FORWARD-LOOKING
STATEMENTS MAY PROVE INACCURATE
This
Information Statement contains forward-looking statements that involve risks
and
uncertainties. Such statements are based on current expectations, assumptions,
estimates and projections about the Company and its industry. Forward-looking
statements are subject to known and unknown risks, uncertainties and other
factors that may cause actual results, levels of activity, performance,
achievements and prospects to be materially different from those expressed
or
implied by such forward-looking statements. The Company undertakes no obligation
to update publicly any forward-looking statements for any reason even if
new
information becomes available or other events occur in the future. The Company
believes that such statements are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995.
Actual
outcomes are dependent upon many factors. Words such as "anticipates,"
"believes," "estimates," "expects," "hopes," "targets" or similar expressions
are intended to identify forward-looking statements, which speak only as
of the
date of this Information Statement, and in the case of documents incorporated
by
reference, as of the date of those documents. The Company undertakes no
obligation to update or release any revisions to any forward-looking statements
or to report any events or circumstances after the date of this Information
Statement or to reflect the occurrence of unanticipated events, except as
required by law.
WITHDRAWAL
OF ELECTION TO BE TREATED AS A BDC
General
On
May
14, 2008, our board of directors consented in writing without a meeting to
the
withdrawal of the Company's election to be treated as a BDC under the 1940
Act,
and recommended that the matter be presented to the Company's stockholders
for
their approval. On May 16, 2008, the Consenting Stockholders, who hold an
aggregate of 5,314,762 shares of Common Stock, representing approximately
61.6%
of the total issued and outstanding shares of Common Stock, consented in
writing
without a meeting to the BDC Withdrawal.
The
BDC
Withdrawal cannot be effectuated until at least 20 calendar days after
the
mailing of a definitive information statement to the Company's shareholders.
The
Company anticipates effectuating the BDC Withdrawal, through the filing
of a
Form N-54C, within thirty days of the tolling of the twenty calendar day
period.
Reasons
for Withdrawal of BDC Election
On
June
1, 2005, the Company filed a notification of election to be regulated as
a BDC
under the 1940 Act on Form N-54A. The Company elected BDC status intending
to
provide equity and debt investment capital to fund growth, acquisitions
and
recapitalizations of small market companies primarily located in the United
States. The Company no longer intends to pursue the foregoing business
plan, and
has determined it to be in the best interest of the Company to withdraw
its BDC
election so that it can more flexibly pursue other business opportunities
that
would not be permitted if the Company remained a BDC, including, but not
limited
to, the identification and acquisition of an operating company (see "Risks
Associated with the Withdrawal of BDC Election").
Under
the
Company's new business model, the Company will at all times conduct its
activities in such a way that it will not be deemed an "investment company"
subject to the regulation under the 1940 Act. Thus, it will not hold itself
out
as being engaged primarily in the business of investing, reinvesting or
trading
in securities.
SEC
Comment Letter
The
Company filed a Form 1-E with the SEC on April 12, 2007 (the "Old E-1").
On May
30, 2007, the SEC issued a comment letter to the Company (the "1st
SEC
Comment Letter") with respect to the Old 1-E setting forth certain instances
in
which the Company may have been out of compliance with the rules and
regulations
governing the business, affairs, financial status, and financial reporting
items
required of BDC's. The Company filed a response to the foregoing comment
letter
on June 21, 2007.
On
January 30, 2008, the SEC issued a second comment letter to the Company
(the
"2nd
SEC
Comment Letter") setting forth additional comments on the Company's disclosure
and filings with the SEC. The Company has not yet responded to the 2nd
SEC
Comment Letter.
The
Company filed a Form 1-E with the SEC on March 27, 2008 (the "New 1-E").
On
April 22, 2008, the SEC issued a third comment letter to the Company (the
"3rd
SEC
Comment Letter, and collectively with the 1st
SEC
Comment Letter and the 2nd
SEC
Comment Letter, the "SEC Comment Letters") setting forth the SEC's comments
on
the New 1-E and certain other filings with the SEC. The Company has not
yet
responded to the 3rd
SEC
Comment Letter.
The
Company has taken certain steps to comply with the comments set forth in
the SEC
Comment Letters. Many of the comments set forth in the SEC Comment Letters
have
not yet been fully addressed by the Company. The Company's responsibility
to
address the matters raised in the SEC Comment Letters and to comply with
any
other currently outstanding obligations under the 1940 Act will continue
notwithstanding the effectuation of the Company's proposed BDC Withdrawal.
The
Company intends to file written responses to the 2nd
SEC
Comment Letter and the 3rd
SEC
Comment Letter with the SEC promptly. The compliance and remediation costs
associated with the foregoing cannot be estimated by management at this
time,
but could be significant in terms of both time and dollars. To the extent
such
liabilities are significant they will materially negatively impact on the
Company's resources and will have an impact on the Company's ability to
continue
as a going concern.
Risks
Associated with the Withdrawal of BDC Election
Upon
the
Company's withdrawal of its BDC election the Company's stockholders will
lose
certain protections under the 1940 Act, including the
following:
1. The
Company will no longer be required to maintain a ratio of assets to senior
securities of at least 200%;
2. The
Company will no longer be prohibited from protecting directors or officers
against any liability to the Company or Company’s stockholders arising from
willful malfeasance, bad faith, gross negligence, or reckless disregard of
the
duties involved the conduct of the person’s office;
3. The
Company will no longer be required to provide and maintain a bond issued
by a
reputable fidelity insurance company to protect against larceny and
embezzlement;
4. The
Company will no longer be required to ensure that a majority of directors
are
not “interested persons,” as the term is defined in Section 2(a)(19) of the 1940
Act, and persons that would be prevented from acting in the capacity of an
employee, officer or director of the Company if it were a BDC (such as persons
convicted of certain malfeasance) will be able to be on the Company’s
board;
5. The
Company will no longer be subject to provisions of the 1940 Act regulating
transactions between BDCs and certain affiliates restricting the Company’s
ability to issue warrants and options;
6. The
Company will no longer be prohibited from issuing its shares for
services;
7. The
Company will be able to change the nature of its business without having
to
obtain the approval of its stockholders;
8. The
Company will no longer be subject to provisions of the 1940 Act prohibiting
the
issuance of securities below net asset value book value;
9. The
Company will no longer be required to disclose its net value per share on
the
face of its financial statements; and
10. The
Company will no longer be subject to the other protections set forth in Sections
55 through 64 of the 1940 Act and the rules and regulations promulgated
thereunder.
However,
the Board will still be subject to customary principles of fiduciary duty
under
the DGCL with respect to the Company and its stockholders.
In
addition, withdrawal of the Company’s election to be treated as a BDC will not
affect the Company’s registration under Section 12(g) of the Exchange Act, which
requires, in part, the Company to file periodic reports on Form 10-K, Form
10-Q,
Form 8-K, proxy statements and other reports with the SEC.
Effect
on the Financial Statements and Tax Status
The
withdrawal of the Company’s election to be regulated as a BDC will result in a
change in its method of accounting. BDC financial statement presentation
and
accounting uses the value method of accounting used by investment companies,
which allows BDCs to value their investments at fair market value as opposed
to
historical cost. In addition, entities in which the Company owns majority
ownership stakes are not consolidated; rather, investments in those entities
are
reflected on the balance sheet as an investment in a majority-owned portfolio
company at fair market value. In this regard, the Company’s only significant
investments at March 31, 2008, were in two minority-owned entities, Syzygy
Entertainment, Ltd. and Chanticleer Investors, LLC. At March 31, 2008,
the value
of such investments recorded in the Company’s financials statement was
approximately $964,000 and $1,610,000, respectively.
Operating
companies use either the fair-value or historical-cost methods of accounting
for
financial statement presentation and accounting for securities, depending
on how
the investment is held. In addition, operating companies consolidate the
accounts of majority-owned entities; any previously recorded unrealized
appreciation on investments which would not be classified as trading securities
will no longer be reflected in the Company’s financial statements. At March 31,
2008, the Company had unrealized appreciation of $691,341 recorded on these
investments.
Upon
the
effectuation of the BDC Withdrawal the Company will change its methods
of
accounting as set forth above. The changes will result in the reversal
of the
unrealized appreciation in the total amount of $691,341 through the
retrospective recording of said amounts in the prior periods in which it
arose.
The Company believes that the effect of these changes in methods of accounting
will be material.
The
Company does not believe that withdrawing its election to be regulated as
a BDC
will have any impact on its federal income tax status, because the Company
never
elected to be treated as a regulated investment company under Subchapter
M of
the Internal Revenue Code. Instead, the Company has always been subject to
corporate level income tax on its income (without regard to any distributions)
as a “regular” corporation under Subchapter C of the Internal Revenue Code.
REVERSE
SPLIT
General
On
May
14, 2008, our Board of Directors consented in writing without a meeting to
a 1
for 10 reverse split of the Company's outstanding shares of Common Stock,
and
recommended the matter be submitted to the Company's stockholders for their
approval. On May 16, 2008, the Consenting Stockholders, who hold an aggregate
of
5,314,762 shares of Common Stock, representing approximately 61.6% of the
total
issued and outstanding shares of Common Stock, consented in writing without
a
meeting to the Reverse Split.
Reasons
for the Reverse Split
In
approving the Reverse Split, the Board considered that the Company's Common
Stock may not appeal to brokerage firms that are reluctant to recommend lower
priced securities to their clients. Investors may also be dissuaded from
purchasing lower priced stocks because the brokerage commissions, as a
percentage of the total transaction, tend to be higher for such stocks.
Moreover, the analysts at many brokerage firms do not monitor the trading
activity or otherwise provide coverage of lower priced stocks. The Board
also
believes that most investment funds are reluctant to invest in lower priced
stocks.
The
Board
proposed the Reverse Split as one method to attract investors and business
opportunities in the Company. The Company believes that the Reverse Split
may
improve the price level of the Company's Common Stock and that this higher
share
price could help generate additional interest in the Company.
However,
the effect of the Reverse Split upon the market price for the Company's Common
Stock cannot be predicted, and the history of similar stock split combinations
for companies in like circumstances is varied. There can be no assurance
that
the market price per share of the Company's Common Stock after the Reverse
Split
will rise in proportion to the reduction in the number of shares of Common
Stock
outstanding resulting from the Reverse Split. The market price of the Company's
Common Stock is also based on its performance and other factors, some of
which
may be unrelated to the number of shares outstanding.
Potential
Risks of the Reverse Split
Upon
effectiveness of the Reverse Split, there can be no assurance that the bid
price
of the Company's Common Stock will continue at a level in proportion to the
reduction in the number of outstanding shares resulting from the Reverse
Split,
that the Reverse Split will result in a per share price that will increase
the
Company's ability to attract and retain employees and other service providers
or
that the market price of the post-split Common Stock will be maintained.
The
market price of the Company's Common Stock will also be based on its financial
performance, market condition, the market perception of its future prospects,
as
well as other factors, many of which are unrelated to the number of shares
outstanding. If the Reverse Split is effected and the market price of the
Company's Common Stock declines, the percentage decline as an absolute number
and as a percentage of the Company's overall capitalization may be greater
than
would occur in the absence of the Reverse Split.
Effects
of the Reverse Split
General
Pursuant
to the Reverse Split, each 10 shares of the Company's Common Stock issued
and
outstanding, or held as treasury shares, immediately prior to the effectiveness
of the Reverse Split, will become one share of the same class of the Company's
Common Stock after consummation of the Reverse Split.
Effect
on
Authorized and Outstanding Shares
The
Company is currently authorized to issue a maximum of 200,000,000 shares
of
Common Stock and no shares of preferred stock. There are 8,628,532 shares
of
Common Stock issued and outstanding, or held as treasury shares. The number
of
issued and outstanding shares of capital stock, including treasury shares
(as
well as the number of shares of Common Stock underlying any options, warrants,
convertible debt or other derivative securities), will be reduced to a number
that will be approximately equal to the number of shares of capital stock
issued
and outstanding, or held as treasury shares, immediately prior to the
effectiveness of the Reverse Split, divided by 10.
With
the
exception of the number of shares issued and outstanding, or held as treasury
shares, the rights and preferences of the shares of Common Stock prior and
subsequent to the Reverse Split will remain the same. It is not anticipated
that
the Company's financial condition, the percentage ownership of management,
the
number of stockholders, or any aspect of the Company's business will materially
change, as a result of the Reverse Split.
The
Reverse Split will be effected simultaneously for all of the Company's Common
Stock and the exchange ratio will be the same for all of the Company's issued
and outstanding capital stock. Subject to the provisions for elimination
of
fractional shares, the Reverse Split will affect all of our stockholders
uniformly and will not affect any stockholder's percentage ownership interests
in the Company or proportionate voting power (See "Fractional Shares" below).
The
Company will continue to be subject to the periodic reporting requirements
of
the Exchange Act. The Company's Common Stock is currently registered under
Section 12(g) of the Exchange Act and as a result, is subject to periodic
reporting and other requirements. The proposed Reverse Split will not affect
the
registration of the Company's Common Stock under the Exchange Act.
Fractional
Shares
No
fractional shares of post-split Common Stock will be issued to any stockholder
in connection with the Reverse Split. Stockholders of record who would otherwise
be entitled to receive fractional shares upon the effective date of the Reverse
Split, will, upon surrender of their certificates representing shares of
pre-split Common Stock, receive a cash payment in lieu thereof equal to the
fair
value of such fractional share. For purposes of the Reverse Split, fair value
shall be the price per share equal to the average closing trading price of
the
Company's Common Stock over the 10 trading days immediately preceding the
effective date of the Reverse Split (as adjusted to reflect the Reverse Split).
The procedures for cashing out fractional shares will be set forth in a
Transmittal Letter forwarded to stockholders after the effective date of
the
Reverse Split.
Number
of
Shares of Common Stock Available for Future Issuance
The
number of shares of Common Stock the Company is authorized to issue will
remain
200,000,000 shares of Common Stock after giving effect to the Reverse Split.
The
ratio of shares of Common Stock authorized and available for issue to the
number
of shares issued and outstanding will increase after the Reverse Split from
approximately 95.7% to approximately 99.4%. The actual number of shares of
Common Stock authorized and available for issuance will increase as a result
of
the Reverse Split from approximately 191,371,468 shares to 199,137,146
shares.
Effectiveness
of the Reverse Split
The
Reverse Split cannot be effectuated until at least 20 calendar days after
the
mailing of a definitive information statement to the Company's shareholders.
The
Company anticipates effectuating the Reverse Split, through the filing
of
a Certificate of Amendment to the Certificate of Incorporation with the
Office
of the Secretary of State of Delaware,
immediately after the effectuation by the Company of its BDC Withdrawal,
which
the Company anticipates effectuating within thirty days of the tolling
of the
twenty calendar day period.
Commencing
on the effective date, each certificate of the Company's Common Stock will
be
deemed for all corporate purposes to evidence ownership of the reduced number
of
shares of Common Stock resulting from the Reverse Split. As soon as practicable
after the effective date, stockholders will be notified via a Letter of
Transmittal as to the effectiveness of the Reverse Split and instructed how
and
when to surrender their certificates representing shares of pre-split Common
Stock in exchange for certificates representing shares of post-split Common
Stock, and how they will receive cash in consideration for any post-split
fractional shares of Common Stock they hold. We intend to use Routh Stock
Transfer, Inc. as our agent to effect the exchange of the certificates and
the
cashing out of fractional shares following the effective date of the Reverse
Split. STOCKHOLDERS SHOULD NOT DESTROY ANY STOCK CERTIFICATE AND SHOULD NOT
SUBMIT ANY CERTIFICATES WITHOUT THE LETTER OF TRANSMITTAL.
Certain
Federal Income Tax Consequences
The
following discussion summarizing certain federal income tax consequences
of the
Reverse Split is based on the Internal Revenue Code of 1986, as amended (the
"Code"), the applicable Treasury Regulations promulgated thereunder, judicial
authority and current administrative rulings and practices in effect on the
date
this Information Statement was first mailed to stockholders. This discussion
is
for general information only and does not discuss consequences that may apply
to
special classes of taxpayers (e.g., non-resident aliens, broker-dealers,
or
insurance companies).
The
receipt of the Common Stock following the effective date of the Reverse Split,
solely in exchange for the Common Stock held prior to the Reverse Split will
not
generally result in a recognition of gain or loss to the stockholders. Cash
received in lieu of fractional shares, however, will generally be treated
as a
sale of the fractional shares (although in unusual circumstances such cash
might
possibly be deemed a dividend), and stockholders will recognize gain or loss
based upon the difference between the amount of cash received and the basis
in
the surrendered fractional share.
The
adjusted tax basis of a stockholder in the Common Stock received after the
Reverse Split will be the same as the adjusted tax basis of the Common Stock
held prior to the Reverse Split exchanged therefore (subject to the treatment
of
fractional shares), and the holding period of the Common Stock received after
the Reverse Split will include the holding period of the Common Stock held
prior
to the Reverse Split exchanged therefore. No gain or loss will be recognized
by
the Company as a result of the Reverse Split. The Company's views regarding
the
tax consequences of the Reverse Split are not binding upon the Internal Revenue
Service or the courts, and there can be no assurance that the Internal Revenue
Service or the courts would accept the positions expressed above.
THIS
SUMMARY IS PROVIDED FOR GENERAL INFORMATION ONLY AND DOES NOT PURPORT TO
ADDRESS
ALL ASPECTS OF THE POSSIBLE FEDERAL INCOME TAX CONSEQUENCES OF THE REVERSE
SPLIT
AND IS NOT INTENDED AS TAX ADVICE TO ANY PERSON. IN PARTICULAR, AND WITHOUT
LIMITING THE FOREGOING, THIS SUMMARY ASSUMES THAT THE SHARES OF COMMON STOCK
ARE
HELD AS "CAPITAL ASSETS" AS DEFINED IN THE CODE, AND DOES NOT CONSIDER THE
FEDERAL INCOME TAX CONSEQUENCES TO THE COMPANY'S STOCKHOLDERS IN LIGHT OF
THEIR
INDIVIDUAL INVESTMENT CIRCUMSTANCES OR TO HOLDERS WHO MAY BE SUBJECT TO SPECIAL
TREATMENT UNDER THE FEDERAL INCOME TAX LAWS (SUCH AS DEALERS IN SECURITIES,
INSURANCE COMPANIES, FOREIGN INDIVIDUALS AND ENTITIES, FINANCIAL INSTITUTIONS
AND TAX EXEMPT ENTITIES). IN ADDITION, THIS SUMMARY DOES NOT ADDRESS ANY
CONSEQUENCES OF THE REVERSE SPLIT UNDER ANY STATE, LOCAL OR FOREIGN TAX LAWS.
THE STATE AND LOCAL TAX CONSEQUENCES OF THE REVERSE SPLIT MAY VARY AS TO
EACH
STOCKHOLDER DEPENDING ON THE STATE IN WHICH SUCH STOCKHOLDER RESIDES. AS
A
RESULT, IT IS THE RESPONSIBILITY OF EACH STOCKHOLDER TO OBTAIN AND RELY ON
ADVICE FROM HIS, HER OR ITS TAX ADVISOR AS TO, BUT NOT LIMITED TO, THE
FOLLOWING: (A) THE EFFECT ON HIS, HER OR ITS TAX SITUATION OF THE REVERSE
SPLIT,
INCLUDING, BUT NOT LIMITED TO, THE APPLICATION AND EFFECT OF STATE, LOCAL
AND
FOREIGN INCOME AND OTHER TAX LAWS; (B) THE EFFECT OF POSSIBLE FUTURE LEGISLATION
OR REGULATIONS; AND (C) THE REPORTING OF INFORMATION REQUIRED IN CONNECTION
WITH
THE REVERSE SPLIT ON HIS, HER OR ITS OWN TAX RETURNS. IT WILL BE THE
RESPONSIBILITY OF EACH STOCKHOLDER TO PREPARE AND FILE ALL APPROPRIATE FEDERAL,
STATE AND LOCAL TAX RETURNS.
EFFECTIVE
DATE OF STOCKHOLDER ACTIONS
The
BDC
Withdrawal and the Reverse Split cannot be effectuated until at least 20
calendar days after the mailing of a definitive information statement to
the
Company's shareholders. The Company anticipates effectuating the BDC Withdrawal,
through the filing of a Form N-54C, within thirty days of the tolling of
the
twenty calendar day period. The Company anticipates effectuating the Reverse
Split, through the filing of a
Certificate of Amendment to the Certificate of Incorporation with the Office
of
the Secretary of State of Delaware, immediately after the effectuation
of the
BDC Withdrawal.
STOCKHOLDERS'
RIGHTS
The
elimination of the need for a special meeting of the stockholders to approve
the
actions set forth herein is authorized by Section 228 of the DGCL, which
provides that action may be taken by the written consent of the holders of
outstanding shares of voting capital stock, having not less than the minimum
number of votes which would be necessary to authorize or take the action
at a
meeting at which all shares entitled to vote on a matter were present and
voted.
Pursuant to Section 228 of the DGCL, we are required to provide prompt notice
of
the taking of a corporate action by written consent to our stockholders who
have
not consented in writing to such action. This Information Statement serves
as
the notice required by Section 228 of the DGCL.
DISSENTERS'
RIGHTS
The
DGCL
does not provide for dissenter's rights in connection with any of the actions
proposed in this Information Statement.
STOCKHOLDERS
SHARING AN ADDRESS
The
Company will deliver only one Information Statement to multiple stockholders
sharing an address unless the Company has received contrary instructions
from
one or more of the stockholders. The Company undertakes to deliver promptly,
upon written or oral request, a separate copy of the Information Statement
to a
stockholder at a shared address to which a single copy of the Information
Statement is delivered. A stockholder can notify the Company that the
stockholder wishes to receive a separate copy of the Information Statement
by
contacting the Company via telephone at (704) 366-5122 or at the address
set
forth above.