DigitalTown, Inc. - Quarter Report: 2006 May (Form 10-Q)
U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
(Mark
One)
|
|
X
|
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
quarterly period ended: May 31, 2006
|
|__|
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
file number: 000-27225
BDC Capital,
Inc.
(Name
of
small business issuer in its charter)
|
Minnesota
|
41-1427445
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
|
11974
Portland Avenue, Burnsville, Minnesota
|
55337
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant's
telephone number: (952)
890-2362
Securities
registered under Section 12(g) of the Exchange Act:
Title
of Each Class
Common
Stock
Par
Value
$0.01 per share
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
[
]
Yes [X]
No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.
[
]
Yes [X]
No
Check
whether the issuer (1) has filed all reports required to be filed by Section
13
or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been
subject to such filing requirements for the past 90 days.
[X]
Yes [
]
No
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained,
to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |__|
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definitions of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check
one):
|
Large
Accelerated Filer [ ]
|
Accelerated
Filer [ ]
|
Non-Accelerated
Filer [X]
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). [ ] Yes [X]
No
State
the
aggregate market value of the voting stock held by non-affiliates computed
by
reference to the price at which the stock was sold, or the average bid and
asked
prices of such stock, as of a specified date within the past 60 days:
$12,827,164 based on shares held by non-affiliates as of April 28, 2006, and
the
closing sale price for said shares in the NASDAQ National Market as of such
date.
There
were 427,572,138 shares of the registrant’s common stock outstanding as of July
10, 2006.
Title
of Each Class
Preferred
Stock, Par Value $0.01 per share
The
Series A Preferred Stock (Series A Preferred) is non-interest bearing, does
not
have voting rights and is not entitled to receive dividends. Each share of
Series A Preferred issued can be converted into common stock on a 1:1 basis
after a twelve month period. Should a liquidation event occur, the Series A
Preferred automatically converts into common stock based on the foregoing
formula. Further, the Series A Preferred is not affected by forward or reverse
splits on the Corporation's common stock or other adjustments to the
Corporation's capital structure. Finally, Series A Preferred is entitled to
elect a majority of the Corporation's board of directors at all times, provided
that a majority of the board of directors is, at all times, independent.
The
Corporation has currently 20,000,000 Series A Preferred issued and outstanding
as of July 10, 2006.
ii
TABLE
OF
CONTENTS
|
PART
I
|
||
|
Item
1.
|
Financial
Statements
|
1-9
|
|
|
||
|
Item
2.
|
Management’s
Discussion and Analysis and Plan of Operation
|
10
|
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
11
|
|
Item
4.
|
Controls
and Procedures
|
12
|
|
|
|
|
|
PART
II
|
|
|
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
13
|
|
Item
1A
|
Risk
Factors
|
13
|
|
|
|
|
|
Item
2.
|
Unregistered
sales of Equity Securities and Use of Proceeds
|
13
|
|
|
|
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
13
|
|
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
13
|
|
|
|
|
|
Item
5.
|
Other
Information
|
13
|
|
|
|
|
|
Item
6.
|
Exhibits
and Reports on Form 8-K
|
13
|
iii
PART
I
ITEM
1. FINANCIAL STATEMENTS
|
|
Page
|
|
|
|
|
Financial
Statements
|
|
|
Balance
Sheets
|
1
|
|
Statements
of Operations
|
2
|
|
Statements
of Cash Flows
|
3
|
|
Notes
to Financial Statements
|
4-9
|
iv
BDC
Capital, Inc.
BALANCE
SHEETS
May
31,
2006 and February 28, 2006
|
ASSETS
|
|||||||
|
May
31,
|
February
28,
|
||||||
|
2006
|
2006
|
||||||
|
Current
assets:
|
|||||||
|
Cash
|
$
|
120,568
|
$
|
15,346
|
|||
|
Prepaid
expense
|
1,260
|
2,019
|
|||||
|
Total
current assets
|
121,828
|
17,365
|
|||||
|
Property
and equipment, net
|
-
|
-
|
|||||
|
Investment
in securities, at fair value (cost of $623,303 and $406,303 at May
31,
2006 and February 28, 2006, respectively)
|
1,230,900
|
1,013,900
|
|||||
|
Total
assets
|
$
|
1,352,728
|
$
|
1,031,265
|
|||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable
|
$
|
16,868
|
$
|
4,420
|
|||
|
Advance
from stockholder
|
6,000
|
798
|
|||||
|
Accrued
liabilities
|
5,276
|
3,876
|
|||||
|
Due
to BDC Partners, Inc.
|
410
|
410
|
|||||
|
Total
current liabilities
|
28,554
|
9,504
|
|||||
|
Notes
payable - stockholder
|
70,000
|
70,000
|
|||||
|
Total
liabilities
|
98,554
|
79,504
|
|||||
|
Commitments
and contingencies
|
|||||||
|
Stockholders’
equity:
|
|||||||
|
Preferred
stock, $.01 par value, 20,000,000 shares authorized, 20,000,000 issued
and
outstanding
|
200,000
|
200,000
|
|||||
|
Common
stock, $.01 par value, 2,000,000,000 shares authorized, 427,572,138
shares
issued and outstanding
|
4,275,721
|
4,275,721
|
|||||
|
Additional
paid-in-capital
|
5,129,389
|
5,149,389
|
|||||
|
Subscription
receivable
|
(3,148,937
|
)
|
(3,550,000
|
)
|
|||
|
Accumulated
deficit
|
(5,201,999
|
)
|
(5,123,349
|
)
|
|||
|
Total
stockholders’ equity
|
1,254,174
|
951,761
|
|||||
|
Total
liabilities and stockholders’ equity
|
$
|
1,352,728
|
$
|
1,031,265
|
|||
The
accompanying notes are an integral part of these financial
statements.
Page
1
BDC
Capital, Inc.
STATEMENTS
OF OPERATIONS
|
|
Three
months
ended
May
31, 2006
|
Three
Months
Ended
May
31, 2005
|
|||||
|
Investment
income
|
$
|
2
|
$
|
804
|
|||
|
Operating
Expenses:
|
|||||||
|
Professional
fees
|
26,775
|
33,235
|
|||||
|
Administrative
expenses
|
47,019
|
15,885
|
|||||
|
Rent
|
1,125
|
1,125
|
|||||
|
Other
|
2,333
|
1,637
|
|||||
|
Interest
expense
|
1,400
|
284,189
|
|||||
|
Total
Operating expenses
|
78,652
|
336,071
|
|||||
|
Net
investment loss
|
(78,650
|
)
|
(335,267
|
)
|
|||
|
Net
change in unrealized appreciation on investment
|
-
|
-
|
|||||
|
Net
decrease in net assets resulting from operations
|
$
|
(78,650
|
)
|
$
|
(335,267
|
)
|
|
|
Loss
per common share - basic and diluted
|
$
|
(0.00
|
)
|
$
|
(0.02
|
)
|
|
|
Weighted
average shares outstanding - basic and diluted
|
427,572,138
|
16,939,870
|
|||||
The
accompanying notes are an integral part of these financial
statements.
Page
2
BDC
Capital, Inc.
STATEMENTS
OF CASH FLOWS
|
|
Three
months
ended
|
Three
months
ended
|
|||||
|
May
31, 2006
|
May
31, 2005
|
||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|||||||
|
Net
decrease in net assets resulting from operations as a business development
company
|
$
|
(78,650
|
)
|
$
|
(335,267
|
)
|
|
|
Adjustments
to reconcile net assets resulting from operations and net loss to
net cash
used by operating activities:
|
|||||||
|
Amortization
of original issue discount
|
-
|
272,270
|
|||||
|
Changes
in operating assets and liabilities:
|
|||||||
|
Prepaid
expenses
|
759
|
(3,000
|
)
|
||||
|
Accounts
payable
|
12,448
|
17,649
|
|||||
|
Accrued
liabilities
|
1,400
|
4,954
|
|||||
|
Investment
in BDC Partners, Inc.
|
(217,000
|
)
|
(275,900
|
)
|
|||
|
Due
to BDC Partners, Inc.
|
-
|
(2,100
|
)
|
||||
|
Net
cash used in operating activities
|
(281,043
|
)
|
(321,394
|
)
|
|||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|||||||
|
Net
advance from stockholder
|
5,202
|
-
|
|||||
|
Payments
received on stockholder subscription receivable net of $20,000 in
transaction costs
|
381,063
|
-
|
|||||
|
Payments
on convertible debt
|
-
|
(161,988
|
)
|
||||
|
Proceeds
from issuance of common stock
|
-
|
58,560
|
|||||
|
Proceeds
from issuance of convertible debentures
|
-
|
250,000
|
|||||
|
Net
cash provided by financing activities
|
386,265
|
146,572
|
|||||
|
Net
change in cash and cash equivalents for the period
|
105,222
|
(174,822
|
)
|
||||
|
Cash
and cash equivalents at beginning of period
|
15,346
|
260,179
|
|||||
|
Cash
and cash equivalents at end of period
|
$
|
120,568
|
$
|
85,357
|
|||
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
|||||||
|
Cash
payments for interest
|
$
|
-
|
$
|
6,965
|
|||
|
SUPPLEMENTAL
SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
|
|||||||
|
Debt
to equity conversion, including accrued interest
|
$
|
-
|
$
|
113,865
|
|||
The
accompanying notes are an integral part of these financial
statements.
Page
3
BDC
Capital, Inc.
SCHEDULE
OF INVESTMENTS
May
31, 2006
|
Portfolio
Company
|
Principal
business
|
Investments
|
Cost
|
Fair
Value
|
|
BDC
Partners, Inc.
|
Technology
|
Equity
|
$623,303
|
$1,230,900
|
BDC
Partners, Inc is a private company founded in 2004 and is located in
Minneapolis, MN. It is a wholly own subsidiary of BDC Capital, Inc. that has
a
unique, multidisciplinary technology process paired with an intellectual
property revenue-focused business model.
Page
4
Note
1. Nature of Business and Summary of Significant Accounting
Policies:
Nature
of business
BDC
Capital, Inc. (“The Company”) was formed as a Minnesota corporation on April 7,
1982. It was incorporated under the name Command Small Computer Learning Center,
Inc., a computer training company. In 1987, the Company changed its name to
Command Electronics, Inc. In February 1995, the Company acquired CyberStar
Computer Systems, a manufacturer and marketer of microcomputers and servers,
and
in 1997 it changed its name to CyberStar Computer Corporation. In 2000, the
Company changed its name to eNetpc, Inc. In November 2004, the Company changed
its name to BDC Capital, Inc. BDC Capital, Inc. has engaged in the sale of
computer components, development of software and resell of major computer
brands. The names "BDC Capital, Inc." "we", "our" and "us" used in this report
refer to BDC Capital, Inc.
On
December 10, 2004, the Company elected to be regulated as a business development
company (BDC) as outlined in the Investment Company Act of 1940 by filing a
Form
NT-54A. As a BDC, the Company plans to focus on current opportunities available
to this attractive business model in these somewhat uncertain economic times.
Investment
Strategy
BDC
Capital, Inc. intends to build an investment portfolio consisting of revenue
generating assets and emerging companies well positioned for future growth.
A
BDC is a unique kind of investment company that primarily focuses on investing
in or lending to small private companies and making managerial assistance
available to them. A BDC may use capital provided by public stockholders and
from other sources to invest in growing small businesses.
A
BDC
provides stockholders the ability to retain the liquidity of a publicly traded
stock while sharing in the possible benefits of investing in privately owned
small and medium-sized companies.
As
a BDC,
the Company is required to have at least 70% of its assets in portfolio
companies.
Use
of estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash
and cash equivalents
The
Company considers all highly liquid investments with original maturity of three
months or less when purchased to be cash equivalents.
Page
5
Valuation
of Investments
Value,
as
defined in Section 2(a)(41) of 1940 Act, is (i) the market price for those
securities for which a market quotation is readily available and (ii) for all
other securities and assets, fair value is as determined in good faith by the
board of directors. Since there is typically no readily available market value
for the Company’s privately held investments, the Company values substantially
all of its investments at fair value as determined in good faith by the board
of
directors pursuant to a valuation policy and a consistent valuation process.
At
May 31, 2006, approximately 91% of the Company’s total assets represented
investments of which approximately 100% are valued at fair value. Because of
the
inherent uncertainty of determining the fair value of investments that do not
have a readily available market value, the fair value of the Company’s
investments determined in good faith by the board of directors may differ
significantly from the values that would have been used had a ready market
existed for the investments, and the differences could be material.
There
is
no single standard for determining fair value in good faith. As a result,
determining fair value requires that judgment be applied to the specific facts
and circumstances of each portfolio investment. The Company must determine
the
fair value of each individual investment on a quarterly basis. The Company
records unrealized depreciation on investments when it believes that an
investment has decreased in value, including where collection of a loan or
realization of an equity security is doubtful. Conversely, the Company records
unrealized appreciation if it believes that the underlying portfolio company
has
appreciated in value and, therefore, the Company’s investment has also
appreciated in value, where appropriate.
As
a BDC,
the Company invests primarily in illiquid securities including debt and equity
securities of private companies. The Company’s investments are generally subject
to some restrictions on resale and generally have no established trading market.
Because of the type of investments that the Company makes and the nature of
its
business, the Company’s valuation process requires an analysis of various
factors. The Company’s fair value methodology includes the examination of, among
other things, the underlying portfolio company performance, financial condition
and market changing events that impact valuation.
With
respect to private debt and equity securities, each investment is valued using
industry valuation benchmarks, and, where appropriate, the value is assigned
a
discount reflecting the illiquid nature of the investment and/or the Company’s
minority, non-control position. When an external event such as a purchase
transaction, public offering, or subsequent equity sale occurs, the pricing
indicated by the external event will be used to corroborate the Company’s
private debt or equity valuation.
Investments
in equity securities
Under
BDC
accounting, all equity investments are carried at fair value with any
adjustments recorded in the statement of operations, combined with adjustments
in the fair value of investments in loans, as investment gains
(losses)—unrealized.
In
accordance with Article 6 of Regulation S-X under the Securities Act of 1933
and
Securities Exchange Act of 1934, the Company does not consolidate portfolio
company investments, including those in which it has a controlling interest.
Page
6
Long-Lived
Assets
Long-lived
assets, such as property and equipment are reviewed for impairment whenever
changes in circumstances indicate that the carrying amount of an asset may
not
be recoverable. Recoverability of assets to be held and used is measured by
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of
an
asset exceeds its estimated future cash flows, an impairment charge is
recognized in the amount by which the carrying amount of the asset exceeds
the
fair value of the asset.
Income
taxes
Deferred
taxes are provided on a liability method whereby deferred tax assets are
recognized for deductible temporary differences and operating losses and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax basis. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for
the
effects of changes in tax laws and rates on the date of the
enactment.
Stock-based
compensation
Prior
to
March 1, 2006, the Company accounted for stock based compensation in accordance
with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees.” Effective March 1, 2006, the Company adopted the Financial
Accounting Standards Board Statement of Financial Accounting Standards No.
123
(revised 2004), “Share-Based Payment,” (“SFAS No.123R”) using the modified
prospective method. The adoption of SFAS No. 123R did not impact the Company’s
operating expenses before investment gains and losses, net investment loss,
cash
flows from operations, cash flows from financing activities, or basic and
diluted earnings per share during the three months ended May 31, 2006. During
the quarter ended May 31, 2006, the Company recognized no compensation expense
related to share-based awards. The Company issued no options during the three
months ended May 31, 2006 and all previously issued option grants were fully
vested as of February 29, 2004.
At
May
31, 2006 and February 28, 2006 there were 422,200 options outstanding for which
forfeiture restrictions have not lapsed.
For
periods prior to March 1, 2006, if compensation expense had been determined
consistent with the method in SFAS No. 123, on a pro forma basis, BDC’s net
investment loss and basic and diluted earnings per share would have been
unchanged for the three months ended May 31, 2005.
Net
loss per share
Basic
loss per share is computed using the weighted average number of shares
outstanding for the period. Diluted loss per share is computed using the
weighted average number of shares outstanding per share adjusted for the
incremental shares attributed to outstanding stock options under the Company's
stock option plans, convertible debt and convertible preferred stock.
Incremental shares attributable to the assumed exercise of stock options and
conversion of debt and preferred stock for the three months ended May 31, 2006
and 2005 were excluded from the computation of diluted loss per share as their
effect would be anti-dilutive.
Page
7
Recently
issued accounting pronouncements
In
May
2005, the FASB issued SFAS 154, "Accounting Changes and Error Corrections"
which
replaces APB Opinion No. 20 "Accounting Changes" and SFAS No. 3, "Reporting
Accounting Changes in Interim Financial Statements-An Amendment of APB Opinion
No. 28." SFAS 154 provides guidance on the accounting for and reporting of
accounting changes and error corrections. It establishes retrospective
application, or the latest practicable date, as the required method for
reporting a change in accounting principle and the reporting of a correction
of
an error. SFAS 154 is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. Adoption of SFAS 154
did
not have an impact on our results of operations and financial condition.
Note
2. Property and Equipment
Property
and equipment are as follows at May 31:
|
2006
|
2005
|
||||||
|
Office
equipment and furniture
|
$
|
469,666
|
)
|
469,666
|
|||
|
Less
accumulated depreciation
|
(455,028
|
)
|
(455,028
|
)
|
|||
|
Less
impairment of equipment
|
(14,638
|
)
|
(14,638
|
)
|
|||
| $ |
$
|
|
|||||
Depreciation
expense was $0 for the three months ended May 31, 2006 and 2005.
Note
3. Debt Financing
The
Company has entered into binding term sheets that provide for convertible debt
financing bearing interest at 8.0% payable at maturity and convertible at 50%
of
the Company’s common stock fair value totaling $16.5 million. The Company, at
its option may draw up to $50,000 weekly against the total investor commitment
over a 24 month period beginning February 28, 2005, subject to certain
restrictions. As of May 31, 2006, no draws have been made against this
commitment.
Note
4. Notes payable - stockholder
As
of May
31, 2006, the Company had advances from a stockholder in the amount of $70,000.
The unsecured notes are due at various dates from June 21, 2007 to August 1,
2007 with an interest rate of 8%. Accrued interest at May 31, 2006 totaled
$5,276.
Note
5. Related Party Transactions
The
Company sub-leases from a director of the Company approximately 1,000 square
feet of space used for offices and operations equipment storage at 11974
Portland Avenue, Burnsville, Minnesota at a monthly rent of $750 renewable
monthly which is split equally between BDC Capital, Inc. and BDC Partners,
Inc.
The Company’s lease payments made to the director for the three months ended May
31, 2006 and 2005 was $1,125, respectively.
Note
6. Commitments and Contingencies
The
Company is exposed to asserted and unasserted claims encountered in the normal
course of business. In the opinion of management, the resolution of these
matters will not have a material adverse effect on the Company's financial
position or results of operations.
Page
8
Note
7. Financial Highlights -
as a business development company:
Following
is a schedule of financial highlights for the three months ended May 31, 2006
and 2005:
|
2006
|
2005
|
||||||
|
Per
Share Data:
|
|||||||
|
Net
asset value, beginning of period
|
$
|
0.00
|
$
|
.12
|
|||
|
|
|||||||
|
Income
from investment operations:
|
|||||||
|
Net
investment loss
|
0.00
|
(0.02
|
)
|
||||
|
Net
realized gains on investments
|
-
|
-
|
|||||
|
Net
unrealized appreciation on investments
|
-
|
-
|
|||||
|
Net
increase (decrease) in net assets resulting from
operations
|
0.00
|
(0.02
|
)
|
||||
|
Dividends
|
-
|
-
|
|||||
|
Issuance
of shares (common and preferred)
|
-
|
0.06
|
|||||
|
Dilutive
effect of share insurances
|
-
|
(0.12
|
)
|
||||
|
Increase
in stockholders' equity (deficit) from OID on convertible
debentures
|
-
|
0.01
|
|||||
|
Increase
(decrease) in stockholder's equity relating to equity
issuances
|
-
|
(0.05
|
)
|
||||
|
|
|||||||
|
Net
asset value, end of period (a)
|
$
|
0.00
|
$
|
0.05
|
|||
|
|
|||||||
|
Per
share market value at end of period
|
0.03
|
0.16
|
|||||
|
Total
Return
|
50
|
%
|
700
|
%
|
|||
|
Common
shares outstanding at end of period, May 31, 2006 and 2005
|
427,572,138
|
17,722,582
|
|||||
|
|
|||||||
|
Ratio/Supplemental
Data:
|
|||||||
|
Net
assets end of period
|
$
|
1,254,174
|
$
|
895,194
|
|||
|
Ratio
of operating expenses to average net assets (annualized)
|
29
|
%
|
157
|
%
|
|||
|
Ratio
of net investment loss to average assets (annualized)
|
29
|
%
|
157
|
%
|
|||
(a)
Based
on total shares outstanding.
Page
9
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
The
following is a discussion of the financial condition and results of operations
of the Company for the three months ended May 31, 2006 and 2005, which should
be
read in conjunction with, and is qualified in its entirety by, the financial
statements and notes thereto included elsewhere in this report.
RESULTS
OF OPERATIONS
THREE
MONTHS ENDED MAY 31, 2006 AND MAY 31, 2005
For
the
three months ended May 31, 2006, the Company incurred an investment loss of
$78,650. The main components of this loss related to $47,019 of administrative
fees with a majority of these fees relating to the management of the Company
and
$26,775 of professional fees primarily related to audit fees.
For
the
three months ended May 31, 2005, the Company incurred an investment loss of
$335,267. The main components of this loss related to $33,235 of professional
fees with a majority of these fees relate to setting up the Company as a
business development company and $284,189 for interest expense on convertible
debt. On the interest expense, $272,270 relates to the amortization of original
debt discount which originated from the beneficial conversion feature related
to
the debt.
LIQUIDITY
AND CAPITAL RESOURCES
As
a business development company
BDC
Capital, Inc.’s cash position at May 31, 2006 was $120,568, an increase of
$105,222 from $15,346 at February 28, 2006. During the three months ended May
31, 2006, net cash used in operating activities was $281,043 of which $217,000
was an additional investment into BDC Partners, Inc. Net cash provided by
financing activities of $386,265 for the three months ended May 31, 2006
consisted primarily of payments received on stockholder subscriptions receivable
during the three month period.
BDC
Capital, Inc.’s cash position at May 31, 2005 was $85,357. During the three
months ended May 31, 2005, net cash used in operating activities was $321,394
of
which $275,900 was an additional investment into BDC Partners, Inc. Net cash
provided by financing activities of $146,572 for the three months ended May
31,
2005 consisted of issuance of convertible debentures and common stock during
the
three month period.
Our
current monthly operating expenses are approximately $25,000 per month. We
anticipate that any additional financing would be through the collection of
subscriptions receivable, sales of our common stock or other equity-based
securities. We do have in place a $16.5 million equity line commitment from
new
and existing investors. BDC Capital, Inc. signed agreements for the equity
line
in February 2005. Under the terms of the agreement, BDC Capital may elect to
receive as much as $16.5 million from the investors in common stock purchases
over the next two years.
Page
10
Recent
Developments — Portfolio Companies
During
the quarter ended May 31, 2006, BDC Capital, Inc. invested $217,000 equity
in
BDC Partners, Inc bringing the total investment in BDC Partners, Inc. to
$623,303 as of May 31, 2006. The additional investment was funded by proceeds
received from the stock subscription receivable.
Critical
Accounting Policies
Critical
accounting policies are those that are both important to the presentation of
our
financial condition and results of operations and those that require
management’s most difficult, complex or subjective judgments. Our critical
accounting policies are those applicable to the valuation of investments.
Valuation
of Portfolio Investments
As
a
business development company, we invest primarily in illiquid securities
including debt and equity securities of private companies. The investments
are
generally subject to restrictions on resale and generally have no established
trading market. We value substantially all of our equity investments at fair
value as determined in good faith by our valuation committee on a quarterly
basis. The valuation committee, comprised of three or more non-interested board
members, reviews and approves the valuation of our investments within the
guidelines established by the board of directors. Fair value is generally
defined as the amount that an investment could be sold for in an orderly
disposition over a reasonable time. Generally, to increase objectivity in
valuing our assets, external measures of value, such as public markets or third
party transactions, are utilized whenever possible. Valuation is not based
on
long term work-out value, nor immediate liquidation value, nor incremental
value
for potential changes that may take place in the future.
Recently
issued accounting pronouncements
In
May
2005, the FASB issued SFAS 154, "Accounting Changes and Error Corrections"
which
replaces APB Opinion No. 20 "Accounting Changes" and SFAS No. 3, "Reporting
Accounting Changes in Interim Financial Statements-An Amendment of APB Opinion
No. 28." SFAS 154 provides guidance on the accounting for and reporting of
accounting changes and error corrections. It establishes retrospective
application, or the latest practicable date, as the required method for
reporting a change in accounting principle and the reporting of a correction
of
an error. SFAS 154 is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. Adoption of SFAS 154
did
not have an impact on our results of operations and financial condition.
FORWARD-LOOKING
INFORMATION
Any
statements contained herein related to future events are forward-looking
statements and are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Readers are cautioned not to place
undue reliance on forward-looking statements. BDC Capital, Inc. undertakes
no
obligation to update any such statements to reflect actual events.
ITEM
3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The
Company’s investment activities contain elements of risk. The portion of the
Company’s investment portfolio consisting of equity or equity-linked debt
securities in private companies is subject to valuation risk. Because there
is
typically no public market for the equity and equity-linked debt securities
in
which it invests, the valuation of the equity interest in the portfolio is
stated at “fair value” and determined in good faith by the Board of Directors on
a quarterly basis in accordance with the Company’s investment valuation
policy.
Page
11
In
the
absence of a readily ascertainable market value, the estimated value of the
Company’s portfolio may differ significantly from the value that would be placed
on the portfolio if a ready market for the investments existed. Any changes
in
valuation are recorded in the Company’s consolidated statement of operations as
“Net unrealized appreciation (depreciation) on investment”.
At
times
a portion of the Company’s portfolio may include marketable securities traded in
the over-the-counter market. In addition, there may be a portion of the
Company’s portfolio for which no regular trading market exists. In order to
realize the full value of a security, the market must trade in an orderly
fashion or a willing purchaser must be available when a sale is to be made.
Should an economic or other event occur that would not allow the markets to
trade in an orderly fashion the Company may not be able to realize the fair
value of its marketable investments or other investments in a timely
manner.
As
of May
31, 2006, the Company did not have any off-balance sheet investments or hedging
investments.
Impact
of Inflation
The
Company does not believe that its business is materially affected by inflation,
other than the impact inflation may have on the securities markets, the
valuations of business enterprises and the relationship of such valuation to
underlying earnings, all of which will influence the value of the Company’s
investments.
ITEM
4.
CONTROLS AND PROCEDURES
(a)
Evaluation of Disclosure Controls and Procedures.
An
evaluation made at the end of the period covered by this report was performed
under the supervision and with the participation of the Company's president,
chief executive officer ("CEO") and the chief financial officer ("CFO") of
the
effectiveness of the design and operation of the Company's disclosure controls
and procedures to insure that the Company records, processes, summarizes and
reports in a timely and effective manner the information required to be
disclosed in reports filed with or submitted to the Securities and Exchange
Commission. Based on that evaluation, the Company's management, including the
CEO and CFO, concluded that the Company's disclosure controls and procedures
were effective in timely bringing to their attention material information
related to the Company required to be included in the Company's periodic
Securities and Exchange Commission filings. Since the date of this evaluation,
there have been no significant changes in the Company's internal controls or
in
other factors that could significantly affect those controls.
However,
due to the limited number of Company employees engaged in the authorization,
recording, processing and reporting of transactions, there is inherently a
lack
of segregation of duties. The Company periodically assesses the cost versus
benefit of adding the resources that would remedy or mitigate this situation,
and currently does not consider the benefits to outweigh the costs of adding
additional staff in light of the limited number of transactions related to
the
Company's operations.
(b)
Changes in Internal Controls Over Financial Reporting.
There
have been no significant changes in internal control over financial reporting
that occurred during the fiscal period covered by this report that have
materially affected or are reasonably likely to materially affect the Company’s
internal control over financial reporting.
Page
12
PART
II
|
ITEM
1.
|
LEGAL
PROCEEDINGS
|
BDC
Capital, Inc. is, from time to time, a party to litigation arising in the normal
course of its business. BDC believes that none of these actions will have a
material adverse effect on its financial condition or results of
operations.
|
ITEM
1A.
|
RISK
FACTORS
|
We
are
subject to various risks that may materially harm our business, financial
condition and results of operations. You should carefully consider the risks
and
uncertainties described below and the other information in this filing before
deciding to purchase our common stock. If any of these risks or uncertainties
actually occurs, our business, financial condition or operating results could
be
materially harmed. In that case, the trading price of our common stock could
decline and you could lose all or part of your investment.
|
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
None.
|
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
None.
|
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
None.
|
ITEM
5.
|
OTHER
INFORMATION
|
|
(a)
|
All
information required to be disclosed on a report on Form 8-K during
the
period ended May 31, 2006 has previously been
reported.
|
|
(b)
|
There
have been no material changes to the procedures by which security
holders
may recommend nominees to the registrant’s board of
directors.
|
|
ITEM
6.
|
EXHIBITS
AND REPORTS ON FORM 8-K
|
|
|
3.1
|
Articles
of Incorporation, as amended (1)
|
Previously
Filed
|
|
|
3.2
|
Bylaws
(1)
|
Previously
Filed
|
|
|
31
|
Certifications
of Chief Executive Officer and Chief Financial Officer under Rule
13a-14(a)/15d-14(a)
|
Included
|
|
|
32
|
Certifications
under Section 1350
|
Included
|
(1)
Incorporated by reference to exhibit filed as a part of Registration Statement
on Form 10-SB (Commission File No. 000-27225).
Page
13
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused
this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
BDC
CAPITAL, INC.
|
|
| Date: July 13, 2006 |
/s/
Richard A.
Pomije
|
|
Richard
A. Pomije, CEO
|
Page
14