in a diversified company. Furthermore, we have not made and
do not intend to make any determination as to the allocation of assets among
different classes of securities. Consequently, at any point in time the Company
may be highly concentrated in a single type of asset and events which affect a
particular asset class disproportionately could have an equally disproportionate
effect on the Company.
There may be changes in laws or regulations governing portfolio companies.
The Company's portfolio companies will be subject to regulation by laws at
the local, state and federal level and, to the extent that we are successful in
expanding our portfolio companies' operations globally, the laws of foreign
countries as well. These laws and regulations, as well as their interpretation,
may be changed from time to time. Any change in these laws or regulations, or
any failure to comply with them by the Company's portfolio companies, could have
a material adverse affect on the Company's business.
We have made forward looking statements in this Registration Statement.
Some of the statements in this Registration Statement constitute
forward-looking statements, which relate to future events or the Company's
future performance or financial condition. The forward looking statements
contained in this Registration Statement involve risks and uncertainties,
including statements as to: the success of our Offering; future operating
results; business prospects and the prospects of portfolio companies; the impact
of investments expected to be made; contractual arrangements and relationships
with third parties, especially our Global Advisory Team; the dependence of the
47
Company's future success on the general economy and its impact on the industries
in which the Company invests; the ability of portfolio companies to achieve
their objectives; expected financings and investments; the adequacy of the
Company's cash resources and working capital; and the timing of cash flows, if
any, from the operations of portfolio companies.
Forward looking statements are typically identified by words or phrases
such as "believe," "expect," "anticipate," "intend," "estimate," "position,"
"target," "mission," "assume," "achievable," "potential," "strategy," "goal,"
"objective," "plan," "aspiration," "outlook," "outcome," "continue," "remain,"
"maintain," "strive," "trend," and variations of such words and similar
expressions, or future or conditional verbs such as "will," "would," "should,"
"could," "may" or similar expressions. Actual results could differ materially
from those projected in the forward-looking statements for any reason, including
the factors set forth in this "Risks" section and elsewhere in this Registration
Statement.
The forward-looking statements included in this Registration Statement are
based on information available to the Company on the date of this Registration
Statement, and the Company assumes no obligation to update any such
forward-looking statements.
48
Item 2. Financial Information.
Selected Financial Information
The Company has only recently re-commenced operations. Reference is made to
the Company's financial statements included elsewhere in this Registration
Statement.
Management's Discussion and Analysis of Results of Operations and Financial
Condition.
The following discussion contains forward-looking statements. The words
"anticipate," "believe," "expect," "plan," "intend," "estimate," "project,"
"will," "could," "may" and similar expressions are intended to identify
forward-looking statements. Such statements reflect the Company's current views
with respect to future events and financial performance and involve risks and
uncertainties. Should one or more risks or uncertainties occur, or should
underlying assumptions prove incorrect, actual results may vary materially and
adversely from those anticipated, believed, expected, planned, intended,
estimated, projected or otherwise indicated. Readers should not place undue
reliance on these forward-looking statements. See Item 1(a), Risk Factors.
The following discussion is qualified by reference to, and should be read
in conjunction with the Company's financial statements and the notes thereto
included elsewhere in this Registration Statement.
The Company has recently filed an election with the Securities and Exchange
Commission to be regulated as a business development company under the 1940 Act,
which will become effective following the effectiveness of this Registration
Statement. Thereafter, the Company's primary business will be to invest in
micro-cap companies. The Company intends to assist these companies in strategic
and financial planning, in market strategies and to assist them in trying to
achieve prudent and profitable growth. Management has been devoting most of its
efforts to general business planning and raising capital. Upon the effectiveness
of this Registration Statement and the closing of the Offering, management
initially intends to focus most of its time on reaching definitive agreements
with prospective portfolio companies regarding appropriate investments.
The Company's primary investment objective will be to increase its net
assets by adding value to the portfolio companies and thus, to shareholder
value. Management believes that the Company will be able to achieve these
49
objectives by concentrating on investments in companies which are most likely to
benefit from management's expertise in finance, strategic planning, operations,
and technology and by using the members of our Global Advisory Team to assist
our portfolio companies expand globally, identifying capital and political
resources, adapting to local customs and operating requirements in international
markets, accessing new consumers, new sources of materials and remote
manufacturing options.
The income that the Company will derive from investments in portfolio
companies will consist of management fees, interest income, and appreciation
(net of depreciation) in the values of portfolio companies. At the time of
disposition, the value of these securities of portfolio companies will most
likely make up most of the Company's revenues. Consequently, the Company's
success or failure will depend on investing in companies which appreciate in
value more than other companies in which the Company invests depreciate in
value.
Pursuant to the requirements of the 1940 Act, the Board of Directors is
responsible for determining in good faith the fair value of the securities and
assets held by the Company for which market quotations are not readily
available. In making its determination, the Board of Directors may consider
valuation appraisals provided by independent financial experts. With respect to
private equity securities, each investment is valued using industry valuation
benchmarks, and then the value may be assigned a discount reflecting the
particular nature of the investment. See Item 1(c) -- Valuation Considerations.
The Board of Directors will base its determination on, among other things,
applicable quantitative and qualitative factors. These factors may include, but
are not limited to, the type of securities, the nature of the business of the
portfolio company, the marketability of the securities, the market price of
unrestricted securities of the same issue (if any), comparative valuation of
securities of publicly traded companies in the same or similar industries,
current financial conditions and operating results of the portfolio company,
sales and earnings growth of the portfolio company, operating revenues of the
portfolio company, competitive conditions, and current and prospective
conditions in the overall stock market.
Without a readily recognized market value, the estimated value of some
portfolio securities may differ significantly from the values that would be
placed on the portfolio if there existed a ready market for such equity
securities. The Company may retain a professional valuation consulting firm to
50
provide it with valuations of the securities of portfolio companies. The Company
expects to pay a professional fee each time such a valuation is provided.
Financial Condition
At August 31, 2006, the Company's total assets were $609,541 and its net
asset value per share ("NAV") was $0.02994.
The Company's financial condition is dependent on a number of factors
including the successful completion of the Offering, and thereafter, the
Company's ability to identify, evaluate, structure, negotiate, and close
suitable investments in potential portfolio companies and assist such portfolio
companies, expand and improve upon their strategies and operations. The Company
intends to invest a substantial portion of its assets in micro-cap companies.
These private businesses are frequently thinly capitalized, unproven, small
companies that may lack management depth, and may be dependent on new or
commercially unproven technologies, and may have limited operating history.
Because the portfolio companies tend to be at early stages of their
business development, and because there are no markets for the securities of
some portfolio companies (see, "Risk Factors"), the Company does not expect to
liquidate any of its investments in the short term.
Results of Operations
The Company's financial statements have been prepared in conformity with
the United States generally accepted accounting principles. The information for
the period ended August 31, 2006 has been audited by the Company's independent
certified public accountants.
For the period ending August 31, 2006, the Company had cash revenues for
services in the amount of $11,300 and operating expenses of $1,202,155 which
resulted in an operational loss of $1,008,855. Company expenses include salaries
and wages (but salaries did not accrue until November, 2005), professional fees,
office expenses and supplies, travel, and other normal business expenses.
General and administrative costs include rent, depreciation, office, investor
relations and other overhead costs. Some of these costs were directly incurred
by Imperiali Organization, LLC, on our behalf and then reimbursed by us to
Imperiali Organization as part of the consulting fee that we pay to them under
the oral Advisory Agreement that we have with them.
51
Revenues
In the future, we plan to generate revenue in the form of interest payable
on the debt the Company holds, dividends on our equity interests and capital
gains on warrants and other debt or equity interests that we acquire in
portfolio companies. The Company expects our portfolio of fixed income
instruments to have an expected maturity of three to ten years and typically to
bear interest at a fixed or floating rate. Other securities may have shorter or
longer terms. Interest on debt securities will be payable generally quarterly or
semi-annually, with the amortization of principal generally being deferred for
several years from the date of the initial investment. In some cases, the
instrument may defer payments of cash interest for the first few years. The
principal amount of the debt securities and any accrued but unpaid interest will
generally become due at the maturity date.
In addition, the Company may generate revenue in the form of commitment,
origination, structuring or diligence fees, fees for providing significant
managerial assistance and possibly consulting fees. Any such fees will be
generated in connection with the Company's investments and recognized as earned,
typically over the life of the related investment.
Expenses
The Company will bear the typical costs and expenses of its operations and
transactions, including those relating to: our organization; calculating net
asset value (including the cost and expenses of any independent valuation firm);
expenses incurred but payable to third parties in monitoring our investments and
performing due diligence on prospective portfolio companies; interest payable on
debt, if any, incurred to finance our investments; the costs of future offerings
of common shares and other securities, if any; distributions on our common
shares; consulting fees payable under our oral agreement with Imperiali
Organization; fees payable to third parties relating to, or associated with,
making investments or providing managerial assistance to portfolio companies;
transfer agent and custodial fees; registration fees; listing fees; taxes;
independent director fees and expenses that we may (subsequently) elect to pay;
costs of preparing and filing reports or other documents with the Securities and
Exchange Commission; the costs of any reports, proxy statements or other notices
52
to shareholders, including printing costs; the Company's fidelity bond,
directors and officers/errors and omissions liability insurance, and any other
insurance premiums; indemnification payments; direct costs and expenses of
administration, including audit and legal costs; general overhead and management
salaries; fees and expenses for members of our Global Advisory Teams; and all
other expenses reasonably incurred by the Company.
To the extent that any of the Company's loans are denominated in a currency
other than U.S. dollars, we may enter into currency hedging contracts to reduce
exposure to fluctuations in currency exchange rates. The Company may also enter
into interest rate hedging agreements. Such hedging activities, which will be
subject to compliance with applicable legal requirements, may include the use of
futures, options and related forward contracts. Costs incurred in entering into
such contracts or in settling them will be borne by the Company.
The Company had net operating loss carry-forwards of approximately
$7,200,000, which are available to offset future taxable income, if any, through
2018. The Company has net deferred tax assets at August 31, 2006, of
approximately $2,500,000; however, a valuation allowance was provided to reduce
the deferred tax assets, as realization of the assets is not assured. The
Company intends to elect to be and to qualify to be treated as a regulated
investment company under Subchapter M of the Code. If the Company does elect
such treatment and meet such requirements, the Company would lose the tax
benefit of our net operating loss carry-forwards.
Liquidity and Capital Resources
The Company will generate cash primarily from the Offering and any future
offerings of securities and cash flows from operations, including interest
earned from the temporary investment of cash in cash equivalents, U.S.
government securities and other high-quality debt investments that mature in one
year or less. In the future, the Company may also determine to fund a portion of
its investments through borrowings from banks and issuances of senior
securities, including preferred shares. We have not determined the extent to
which the Company will incur indebtedness or issue other senior securities, if
at all, and do not expect to make a determination in that regard until we have
invested a substantial majority of the net proceeds of the Offering. Any
decision to incur leverage will depend on our assessment of the attractiveness
of available investment opportunities in relation to the costs and perceived
53
risks of such leverage. In the future, the Company may also securitize a portion
of its investments in junior unsecured loans or senior secured loans or other
assets. The Company's primary use of funds will be investments in portfolio
companies and cash distributions to holders of its common shares.
Critical Accounting Estimates
There were no material estimates or assumptions for this reporting period.
Controls and Procedures
As of the date this report is filed, an evaluation was performed under the
supervision and with the participation of the Company's principal executive
officer and financial officer of the effectiveness of the design and operation
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the 1934 Act) as of the end of the period
covered by this report. During the period covered by this report, management
believes that the Company has implemented adequate controls and procedures.
Market Risk Disclosure
The Company's business activities contain elements of risk. The Company
considers a principal type of market risk to be a valuation risk. All assets are
valued at fair market value as determined in good faith by or under the
direction of the Board of Directors. See Item 1(a), "Risk Factors."
Neither the Company's investments nor an investment in the Company is
intended to constitute a balanced investment program. The Company will be
subject to exposure in the public-market pricing and the risks inherent therein.
54
Item 3. Properties
The Company occupies approximately 688 square feet of space at 777 S
Flagler Drive, Suite 800W, West Palm Beach, Florida USA 33401. The space is
currently provided to us at no cost by Imperiali Organization, LLC, which will
continue indefinitely under our oral Advisory Agreement. The office space is
used for sales, administrative offices, and customer support.
On November 29, 2006, the Company opened a new office in Rio de Janiero,
Brazil. That office consists of approximately 400 square feet of space and will
be used by two of our employees.
55
Item 4. Security Ownership of Certain Beneficial Owners and Management
The Company has 500,000,000 authorized shares of Common Stock, $0.001 par value,
20,358,486 shares of which were issued and outstanding as of August 31, 2006.
There is no trading market for any of the shares. All outstanding shares of
Common Stock are validly issued, fully paid and nonassessable. The Company also
has 5,000,000 authorized shares of blank check preferred stock, none of which
were issued or outstanding at August 31, 2006; but which have subsequently been
issued as Series B Preferred Stock to Imperiali Organization, LLC, as disclosed
in Item 7. "Certain Relationships and Related Transactions".
The following table sets forth information as of the date hereof with
respect to the beneficial ownership of shares of common stock and preferred
stock by (i) each person owning more than five percent, (ii) each director and
officer, and (iii) officers and directors as a group:
- --------------------------------------------------------------------------------
Name and address of Beneficial Owner Number of shares Percentage
- --------------------------------------------------------------------------------
Common Stock:
- --------------------------------------------------------------------------------
Daniel J. Imperato(1) (2) 11,214,298 60.363%
777 South Flagler Drive
Suite 800W
West Palm Beach, FL 33401
- --------------------------------------------------------------------------------
Kenneth Martin 1,400,000 7.53%
777 South Flagler Drive, Suite 800W
West Palm Beach, FL 33401
- --------------------------------------------------------------------------------
All officers and directors as a group 11,214,298 60.363%
(1 person)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Preferred Stock:
- --------------------------------------------------------------------------------
Daniel J. Imperato(1)(3) 5,000,000 100%
- --------------------------------------------------------------------------------
(1) A director
(2) Of the total shares owned 6,314,298 are held by Imperiali Organization, LLC
a company wholly owned and controlled by Daniel J. Imperato.
(3) All of the shares of Series B Preferred Stock are held by Imperiali
Organization, LLC a company wholly owned and controlled by Daniel J. Imperato.
56
Item 5. Directors and executive officers
Directors and Officers
Daniel Imperato, Non-Executive Chairman
Mr. Imperato brings over thirty years of experience in global business
planning and development and has personal relationships at high levels around
the world. He has consulted for Fortune 500 corporations, with a mix of product
lines, consisting of telecommunications products and services,
telecommunications equipment including v-sat terminals and handheld mobile
satellite telephones, along with passport and identification cards services and
secure documents for foreign governments around the world. Imperato has also
orchestrated real estate development around the globe ranging from commercial
office buildings, educational and medical facilities, sports arenas and
entertainment venues, to regional shopping malls.
Mr. Imperato is currently a Presidential Candidate for the 2008
Presidential Election, and a Presidential Committee. As a responsible citizen
and a Papal Knight with honors from the Vatican, Daniel Imperato has done many
things to help aid and better our country and the world. Being a strong activist
for Africa, Daniel has selflessly dedicated his time to the African Center
Foundation, a United Nations NGO (Non-Governmental Organization), where he had
served as a trustee, and head of the Palm Beach branch. In 2004, Daniel Imperato
was named Honorary Chairman of the NRCC (National Republican Congressional
Committee) Business Advisory Council, composed of top business people from
around the country. In addition, Imperato also received the NRCC Businessman of
the Year Award (2004), and was awarded a Ronald Reagan Gold Medal. He founded
Imperiali Inc. and organized the Board in 1995 and is 48 years old.
Steven Lopez, Board Director
Lopez brings over 35 years of international banking experience to the table
from organizations such as First Fidelity Bank (Now Wachovia Bank), and Chemical
Bank (now JP Morgan Chase). In addition, Lopez has operated diplomatically on an
international basis and has worked with the United Nations.
Most recently, Lopez was the founder and CEO of Banque de Credit ET
Investissements Inc. in Grenada, West Indies, where he developed a $3 billion
portfolio for the bank. Now, Lopez has focused his efforts on international
finance, and opening finance avenues to impoverished communities. Mr. Lopez
57
received his Bachelors of Arts from St. Francis College with a double major in
History and Economics. He went on to obtain a Masters Degree in Economics from
New York University. He was appointed to the board in 2004.
Douglas A. King, Esq., Board Director
Mr. King has been an Attorney at Law since 1978, and is currently the
proprietor of his own practice Douglas A. King Co., LPA, based out of Ohio. He
was admitted to the Ohio Bar Association in 1978 and was admitted to the U.S.
Supreme Court in 1990.
Mr. King brings particular expertise in commercial dispute resolution,
investor real estate transactions, title dispute resolution, and international
business transactions. In his professional career he has served as President,
Title Holdings, Ltd. (real estate title insurance and escrow services), since
1993; Vice President, King USA Inc., (international commercial trading), 1982;
Vice President and General Counsel, HOM Petroleum, S.A., Madrid, Spain,
1987-2001; Adjunct Instructor, Trail Tactics, Case Western Reserve University
School of Law, Cleveland, Ohio, 1990-1997.
In addition, Mr. King has been President, Chagrin Valley Title & Escrow
Agency, since 1993. Vice President, General Title & Trust Co. (Title Insurance
Underwriter), 1995-1999. He received his B.A. from The Ohio State University
(1975), and his J.D. from Case Western Reserve University (1978). He was
appointed to the Board in 2006.
Michael A. Cenit, Board Director
Mr. Cenit brings over 35 years of entrepreneurial experience to the
Imperiali Inc. team. Most recently, Cenit was named as Chief Executive Officer
of Berne Furniture Company, a fine furniture manufacturer with a Swiss tradition
of excellence, based in Berne, IN. Prior to that he was a principal for Rengp
Inc., a wholesale manufacturing representative firm, that he took from roughly
$600,000 in revenues to over $10 million.
Currently, Mr. Cenit sits on the Board of Directors of three other
companies: Berne Furniture Company, Amalgamated Chemicals Inc. and Planet
Jubilee Inc and is active in his local community having recently served on the
West Bloomfield Township planning commission. He received his B.S. in Accounting
58
from the City College of New York, and received his M.B.A. in Economics from
Fairleigh Dickinson University. He was appointed to the Board in 2006.
Charles A Fiscina, Chief Financial Officer and Investment Advisory Committee
Chairman
Mr. Fiscina is an experienced international business manager who
specializes in the pharmaceutical and biotechnology industries. In addition to
his responsibilities as CFO, Mr. Fiscina has a broad range of experience in
business valuation, due diligence and merger acquisition areas.
Most recently, he was responsible for business development and international
consolidation for a European Holding Company. In this capacity, he helped
develop businesses in emerging international markets in Europe, Asia, Latin
America and Africa.
Mr. Fiscina is a graduate of the University Of Miami School Of Medicine
where he majored in biochemistry and microbiology. His graduate work was
performed at the New York University, Stern School of Business where he studied
accounting, finance and international business.
John N Chaplik, Controller and Investment and Advisory Committee Member
Mr. Chaplik is a CPA and has over 30 year's financial experience. He was
formerly President of his own management consulting firm. Most recently he was
involved in forming two startup biotechnology companies. He also has experience
in the telecommunications industry for a Fortune 100 Company.
Mr. Chaplik is a graduate of the Wharton School of Finance where he
received a B.S. in Economics degree. He also holds an MBA degree from the
University of Central Florida and a Masters in Accounting from Florida Atlantic
University.
Dr. Kjell H. Gaustad, Investment Advisory Committee Member
Dr. Gaustad brings over 35 years of biomedical and pharmaceuticals
knowledge to Imperiali Inc. He has served in the capacities of International
Sales Director, Managing Director, Board Director, and Founder from
pharmaceutical companies in Finland, Iceland, Norway, Switzerland, and the
United States. Recently Dr. Gaustad was the president and founder of Alphamed
Inc., a medical and consulting firm based out of Basel Switzerland.
59
Dr. Gaustad brings not only brings a scientific background to Imperiali,
but also brings an entrepreneurial background having been involved in numerous
international business financing transactions from Switzerland, the United
States, to Japan. He speaks fluent English, German, French, Norwegian, Danish,
and Swedish with conversational knowledge of Spanish and Portuguese.
His education and his abilities have distinguished him from members of his
industry, and he is uniquely qualified to bring both technical and practical
expertise to Imperiali Inc.'s Investment Advisory Committee. He received his MBA
from Hochschule St. Gallen fur Wirtschafts- und Sozialwissenschaften in
Switzerland and his Ph.D. from Northfield University in London England.
Richard Biggs, Investment Advisory Committee Member
Richard Biggs is a financial executive with 26 years of progressive
financial and managerial experience. He has been successful at all
organizational levels from plant to corporate and has e extensive experience in
areas of plant, division & corporate operations including strategic planning,
property management, finance system implementation and consolidations. Mr. Biggs
is currently a Corporate Controller for Picometrix LLC, were he has implemented
Sarbox Regulations and requirements and interfaces with the board of directors
on corporate financial matters. Mr. Biggs has a Masters of Arts in Business
Management from Central University, and a Bachelors of Arts in Accounting from
Davenport University.
Dan Mangru, Vice President Business Development
Mr. Mangru is the founder of a Palm Beach based advisory firm that
focuses on globalization, public relations, strategic collaborating, real estate
development, mergers & acquisitions, and new business development. Mangru has
helped advise a wide array of companies in industries ranging from education,
document delivery, internet search, telecommunications, non-profit, and
pharmaceuticals. Mangru brings unique experience to the organization having been
involved in investments, national television, music concert operations,
politics, and brings media contacts in over six continents and 50 countries from
around the globe to the company.
Mr. Mangru has a proven record of accomplishment of working with many
successful charitable organizations including American Cancer Society, March of
Dimes, Habitat for Humanity, and the Best Buddies Program. He has been nominated
60
for such prestigious awards as International WHO's WHO of Professionals 2004 and
International WHO's WHO of Entrepreneurs 2005, and was a Special Advisor to the
African Center Foundation (ACF), a United Nations NGO. Dan Mangru was born in
New York City, and holds a B.A. in Political Science from Florida Atlantic
University where he sits on various alumni committees.
Global Advisory Team
The Global Advisory Team has been selected by Imperiali Inc. and Daniel
Imperato and has worked in the Company's behalf in the past (as well as for
Imperiali Organization). This Team has presence in many countries and regions,
spanning more than 5 continents and is there to work in unison with Imperiali
Inc., in support of its' portfolio companies and the globalization process.
Confidentiality requirements and competitive considerations prevent a listing of
individual members of the Global Advisory Team and within some regions, team
members prefer to remain as silent partners with Imperiali Inc., due to posts
they currently hold, within those countries and regions. Relevant, individual
biographies are available for our qualified business associates and our
portfolio company companies, upon request.
If in the event an advisor wishes to sever their relationship with the
Company, the Company will be protected by having advisors in overlapping regions
and industries, in order to facilitate global business expansion for the Company
and our future portfolio companies.
61
Item 6. Executive Compensation
The following table sets forth compensation awarded to, earned by or paid to the
Company's Chief Executive Officer and the four other most highly compensated
executive officers with compensation in excess of $100,000 for the year ended
August 31, 2006 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation Awards
------------------- ----------------------------
Year Salary Bonus Restricted Securities All other
Name and ($) ($) Stock Underlying compensation
Principal Award(s) Options/ ($)
Position Warrants
- --------------------------------------------------------------------------------------------
Daniel Imperato 2006 0 0 5000000 0 0
2005 0 0 0 0 0
Dan Mangru 2006 60000 0 1000000 0 0
2005 50000 0 0 0 0
Charles Fiscina 2006 120000 0 1000000 0 0
2005 0 0 0 0 0
John Chaplik 2006 60000 0 100000 0 0
Employment Contracts: None
The Company does not offer stock options to the executive officers or other
employees.
Compensation of Directors
The Company's directors are not compensated for their services as directors
of the Company.
62
Item 7. Certain Relationships and Related Transactions
Our Chairman, Daniel Imperato, advises the Company via an oral Advisory
Agreement between the Company and Imperiali Organization, LLC, a Florida limited
liability company (f/k/a Christ Investment Group, LLC), a company that Mr.
Imperato owns and controls. Pursuant to the terms of the Advisory Agreement,
Imperiali Organization agrees to assist us in (i) developing or reviewing the
Company's business plan and financial projections and plans; (ii) maintaining
and expanding the Company's relationships with our Global Advisory team and
professional consultants; (iii) a detailed evaluation of the Company's
competition in new and existing markets; (iv) analyzing suitable prospective
portfolio companies; (v) identification of suitable merger and acquisition
candidates relative to portfolio companies; (vi) such other aspects of the
business of the Company as Mr. Imperato and the Company may agree from time to
time; and (vii) assisting in filing SEC documents and coordinating with the
Company's lawyers. Additionally, Imperiali Organization agrees to incur, on our
behalf, certain of our expenses and we have agreed to timely reimburse them with
respect to such expenses.
Imperiali Organization has been working on several projects on behalf of
our Company, including: public relations (www.i1connect.com); a search engine
(www.i1search.com); telecommunications services; and others. Each of these
projects is well under way.
In exchange for the services rendered by Imperiali Organization and a first
right of refusal on all Imperiali Organization websites and projects, the
Company has issued 5,000,000 preferred shares of stock to Imperiali
Organization.
Item 8. Legal Proceedings.
The Company is not currently involved in any pending legal proceedings, nor
are any such proceedings known to be contemplated by governmental authorities.
63
Item 9. Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder Matters.
There is no current market for the shares of our common stock. The Company
cannot assure you that a liquid market will develop in the foreseeable future.
Because the common shares of the Company have been and will be (e.g., during the
Offering) acquired by investors in one or more transactions "not involving a
public offering," they will be "restricted securities" and may be required to be
held indefinitely. The Company's common shares may not be sold, transferred,
assigned, pledged or otherwise disposed of unless (i) Company consent is
granted, and (ii) the common shares are registered under applicable securities
laws or specifically exempted from registration (in which case the shareholder
may, at the option of the Company, be required to provide the Company with a
legal opinion, in form and substance satisfactory to the Company, that
registration is not required). Accordingly, an investor must be willing to bear
the economic risk of investment in the common shares until the Company is
liquidated. No sale, transfer, assignment, pledge or other disposition, whether
voluntary or involuntary, of the common shares may be made except by
registration of the transfer on the Company's books. Each transferee will be
required to execute an instrument agreeing to be bound by these restrictions and
the other restrictions imposed on the common shares and to execute such other
instruments or certifications as are reasonably required by the Company.
The Company has never paid any cash dividends on shares of our common stock
and do not anticipate that the Company will pay dividends in the foreseeable
future. The Company intends 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 September 1, 2006, there were approximately 504 holders of record of
our common stock. This number does not include an indeterminate number of
shareholders whose shares are held by brokers in street name.
As of August 31, 2006, the Company had no securities authorized for
issuance under any equity compensation plan.
Transfer Agent
The Company's transfer agent is Florida Atlantic Stock Transfer, Inc.
64
Item 10. Recent Sales of Unregistered Securities.
From 1994 through 2002, the Company sold shares of common stock in various
private transactions, which transactions were exempt pursuant to Regulation D.
In addition, during that time the Company issued shares of common stock in
exchange for services rendered and in exchange for the release of debts. Each
such issuance was exempt pursuant to Sections 4(2), 3(9) or Section 3(b) of the
1933 Act and the rules promulgated there under.
In particular, from late 1994 through September 1995, the Company issued
2,501,987 shares at a weighted average price of $.44 per share. The total
2,501,987 shares includes 2,012,281 founder shares, 200,000 shares issued for
services rendered and 289,706 shares which were issued to eight (8) Investors in
an offering exempt pursuant to Section 4(2) or Section 3(b) of the 1933 Act and
Regulation D.
In 1999 and 2000, the Company engaged in a private offering exempt pursuant
to Section 4(2) of the 1933 Act and Rule 506 of Regulation D.
The Company is presently offering up to 10,000,000 shares of common stock,
$0.001 par value per share, in reliance upon the non-public offering exemptions
from the registration requirements of the 1933 Act, and from the registration or
qualification requirements of the securities laws of the states in which offers
and/or sales are to be made. This offering is directed only to "accredited"
investors, as that term is defined in Rule 501 (a) of Regulation D. These shares
have not yet been "sold," but the Company has commitments to purchase the entire
offering. We expect, but cannot assure, that the sale of the shares in the
Offering will be completed shortly after this Registration Statement is declared
effective.
As disclosed under Item 7. "Certain Relationships and Related
Transactions," 500,000 shares of our preferred stock were issued to Imperiali
Organization, LLC in exchange for services and certain contractual rights. These
shares of "Series B Preferred Stock" were issued during November, 2006. In
summary, the holders of the Series B Preferred Stock are entitled to receive
dividends on the same basis as the holders of common shares (when, as and if
declared by the Board), are entitled to three (3) votes per share (and vote
together with the common shares), and are convertible, at the option of the
holder, at any time after the date of issuance into three (3) shares of common
stock (subject to adjustment). The details regarding these and all other
65
preferences and rights are contained in the Articles of Amendment to our
Articles of Incorporation filed with the Florida Secretary of State on August 4,
2006, and attached to this Registration Statement as Exhibit 3.1.
Item 11. Description of Registrant's Securities to be Registered.
Common Shares
The Company is authorized to issue 500,000,000 common shares, par value
$0.001 per share. Each common share has one vote and, when issued and paid for
in accordance with the terms of the Offering, will be fully paid and
non-assessable. All common shares are equal as to dividends, assets and voting
privileges and have no conversion, preemptive or other subscription rights. The
Company will send to all holders of its common shares such reports as are
required by the 1934 Act.
Transferability of Shares
The Company's common shares will not initially be registered under the 1933
Act. The common shares are currently exempt from registration requirements
pursuant to Section 4(2) of and Regulation D under the 1933 Act.
Because the Company's common shares have been or will be acquired by
investors in one or more transactions "not involving a public offering," they
will be "restricted securities" and may be required to be held indefinitely. The
Company's common shares may not be sold, transferred, assigned, pledged or
otherwise disposed of unless (i) Company consent is granted and (ii) the common
shares are registered under applicable securities laws or specifically exempted
from registration (in which case the shareholder may, at the option of the
Company, be required to provide the Company with a legal opinion, in form and
substance satisfactory to the Company, that registration is not required).
Accordingly, an investor must be willing to bear the economic risk of
investment in the common shares until the Company is liquidated. No sale,
transfer, assignment, pledge or other disposition, whether voluntary or
involuntary, of the common shares may be made except by registration of the
transfer on the Company's books. Each transferee will be required to execute an
instrument agreeing to be bound by these restrictions and the other restrictions
imposed on the common shares, and to execute such other instruments or
certifications as are reasonably required by the Company.
66
Change of Control
Certain types of transactions will require the affirmative vote or consent
of a majority of the directors then in office followed by the affirmative vote
of the holders of not less than seventy-five percent (75%) of the common shares
of the Company of each affected class or series outstanding, voting as separate
classes or series, when a Principal Shareholder (as defined below) is a party to
the transaction. Such affirmative vote or consent will be in addition to the
vote or consent of the holders of common shares otherwise required by law or by
the terms of any class or series of Preferred Shares, whether now or hereafter
authorized, or any agreement between the Company and any national securities
exchange.
The term "Principal Shareholder" means any corporation, person (which shall
mean and include individuals, partnerships, trusts, limited liability companies,
associations, joint ventures and other entities, whether or not legal entities,
and governments and agencies and political subdivisions thereof) or other entity
which is the beneficial owner, directly or indirectly, of twenty percent (20%)
(or ten percent (10%) if there has been a Public Market Event) or more of the
Company's outstanding common shares of all outstanding classes or series and
shall include any affiliate or associate, as such terms are defined below, of a
Principal Shareholder. In addition to the Company's common shares which a
corporation, person or other entity beneficially owns directly, (a) any
corporation, person or other entity shall be deemed to be the beneficial owner
of any common shares (i) which it has the right to acquire pursuant to any
agreement or upon exercise of conversion rights or warrants, or otherwise (but
excluding share options granted by the Company) or (ii) which are beneficially
owned, directly or indirectly by any other corporation, Person or entity with
which its "affiliate" or "associate" (as defined below) has any agreement,
arrangement or understanding for the purpose of acquiring, holding, voting or
disposing of common shares, or which is its "affiliate" or "associate" as those
terms are defined in Rule 12b-2 of the General Rules and Regulations under the
1934 Act, and (b) the outstanding common shares shall include common shares
deemed owned through application of clauses (i) and (ii) above but shall not
include any other common shares which may be issuable pursuant to any agreement,
or upon exercise of conversion rights or warrants, or otherwise.
67
The following transactions must conform to the rules set forth in the two
immediately preceding paragraphs:
(a) The merger or consolidation of the Company or any subsidiary of the
Company with or into any Principal Shareholder.
(b) The issuance of any securities of the Company to any Principal
Shareholder for cash (other than pursuant to any automatic dividend
reinvestment plan).
(c) The sale, lease or exchange of all or any substantial part of the
assets of the Company to any Principal Shareholder (except assets
having an aggregate fair market value of less than five percent (5%)
of the total assets of the Company, aggregating for the purpose of
such computation all assets sold, leased or exchanged in any series of
similar transactions within a twelve-month period).
(d) The sale, lease or exchange to the Company or any subsidiary thereof,
in exchange for securities of the Company, of any assets of any
Principal Shareholder (except assets having an aggregate fair market
value of less than five percent (5%) of the total assets of the
Company, aggregating for the purposes of such computation all assets
sold, leased or exchanged in any series of similar transactions within
a twelve-month period).
The transactional guidelines will not be applicable to (i) any of the
transactions set forth above if 80% of the Board of Directors will by resolution
have approved a memorandum of understanding with such Principal Shareholder with
respect to and substantially consistent with such transaction, in which case
approval by a "majority of the outstanding voting securities," as such term is
defined in the 1940 Act, of the Company with each class and series of common
shares voting together as a single class, except to the extent otherwise
required by law, the 1940 Act or the Certificate of Incorporation with respect
to any one or more classes or series of common shares, in which case the
applicable proportion of such classes or series of common shares voting as a
separate class or series, as the case may be, also will be required, will be the
only vote of shareholders required, or (ii) any such transaction with any entity
68
of which a majority of the outstanding shares of all classes and series of a
stock normally entitled to vote in elections of directors is owned of record or
beneficially by the Company and its subsidiaries.
The Board of Directors will have the power and duty to determine on the
basis of information known to the Company whether (i) a corporation, person or
entity beneficially owns any particular percentage of the Company's outstanding
common shares of any class or series, (ii) a corporation, person or entity is an
"affiliate" or "associate" (as defined above) of another, (iii) the assets being
acquired or leased to or by the Company or any subsidiary thereof constitute a
substantial part of the assets of the Company and have an aggregate fair market
value of less than five percent (5%) of the total assets of the Company, and
(iv) the memorandum of understanding referred to above is substantially
consistent with the transaction covered thereby. Any such determination will be
conclusive and binding for all purposes of the above.
69
Item 12. Indemnification of Directors and Officers
Section 607.0850(1) of the Florida Business Corporation Act, as amended
(the "Florida Act"), provides that, in general, a Florida corporation may
indemnify any person who was or is a party to any proceeding (other than an
action by, or in the right of, the corporation), by reason of the fact that he
is or was a director, officer, employee or agent of the corporation, or is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against liability incurred in connection with such proceeding,
including any appeal thereof, if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
corporation and, with respect to any criminal action or proceeding, he had no
reasonable cause to believe his conduct was unlawful.
In the case of proceedings by or in the right of the corporation, Section
607.0850(2) of the Florida Act provides that, in general, a corporation may
indemnify any person who was or is a party to any such proceeding by reason of
the fact that he is or was a director, officer, employee or agent of the
corporation against expenses and amounts paid in settlement actually and
reasonably incurred in connection with the defense or settlement of such
proceeding, including any appeal thereof, provided that such person acted in
good faith and in a manner he reasonably believed to be in, or not opposed to,
the best interests of the corporation, except that no indemnification shall be
made in respect of any claims as to which such person is adjudged liable unless
a court of competent jurisdiction determines upon application that such person
is fairly and reasonably entitled to indemnity.
Section 607.0850 further provides that to the extent a director, officer,
employee or agent of a corporation is successful on the merits or in the defense
of any proceeding referred to in subsections (1) or (2) of Section 607.0850 or
in the defense of any claim, issue or matter therein, he shall be indemnified
against expenses actually and reasonably incurred by him in connection
therewith; that the corporation may advance such expenses; that indemnification
provided for by Section 607.0850 shall not be deemed exclusive of any other
rights to which the indemnified party may be entitled; and that the corporation
may purchase and maintain insurance on behalf of such person against any
liability asserted against him or incurred by him in any such capacity or
arising out of his status as such, whether or not the corporation would have the
power to indemnify him against such liabilities under such Section 607.0850.
70
Section 607.0850 of the Florida Act further provides that, in general,
indemnification or advancement of expenses shall not be made to or on behalf of
any director, officer, employee or agent if a judgment or other final
adjudication establishes that such person's actions, or omissions to act, were
material to the cause of action so adjudicated and constitute: (i) a violation
of the criminal law, unless such person had reasonable cause to believe his
conduct was lawful or had no reasonable cause to believe his conduct was
unlawful; (ii) a transaction from which such person derived an improper personal
benefit; (iii) in the case of a director, a circumstance under which the
director has voted for or assented to a distribution made in violation of the
Florida Act or the corporation's articles of incorporation; or (iv) willful
misconduct or a conscious disregard for the best interests of the corporation in
a proceeding by or in the right of the corporation to procure a judgment in
favor or in a proceeding by or in the right of a shareholder.
The Company's Articles of Incorporation and Bylaws provide that the Company
shall indemnify its directors and officers to the fullest extent permitted by
Florida law.
71
Item 13. Financial Statements and Supplementary Data.
The Company's audited financial statements for August 31, 2006:
IMPERIALI, INC.
Financial Statements
August 31, 2006
72
IMPERIALI, INC.
Financial Statements
Table of Contents
Page
Report of Independent Registered Public Accounting Firm F-1
Financial Statements:
Balance Sheets F-2
Statements of Operations F-3
Statements of Changes in Stockholders' Deficit F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-6 - F-9
Larry O'Donnell, CPA, P.C.
Telephone (303) 745-4545 2228 South Fraser Street
Unit I
Aurora, Colorado 80014
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
Board of Directors
Imperiali, Inc.
I have audited the accompanying balance sheet of Imperiali, Inc. as of August
31, 2006 and 2005, and the related statements of operations, changes in
stockholders' deficit and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. My responsibility
is to express an opinion on these financial statements based on my audits.
I conducted my audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that I 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. I believe that my audits provide a reasonable
basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Imperiali, Inc. as of August 31,
2006 and 2005, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles in
the United States of America.
Larry O'Donnell, CPA, P.C.
Aurora, Colorado
September 22, 2006
F-1
IMPERIALI, INC.
Balance Sheets
August 31, 2006 and 2005
ASSETS
2006 2005
Current assets:
Cash $ 609,541 $ -
------------ ------------
Total current assets $ 609,541 $ -
------------ ------------
Total assets $ 609,541 $ -
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Due to officer $ - $ 104
------------ ------------
Total current liabilities $ - 104
------------ ------------
Stockholders' equity:
Common stock; $.001 par value; authorized-
500,000,000 shares; issued and outstanding-
2006 20,358,486 shares; 2005 17,995,986 shares- 20,358 17,996
Additional paid in capital 11,760,605 10,144,467
Accumulated deficit (11,171,422) (10,162,567)
609,541 (104)
------------ ------------
$ 609,541 $ -
============ ============
See Notes to Financial Statements
F-2
IMPERIALI, INC.
Statements of Operations
Year ended August 31
----------------------------
2006 2005
---- ----
Gross Revenues $ 11,300 $ -
General and administrative 1,020,155 -
Net income (loss) $ (1,008,855) $ -
Income (loss) per common share $ (.053) $ -
Weighted average common shares outstanding 19,177,000 17,995,985
- --------------------------------------------------------------------------------
See Notes to Financial Statements
F-3
IMPERIALI, INC.
Statements of Changes in Stockholders' Equity
Common Stock Additional Accumulated
------------
Shares Amount Paid in Capital Deficit Total
------ ------ --------------- ------- -----
Balance, August 31, 2003 17,995,986 $ 17,996 $ 10,144,467 $(10,162,567) $ (104)
Net loss for the year - -
------------ ------------ ------------ ------------ ------------
Balance, August 31, 2004 17,995,986 17,996 10,144,467 (10,162,567) (104)
Issuance of common stock 2,362,500 2,362 1,616,138 1,618,500
Net loss for the year (1,008,855) (1,008,855)
------------ ------------ ------------ ------------ ------------
Balance, August 31, 2006 20,358,486 $ 20,358 $ 11,760,605 $(11,171,422) $ 609,541
============ ============ ============ ============ ============
See Notes to Financial Statements
F-4
IMPERIALI, INC.
Statements of Cash Flows
Year ended August 31
----------------------------
2006 2005
---- ----
Cash flows from operating activities:
Net income (loss) $(1,088,855) $ --
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Increase (decrease) in:
Due to officer (104) --
----------- -----
Net cash used by operating activities (1,008,959) --
----------- -----
Cash flows from investing activities:
Net cash used in investing activities -- --
----------- -----
Cash flows from financing activities:
Proceeds from common stock 1,618,500 --
----------- -----
Net cash provided by financing activities 1,618,500 --
----------- -----
Net increase in cash 609,541 --
----------- -----
Cash at beginning of year -- --
----------- -----
Cash at end of year $ 609,541 $ --
=========== =====
See Notes to Financial Statements
F-5
IMPERIALI, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Background
Imperiali, Inc. (the Company) was formed in Florida on September 27, 1994 as
Automated Energy Security, Inc. On March 22, 1999 the Company's name was changed
to New Millennium Development Group, Inc. On August 24, 2004 the Company's name
was changed to Hercules Global Interests, Inc.
The Company has been dormant since 2002 and was started up again in the fall of
2005 by Christ Investment Group, LLC, the Company's business manager and a
related company, which is controlled by the Company's major shareholder Mr.
Daniel Imperato. On November 18, 2005 the name of the company was changed to
Imperiali, Inc.
Nature of Business
- ------------------
Imperiali, Inc. is a team of global expansion and business development experts
that are strategically positioned around the globe to identify emerging
companies that wish to align with strategic partners to grow their businesses,
and raise capital for business development and telecommunications
infrastructure.
Imperiali revenues will come from sales of products and services rendered to
telecommunications companies worldwide. Infrastructure, equipment and consulting
services will be supplied on a contract basis.
Inventory
- ---------
Inventories are stated at lower of cost or market, with cost generally
determined on a first-in, first-out basis. Currently the Company carries no
inventory.
Depreciation
- ------------
Depreciation is calculated using straight-line methods over the estimated useful
life of the equipment, furniture and fixtures.
Income Taxes
- ------------
The Company is recognized as a corporation under the Internal Revenue Code. As
such, the corporation must report income and expenses properly on their tax
return and pay all the related income taxes. As of August 31, 2006 the Company
has an approximately $7,200,000 net operating loss carryover which can be used
against future income through 2018. No provisions for income taxes are provided
in these financial statements since the Company was dormant for the years ending
August 31, 2006 and 2005.
Concentration of Credit Risk
- ----------------------------
The Company maintains cash accounts in commercial banks. Total cash deposits are
secured by the Federal Deposit Insurance Corporation (FDIC) up to a limit of
$100,000 per company. At August 31, 2006, the Company's cash balances exceeded
insured amounts by approximately $510,000.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
F-6
IMPERIALI, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash and Cash Equivalents
- -------------------------
The Organization considers all highly liquid investments with a maturity of
three months or less when acquired to be cash equivalents.
Recently Issued Accounting Pronouncements
- -----------------------------------------
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error - an
amendment of APB Opinion No. 29." This Statement applies to all voluntary
changes in accounting principle. It also applies to changes required by an
accounting pronouncement in the usual instance that the pronouncement does not
include specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. Opinion 20
previously required that most voluntary changes in accounting principle be
recognized by including in net income of the period of the change the cumulative
effect of changing to the new accounting principle. This Statement requires
retrospective application to prior period's financial statements of changes in
accounting principle, unless it is impracticable to determine either the
period-specific effects of the cumulative effect of the change. This Statement
is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. The Company does not expect application
of SFAS No. 154 to have a material affect on its financial statements.
In February 2006, the FASB issued SFAS No. 155. This Statement amends FASB
Statements No. 133, Accounting for Derivative Instruments and Hedging
Activities, and No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. This Statement resolves issues
addressed in Statement 133 Implementation Issue No. D1, "Application of
Statement 133 to Beneficial Interests in Securitized Financial Assets." The
Company does not expect application of SFAS No. 155 to have a material affect on
its financial statements.
In March 2006, the FASB issued SFAS No. 156. This Statement amends FASB
Statement No. 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, with respect to the accounting for
separately recognized servicing assets and servicing liabilities. This Statement
is effective as of the beginning of its first fiscal year that begins after
September 15, 2006. An entity should apply the requirements for recognition and
initial measurement of servicing assets and servicing liabilities prospectively
to all transactions after the effective date of this Statement. The Company does
not expect application of SFAS No. 156 to have a material affect on its
financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This
Statement is effective as of the beginning of its first fiscal year that begins
after November 15, 2007. This Statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
(GAAP), and expands disclosures about fair value measurements. This Statement
F-7
IMPERIALI, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Accounting Pronouncements (continued)
- -----------------------------------------------------
applies under other accounting pronouncements that require or permit fair value
measurements, the Board having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute.
Accordingly, this Statement does not require any new fair value measurements.
However, for some entities, the application of this Statement will change
current practice.
The Company does not expect application of SFAS No. 157 to have a material
affect on its financial statements.
In September 2006, the FASB issued SFAS No. 158 Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans. This Statement amends
FASB Statements No. 87, 88, 106, and 132(R). This Statement is effective as of
the beginning of its first fiscal year that begins after December 15, 2006, but
before June 16, 2007. This Statement improves financial reporting by requiring
an employer to recognize the overfunded or underfunded status of a defined
benefit postretirement plan (other than a multiemployer plan) as an asset or
liability in its statement of financial position and to recognize changes in
that funded status in the year in which the changes occur through comprehensive
income of a business entity or changes in unrestricted net assets of a
not-for-profit organization. The Company does not expect application of SFAS No.
158 to have a material affect on its financial statements.
NOTE B - INVESTMENTS
Investments are carried at market value.
NOTE C - RELATED PARTIES
Currently the Company has been provided office space, personnel and facilities
at no cost by Christ Investment Group, LLC (Christ LLC). Mr. Daniel Imperato
controls Christ LLC. Mr. Imperato is also the majority shareholder of the
Company. An approximate value related to these costs and the new development of
the Company exceeds $1,000,000. It is the Company's intention to acquire Christ
LLC.
F-8
IMPERIALI, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE D - INCOME TAXES
The Company recognizes deferred income tax liabilities and assets for the
expected future tax consequences of events that have been recognized in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the differences between the financial
statement carrying amounts and the tax basis of assets and liabilities using
enacted tax rates in effect in the years in which the differences are expected
to reverse.
The Company incurred no income taxes for the years ended August 31, 2006 and
2005. The expected tax provision/(benefit) for the years ended August 31, 2006
is approximately $343,000. The difference between the expected tax
provision/(benefit) and non-recognition of a tax provision/(benefit) in each
period is the result of a valuation allowance applied to deferred tax assets.
Net operating loss carryforwards of approximately $7,200,000 are available to
offset future taxable income, if any, through 2018. The Company has net deferred
tax assets at August 31, 2006, of approximately $2,500,000; however, a valuation
allowance has been provided to reduce the deferred tax assets, as realization of
the assets is not assured.
The net operating loss carryforwards may be limited under the Change of Control
provisions of the Internal Revenue Code section 382.
F-9
Item 14. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
Item 15. Financial Statements and Exhibits.
Financial Statements
Balance Sheet at August 31, 2006 and related Statements of Operation,
Changes in Stockholders' Deficit, Cash Flows, and Notes for the Company's fiscal
years ended August 31, 2006 and 2005.
Exhibits
3.1 Articles of Incorporation and all amendments thereto
3.2 By-Laws
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
Imperiali, Inc.
Date: January 17, 2007 By:/s/ Charles A. Fiscina
Name: Charles A. Fiscina
Title: Chief Financial Officer
73
EXHIBIT INDEX
3.1 Articles of Incorporation and all amendments thereto
3.2 By-Laws
74