SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _______________ to _______________.
COMMISSION FILE NUMBER: 000-49687
M-GAB DEVELOPMENT CORPORATION
(Exact name of registrant as specified in its charter)
FLORIDA 33-0961490
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9900 RESEARCH DR.
IRVINE, CA 92618
(Address of principal executive offices) (Zip Code)
ISSUER'S TELEPHONE NUMBER (949) 635-1240
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $0.001
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes |_| No |X|.
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act.Yes |_| No |X|.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition 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 Exchange Act). Yes |_| No |X|.
State the aggregate market value of voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked price of such common equity,
as of the last business day of the registrant's most recently completed second
fiscal quarter. There was no market for our common stock.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Exchange Act of
1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes |_| No |_|.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of registrant's classes
of common stock, as of the latest practicable date. As of March 30, 2006, there
were 6,550,512 shares of common stock, par value $0.001, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and
the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document
is incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to rule 424(b) or
(c) of the Securities Act of 1933 ("Securities Act"). The listed documents
should be clearly described for identification purposes (e.g., annual report to
security holders for fiscal year ended December 24, 1980). None.
2
M-GAB DEVELOPMENT CORPORATION
TABLE OF CONTENTS
-----------------
PART I............................................................................................................4
ITEM 1 - BUSINESS.................................................................................................4
ITEM 1A - RISK FACTORS ...........................................................................................6
ITEM 1B - UNRESOLVED STAFF COMMENTS ..............................................................................8
ITEM 2 - PROPERTIES...............................................................................................8
ITEM 3 - LEGAL PROCEEDINGS........................................................................................8
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................................................8
PART II...........................................................................................................9
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES...........................................................................9
ITEM 6 - SELECTED FINANCIAL DATAMANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION........................10
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................10
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.............................................16
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................................................16
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE....................16
ITEM 9A - CONTROLS AND PROCEDURES................................................................................16
ITEM 9B - OTHER NFORMATION.......................................................................................16
PART III.........................................................................................................18
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.....................................................18
ITEM 11 - EXECUTIVE COMPENSATION.................................................................................19
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.........21
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.........................................................22
ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES.................................................................23
PART IV..........................................................................................................24
ITEM 15 - EXHIBITS, FINANCIAL STATEMENTS SCHEDULES...............................................................24
3
PART I
This Annual Report includes forward-looking statements within the meaning of the
Securities Exchange Act of 1934 (the "Exchange Act"). These statements are based
on management's beliefs and assumptions, and on information currently available
to management. Forward-looking statements include the information concerning
possible or assumed future results of operations of the Company set forth under
the heading "Management's Discussion and Analysis of Financial Condition or Plan
of Operation." Forward-looking statements also include statements in which words
such as "expect," "anticipate," "intend," "plan," "believe," "estimate,"
"consider" or similar expressions are used.
Forward-looking statements are not guarantees of future performance. They
involve risks, uncertainties and assumptions. The Company's future results and
shareholder values may differ materially from those expressed in these
forward-looking statements. Readers are cautioned not to put undue reliance on
any forward-looking statements.
ITEM 1 - BUSINESS
GENERAL
M-GAB Development Corporation, a Florida corporation (the "Company") was
incorporated in March 2001. From inception through early 2003, our business was
the development, marketing, and distribution of an interactive travel brochure.
On May 16, 2003, we filed an election to be treated as a business development
company ("BDC") under the Investment Company Act of 1940 (the "1940 Act"), which
became effective on the date of filing.
Subsequent to the BDC election our principal business is to make venture
capital investments in early-stage and/or developing enterprises that are
principally engaged in the development or exploitation of inventions,
technological improvements, and new or unique products and services. Our
principal objective is long-term capital appreciation. We may invest in debt
securities of these companies, or may acquire an equity interest in the form of
common or preferred stock, warrants or options to acquire stock or the right to
convert the debt securities into stock. We may invest alone, or as part of a
larger investment group. Consistent with our status as a BDC and the purposes of
the regulatory framework for BDC's under the 1940 Act, we will provide
managerial assistance, potentially in the form of a consulting agreement or in
the form of a board of director's seat, to the developing companies in which we
invest.
In addition, we may acquire either a minority or controlling interest in
mature companies in a roll-up strategy. It is anticipated that any acquisitions
will be primarily for our stock, or a combination of cash and stock. The
principal objective of acquisitions pursuant to a roll-up strategy would be to
consolidate an industry and either sell the acquired entities as a larger unit,
or take the unit public through an initial public offering, spin-off to our
shareholders, or reverse merger into a publicly traded shell corporation.
We operate as an internally managed investment company whereby our
officers and employees conduct our operations under the general supervision of
our Board of Directors. We have not elected to qualify to be taxed as a
regulated investment company as defined under Subchapter M of the Internal
Revenue Code, we do not have any intellectual property protections nor does our
management feel that any is necessary, and we have not spent any funds on
research and development or compliance with environmental laws during the last
two fiscal years.
4
During the quarter ended March 31, 2005, a market maker filed an
application to list our securities on the OTC Bulletin Board. On October 10,
2005, we were informed by the NASD that our common stock was approved by the
NASD for trading on the OTC Bulletin Board. Our trading symbol is MGBD.
REGULATION AS A BDC
Although the 1940 Act exempts a BDC from registration under that Act, it
contains significant limitations on the operations of BDC's. Among other things,
the 1940 Act contains prohibitions and restrictions relating to transactions
between a BDC and its affiliates, principal underwriters and affiliates of its
affiliates or underwriters, and it requires that a majority of the BDC's
directors be persons other than "interested persons," as defined under the 1940
Act. The 1940 Act also prohibits a BDC from changing the nature of its business
so as to cease to be, or to withdraw its election as, a BDC unless so authorized
by the vote of the holders of a majority of its outstanding voting securities.
BDC's are not required to maintain fundamental investment policies relating to
diversification and concentration of investments within a single industry.
Generally, a BDC must be primarily engaged in the business of furnishing
capital and providing managerial expertise to companies that do not have ready
access to capital through conventional financial channels. Such portfolio
companies are termed "eligible portfolio companies." More specifically, in order
to qualify as a BDC, a company must (1) be a domestic company; (2) have
registered a class of its equity securities or have filed a registration
statement with the Securities and Exchange Commission pursuant to Section 12 of
the Securities Exchange Act of 1934; (3) operate for the purpose of investing in
the securities of certain types of portfolio companies, namely immature or
emerging companies and businesses suffering or just recovering from financial
distress; (4) extend significant managerial assistance to such portfolio
companies; and (5) have a majority of "disinterested" directors (as defined in
the 1940 Act).
An eligible portfolio company is, generally, a U.S. company that is not an
investment company and that (1) does not have a class of securities registered
on an exchange or included in the Federal Reserve Board's over-the-counter
margin list; or (2) is actively controlled by a BDC and has an affiliate of a
BDC on its board of directors; or (3) meets such other criteria as may be
established by the Securities and Exchange Commission. Control under the 1940
Act is generally presumed to exist where a BDC owns 25% of the outstanding
voting securities of the company.
The 1940 Act prohibits or restricts companies subject to the 1940 Act from
investing in certain types of companies, such as brokerage firms, insurance
companies, investment banking firms and investment companies. Moreover, the 1940
Act limits the type of assets that BDC's may acquire to "qualifying assets" and
certain assets necessary for its operations (such as office furniture, equipment
and facilities) if, at the time of acquisition, less than 70% of the value of
the BDC's assets consist of qualifying assets. Qualifying assets include: (1)
securities of companies that were eligible portfolio companies at the time the
BDC acquired their securities; (2) securities of bankrupt or insolvent companies
that were eligible at the time of the BDC's initial acquisition of their
securities but are no longer eligible, provided that the BDC has maintained a
substantial portion of its initial investment in those companies; (3) securities
received in exchange for or distributed in or with respect to any of the
foregoing; and (4) cash items, government securities and high-quality short-term
debt. The 1940 Act also places restrictions on the nature of the transactions in
which, and the persons from whom, securities can be purchased in order for the
securities to be considered qualifying assets. These restrictions include
limiting purchases to transactions not involving a public offering and acquiring
securities from either the portfolio company or its officers, directors, or
affiliates.
5
A BDC is permitted to invest in the securities of public companies and
other investments that are not qualifying assets, but those kinds of investments
may not exceed 30% of the BDC's total asset value at the time of the investment.
A BDC must make significant managerial assistance available to the issuers
of eligible portfolio securities in which it invests. Making available
significant managerial assistance means, among other things, any arrangement
whereby the BDC, through its directors, officers or employees, offers to
provide, and, if accepted does provide, significant guidance and counsel
concerning the management, operations or business objectives and policies of a
portfolio company. The portfolio company does not have to accept the BDC's offer
of managerial assistance, and if they do accept may be required to pay
prevailing market rates for the services.
We do not currently have any investments in eligible portfolio companies.
EMPLOYEES
Other than our current sole officer, we do not have any employees, and do
not anticipate having any other employees other than administrative personnel in
the future.
ITEM 1A - RISK FACTORS
On at least an annual basis, we are required to provide our shareholders
with a statement of risk factors and other considerations for their review.
These risk factors and other considerations include:
WE HAVE NOT MADE ANY INVESTMENTS INTO OTHER COMPANIES. We have not yet
made any investments into other companies, and thus we have virtually no assets.
We need to raise capital before we can make investments into, and offer
managerial assistance to, other companies. We may not be successful in raising
capital. If we are successful in raising capital, we may make investments that
turn out to be worthless.
WE HAVE NEVER GENERATED ANY REVENUE, AND WE ARE NOT PROFITABLE. We were
incorporated in March 2001 and have generated no revenue to date. Our primary
activity to date has been development of our business plan, which has changed
since our inception. Our success is dependent upon the successful development of
our business model as a business development company, as to which there is no
assurance. Unanticipated problems, expenses and delays are frequently
encountered in establishing a new business. These include, but are not limited
to, inadequate funding, competition, and investment development. Our failure to
meet any of these conditions would have a materially adverse effect upon us and
may force us to reduce or curtail operations. We may not ever be profitable.
WE NEED TO RAISE CAPITAL IN ORDER TO FULFILL OUR BUSINESS PLAN. To date we
have relied on private funding from our founders and directors, short-term
borrowing, and capital raised from the sale of our common stock to fund
operations. We have generated no revenues and have extremely limited cash
liquidity and capital resources. Any equity financings could result in dilution
to our stockholders. Debt financing may result in high interest expense. Any
financing, if available, may be on unfavorable terms. If adequate funds are not
obtained, we may be required to reduce or curtail operations.
INVESTING IN OUR STOCK IS HIGHLY SPECULATIVE AND YOU COULD LOSE SOME OR
ALL OF YOUR INVESTMENT. The value of our common stock may decline and may be
affected by numerous market conditions, which could result in the loss of some
or the entire amount invested in our stock. The securities markets frequently
experience extreme price and volume fluctuations that affect market prices for
securities of companies generally, and very small capitalization companies in
particular.
6
INVESTING IN OUR STOCK MAY BE INAPPROPRIATE FOR YOUR RISK TOLERANCE. Our
planned investments into other companies, in accordance with our investment
objective and principal strategies, result in a far above average amount of risk
and volatility and may well result in loss of principal.
WE WILL FACE A LOT OF COMPETITION, MOST OF WHICH IS BETTER CAPITALIZED AND
MORE EXPERIENCED THAN US. We will face competition in our investing activities
from private venture capital funds, investment affiliates of large industrial,
technology, service and financial companies, small business investment
companies, wealthy individuals and foreign investors. As a regulated business
development company ("BDC"), we are required to disclose quarterly the name and
business description of portfolio companies and value of any portfolio
securities. Most of our competitors are not subject to this disclosure
requirement. Our obligation to disclose this information could hinder our
ability to invest in certain portfolio companies. Additionally, other
regulations, current and future, may make us less attractive as a potential
investor to a given portfolio company than a private venture capital fund.
WE ARE SUBJECT TO REGULATORY RISKS AS A BUSINESS DEVELOPMENT COMPANY. We
are subject to regulation as a BDC. The loans and other investments that we
expect to make in small business concerns are extremely speculative. Many of
these concerns will be privately held. Even if a public market for their
securities later develops, the securities we purchase are likely to be
restricted from sale or other transfer for significant periods of time. These
securities will be very illiquid.
THE SERVICES OF OUR DIRECTORS AND OFFICER ARE KEY TO OUR FUTURE SUCCESS.
We are dependent for the selection, structuring, closing and monitoring of its
investments on the diligence and skill of our officer, Carl M. Berg, and each of
our directors. Our future success depends to a significant extent on the
continued service and coordination of its senior management team.
WE PLAN TO INVEST PRIMARILY IN SMALL, PRIVATE COMPANIES. There are
significant risks inherent in our planned venture capital business. We intend to
invest a substantial portion of our assets in early stage or start-up companies.
These private businesses tend to be thinly capitalized, unproven small companies
with risky technologies that lack management depth and have not attained
profitability or have no history of operations. Because of the speculative
nature and the lack of a public market for these investments, there is
significantly greater risk of loss than is the case with traditional investment
securities. We expect that some of our investments will be a complete loss or
will be unprofitable and that some will appear to be likely to become successful
but never realize their potential. We intend to be risk seeking rather than risk
averse in our approach to venture capital and other investments. Neither our
investments nor an investment in our stock is intended to constitute a balanced
investment program. We intend to rely to a large extent upon proceeds from sales
of investments rather than investment income to defray a significant portion of
our operating expenses. Such sales are unpredictable and may not occur. The
terrorist acts in the United States of September 11, 2001 are the type of events
that could severely impact a small company that does not have as many resources
to ride out market downturns and would need immediate investment capital that
might be temporarily unavailable.
THERE WILL BE NO LIQUID MARKET FOR OUR PORTFOLIO INVESTMENTS. Most of our
intended investments will be either equity securities acquired directly from
small companies or below investment grade subordinated debt securities. Our
portfolio of equity securities will usually be subject to restrictions on resale
or otherwise have no established trading market. The illiquidity of most of our
portfolio may adversely affect our ability to dispose of such securities at
times when it may be advantageous for us.
7
Even if our portfolio companies are able to develop commercially viable
products, the market for new products and services is highly competitive and
rapidly changing. Commercial success is difficult to predict and the marketing
efforts of our expected portfolio companies may not be successful.
OUR BOARD OF DIRECTORS WILL VALUE OUR PORTFOLIO INVESTMENTS. There is
typically no public market of equity securities of the small privately held
companies in which we intend to invest. As a result, the valuation of the equity
securities in our portfolio are likely to be stated at fair value as determined
by the good faith estimate of our Board of Directors. In the absence of a
readily ascertainable market value, the estimated value of our portfolio of
securities may differ significantly, favorably or unfavorably, from the values
that would be placed on the portfolio if a ready market for the equity
securities existed.
OUR QUARTERLY RESULTS WILL FLUCTUATE. Our quarterly operating results
could fluctuate as a result of a number of factors. These factors include, among
other things, variations in and the timing of the recognition of realized and
unrealized gains or losses, the degree to which portfolio companies encounter
competition in their markets and general economic conditions. As a result of
these factors, results for any one quarter should not be relied upon as being
indicative of performance in future quarters.
ITEM 1B - UNRESOLVED STAFF COMMENTS
This Item is not applicable to us as we are not an accelerated filer, a
large accelerated filer, or a well-seasoned issuer; however, we have not
received written comments from the Commission staff regarding our periodic or
current reports under the Securities Exchange Act of 1934 within the last 180
days before the end of our last fiscal year.
ITEM 2 - PROPERTIES
We utilize the office of our legal counsel, The Lebrecht Group, APLC,
under a verbal agreement where we do not pay rent or reimburse him for the
minimal expenses incurred.
ITEM 3 - LEGAL PROCEEDINGS
We are not a party to or otherwise involved in any legal proceedings.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the
three month period ended December 31, 2005.
8
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
During the quarter ended March 31, 2005, a market maker filed an
application to list our securities on the OTC Bulletin Board of the National
Association of Securities Dealers, Inc. On October 10, 2005, we were informed by
the NASD that our common stock was approved by the NASD for trading on the OTC
Bulletin Board Our trading symbol is MGBD. Our common stock has not traded since
we were listed on the OTC Bulletin Board and there is no assurance that there
will be liquidity in the common stock.
The following table sets forth the high and low bid information for each
quarter within the two most recent fiscal years, as provided by the Nasdaq Stock
Markets, Inc. The information reflects prices between dealers, and does not
include retail markup, markdown, or commission, and may not represent actual
transactions.
BID PRICES
FISCAL YEAR ----------------------------
ENDED
DECEMBER 31, PERIOD HIGH LOW
-------------- ----------------------- ---------- ----------
2003 First Quarter N/A N/A
Second Quarter N/A N/A
Third Quarter N/A N/A
Fourth Quarter N/A N/A
2004 First Quarter N/A N/A
Second Quarter N/A N/A
Third Quarter N/A N/A
Fourth Quarter N/A N/A
2005 First Quarter N/A N/A
Second Quarter N/A N/A
Third Quarter N/A N/A
Fourth Quarter $ - $ -
2006 First Quarter (through $ - $ -
March 30, 2006)
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure relating to the market for penny stocks in connection with
trades in any stock defined as a penny stock. The Commission has adopted
regulations that generally define a penny stock to be any equity security that
has a market price of less than $5.00 per share, subject to a few exceptions
which we do not meet. Unless an exception is available, the regulations require
the delivery, prior to any transaction involving a penny stock, of a disclosure
schedule explaining the penny stock market and the risks associated therewith.
9
There are currently warrants outstanding to acquire 333,334 shares of our
common stock at $0.15 per share. Other than these warrants, there are no
outstanding options or warrants to purchase, or securities convertible into,
shares of our common stock. If we are successful in getting our common stock
traded, of the 6,550,512 shares of common stock outstanding, (i) 10,000 shares
held by 20 shareholders of record were sold pursuant to an effective
registration statement and may be sold without restriction, (ii) 13,000 shares
held by 12 shareholders of record were sold in a private placement over two
years ago and the resale of those shares was subsequently registered, and thus
the shares may be sold either pursuant to the effective registration statement
or pursuant to Rule 144(k), (iii) 450,000 shares are held by one shareholder who
may sell all of them pursuant to Rule 144(k), and (iv) 360,845 shares held by 42
shareholders were acquired pursuant to an exemption from registration under
Regulation E, promulgated under the Securities Act, and may be sold without
restriction. In addition to the above, Mr. Carl Berg, our sole officer and
director, is the holder of 5,550,000 shares and may sell up to 63,838 shares
every 90 days pursuant to Rule 144.
The number of holders of record of shares of our common stock is one
hundred thirty three (133).
There have been no cash dividends declared on our common stock. Dividends
are declared at the sole discretion of our Board of Directors.
ITEM 6 - SELECTED FINANCIAL DATA
----------------------------------------------------------------------
M-GAB DEVELOPMENT CORP. For the Years Ended December 31,
----------------------------------------------------------------------
2005 2004 2003 2002 2001(1)
---------- -------- ----------- ---------- -----------
Statement of Operations Data:
-----------------------------------
Total revenues $ - - - - -
Income (loss) from continuing
operations (30,026) 57,059 (63,253) (37,376) (19,575)
Net income (loss) (30,026) 57,059 (63,253) (37,376) (19,575)
Net income (loss) per common
share from continuing operations (0.01) 0.01 (0.01) (0.01) (0.00)
Balance Sheet Data:
-----------------------------------
Current assets $ - 17,403 - 6,437 -
Total assets 25,000 17,403 - 6,437 -
Current liabilities 21,947 9,324 93,105 46,289 3,476
Total liabilities 21,947 9,324 103,105 46,289 3,476
Total stockholders' equity
(deficit) 3,053 8,079 (103,105) (39,852) (3,476)
Total dividends per common share - - - - -
(1) Statement of Operations Data is from inception (March 2001) through
December 31, 2001.
10
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Our Management's Discussion and Analysis contains not only statements that
are historical facts, but also statements that are forward-looking (within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934). Forward-looking statements are, by their very
nature, uncertain and risky. These risks and uncertainties include
international, national and local general economic and market conditions;
demographic changes; our ability to sustain, manage, or forecast growth; our
ability to successfully make and integrate acquisitions; existing government
regulations and changes in, or the failure to comply with, government
regulations; adverse publicity; competition; fluctuations and difficulty in
forecasting operating results; changes in business strategy or development
plans; business disruptions; the ability to attract and retain qualified
personnel; the ability to protect technology; and other risks that might be
detailed from time to time in our filings with the Securities and Exchange
Commission.
Although the forward-looking statements in this Annual Report reflect the
good faith judgment of our management, such statements can only be based on
facts and factors currently known by them. Consequently, and because
forward-looking statements are inherently subject to risks and uncertainties,
the actual results and outcomes may differ materially from the results and
outcomes discussed in the forward-looking statements. You are urged to carefully
review and consider the various disclosures made by us in this report and in our
other reports as we attempt to advise interested parties of the risks and
factors that may affect our business, financial condition, and results of
operations and prospects.
PLAN OF OPERATION
We were incorporated in March 2001. On May 16, 2003, we filed an election
to be treated as a business development company ("BDC") under the Investment
Company Act of 1940 (the "1940 Act"), which became effective on the date of
filing.
Subsequent to the BDC election our principal business is to make venture
capital investments in early-stage and/or developing enterprises that are
principally engaged in the development or exploitation of inventions,
technological improvements, and new or unique products and services. Our
principal objective is long-term capital appreciation. We may invest in debt
securities of these companies, or may acquire an equity interest in the form of
common or preferred stock, warrants or options to acquire stock or the right to
convert the debt securities into stock. We may invest alone, or as part of a
larger investment group. Consistent with our status as a BDC and the purposes of
the regulatory framework for BDC's under the 1940 Act, we will provide
managerial assistance, potentially in the form of a consulting agreement or in
the form of a board of director's seat, to the developing companies in which we
invest.
In addition, we may acquire either a minority or controlling interest in
mature companies in a roll-up strategy. It is anticipated that any acquisitions
will be primarily in exchange for our common stock, or a combination of cash and
stock. The principal objective of acquisitions pursuant to a roll-up strategy
would be to consolidate an industry and either sell the acquired entities as a
larger unit, or take the unit public through an initial public offering,
spin-off to our shareholders, or reverse merger into a publicly traded shell
corporation.
We operate as an internally managed investment company whereby our
officers and employees conduct our operations under the general supervision of
our Board of Directors. We have not elected to qualify to be taxed as a
regulated investment company as defined under Subchapter M of the Internal
Revenue Code.
11
During the quarter ended March 31, 2005, a market maker filed an
application to list our securities on the OTC Bulletin Board. On October 10,
2005, we were informed by the NASD that our common stock was approved by the
NASD for trading on the OTC Bulletin Board. Our trading symbol is MGBD.
Management does not anticipate that we will engage in any material product
research and development, nor do we anticipate that we will purchase a plant or
significant equipment.
Our financial statements have been prepared assuming we will continue as a
going concern. Because we have not generated any revenues to date and have
minimal capital resources, our Certified Public Accountants included an
explanatory paragraph in their report raising substantial doubt about our
ability to continue as a going concern.
Subsequent to our fiscal year end, on March 15, 2006, we entered into an
Agreement and Plan of Merger with China Agro Sciences Corp., a Florida
corporation ("China Agro") whereby, at the closing, China Agro will merge with
DaLian Acquisition Corp., a Florida corporation that is our wholly-owned
subsidiary. As a result of the merger, China Agro will become a wholly-owned
subsidiary of M-GAB, and we will issue 13,349,488 shares of M-GAB common stock
to the former owners of China Agro. At the same time, certain of the China Agro
shareholders will acquire 5,500,000 M-GAB shares directly from our majority
shareholder, director, and sole officer, Carl M. Berg, and his holding company.
Following the closing, the China Agro shareholders will own 18,849,488 shares of
our common stock, or 94.2% of our then-outstanding 20,000,000 shares. As a
condition precedent to the closing, we are required to take certain steps that
will require shareholder approval, including terminating our status as a
Business Development Company under the Investment Company Act of 1940. We
anticipate that a closing will take place in late April 2006.
REGULATION AS A BDC
Although the 1940 Act exempts a BDC from registration under that Act, it
contains significant limitations on the operations of BDC's. Among other things,
the 1940 Act contains prohibitions and restrictions relating to transactions
between a BDC and its affiliates, principal underwriters and affiliates of its
affiliates or underwriters, and it requires that a majority of the BDC's
directors be persons other than "interested persons," as defined under the 1940
Act. The 1940 Act also prohibits a BDC from changing the nature of its business
so as to cease to be, or to withdraw its election as, a BDC unless so authorized
by the vote of the holders of a majority of its outstanding voting securities.
BDC's are not required to maintain fundamental investment policies relating to
diversification and concentration of investments within a single industry.
Generally, a BDC must be primarily engaged in the business of furnishing
capital and providing managerial expertise to companies that do not have ready
access to capital through conventional financial channels. Such portfolio
companies are termed "eligible portfolio companies." More specifically, in order
to qualify as a BDC, a company must (1) be a domestic company; (2) have
registered a class of its equity securities or have filed a registration
statement with the Securities and Exchange Commission pursuant to Section 12 of
the Securities Exchange Act of 1934; (3) operate for the purpose of investing in
the securities of certain types of portfolio companies, namely immature or
emerging companies and businesses suffering or just recovering from financial
distress; (4) extend significant managerial assistance to such portfolio
companies; and (5) have a majority of "disinterested" directors (as defined in
the 1940 Act).
12
An eligible portfolio company is, generally, a U.S. company that is not an
investment company and that (1) does not have a class of securities registered
on an exchange or included in the Federal Reserve Board's over-the-counter
margin list; or (2) is actively controlled by a BDC and has an affiliate of a
BDC on its board of directors; or (3) meets such other criteria as may be
established by the Securities and Exchange Commission. Control under the 1940
Act is generally presumed to exist where a BDC owns 25% of the outstanding
voting securities of the company.
The 1940 Act prohibits or restricts companies subject to the 1940 Act from
investing in certain types of companies, such as brokerage firms, insurance
companies, investment banking firms and investment companies. Moreover, the 1940
Act limits the type of assets that BDC's may acquire to "qualifying assets" and
certain assets necessary for its operations (such as office furniture, equipment
and facilities) if, at the time of acquisition, less than 70% of the value of
the BDC's assets consist of qualifying assets. Qualifying assets include: (1)
securities of companies that were eligible portfolio companies at the time the
BDC acquired their securities; (2) securities of bankrupt or insolvent companies
that were eligible at the time of the BDC's initial acquisition of their
securities but are no longer eligible, provided that the BDC has maintained a
substantial portion of its initial investment in those companies; (3) securities
received in exchange for or distributed in or with respect to any of the
foregoing; and (4) cash items, government securities and high-quality short-term
debt. The 1940 Act also places restrictions on the nature of the transactions in
which, and the persons from whom, securities can be purchased in order for the
securities to be considered qualifying assets. These restrictions include
limiting purchases to transactions not involving a public offering and acquiring
securities from either the portfolio company or its officers, directors, or
affiliates.
A BDC is permitted to invest in the securities of public companies and
other investments that are not qualifying assets, but those kinds of investments
may not exceed 30% of the BDC's total asset value at the time of the investment.
A BDC must make significant managerial assistance available to the issuers
of eligible portfolio securities in which it invests. Making available
significant managerial assistance means, among other things, any arrangement
whereby the BDC, through its directors, officers or employees, offers to
provide, and, if accepted does provide, significant guidance and counsel
concerning the management, operations or business objectives and policies of a
portfolio company. The portfolio company does not have to accept the BDC's offer
of managerial assistance, and if they do accept may be required to pay
prevailing market rates for the services.
The Company does not currently have any investments in eligible portfolio
companies. However, we are actively seeking quality eligible portfolio companies
in which to make an investment and provide managerial assistance.
YEAR ENDED DECEMBER 31, 2005 COMPARED TO THE YEAR ENDED DECEMBER 31, 2004
RESULTS OF OPERATIONS
Introduction
------------
We did not have any revenues for either period presented. We do not
anticipate having revenue from our BDC activities until we begin making
investments in eligible portfolio companies and subsequently liquidate those
investments. If the China Agro transaction described above closes it will have
an unknown impact on our ability to generate revenues in the future. Because we
are actively seeking eligible portfolio companies and may close the China Agro
transaction we anticipate that our revenues from quarter-to-quarter may differ
significantly depending on whether we realize a return on future investments or
the impact of the China Agro transaction. Our operating expenses increased
slightly when compared to the prior year. We did not record any other income in
the year ended December 31, 2005, which differed from the previous year when we
recorded other income of $83,355 related entirely to forgiveness of debt by two
of our shareholders, one of which was Carl Berg, our sole officer and a
director. A breakdown of our operating expenses and other expenses, as well as
management's explanation of each, is outlined below.
13
Revenues and Income (Loss) from Operations
------------------------------------------
As stated above, because we do not have any investments in eligible
portfolio companies, we did not have any revenues for the either period. We
generated a net loss of ($30,026) for the year ended December 31, 2005, compared
to net income of $57,059 for the year ended December 31, 2004. Our net income
for the year ended December 31, 2004 was primarily attributed to forgiveness of
debt in the amount of $83,355 which was recorded as other income in the
accompanying financial statements for the twelve months ended December 31, 2004.
Our expenses for the year's ended December 31, 2005 and 2004 were made up
entirely of general and administrative expenses. Our general and administrative
expenses for 2005 consisted of $25,237 in accounting and other professional
fees, and $4,789 in transfer agent fees and miscellaneous expenses, such as
postage, facsimiles, and copies. Our general and administrative expenses for
2004 consisted of $23,480 in accounting and other professional fees, $1,375 in
transfer agent fees, and $1,441 in miscellaneous expenses, such as postage,
facsimiles, and copies.
Net Income (Loss)
-----------------
We had a net loss of ($30,026) for the year ended December 31, 2005,
compared to net income for the year ended December 31, 2004 of $57,059. The net
loss in the current year is due to the fact we did not have any revenues and
incurred general and administrative expenses related to the reporting
obligations necessary to keep the company current in our reporting obligations.
Our net income for the year ended December 31, 2004 is a direct result of the
forgiveness of debt in the amount of $83,355 which was recorded as other income
in the accompanying financial statements for the twelve months ended December
31, 2004. Because we do not have any investments in eligible portfolio
companies, and we have not closed the China Agro transaction, we anticipate that
our net income (loss) could differ significantly from period to period.
LIQUIDITY AND CAPITAL RESOURCES
Introduction
------------
As of December 31, 2005, we had no cash and our only asset was an
investment in NuQuest, Inc. common stock valued at $25,000. Our total current
liabilities as of December 31, 2005 were $21,947 consisting entirely of accrued
liabilities. Although our assets exceeded our liabilities on December 31, 2005,
given our lack of investments in eligible portfolio companies and the potential
closing of the China Agro transaction, our financial results at the end of
future quarters could differ significantly. Until we begin to realize a return
from our investment in eligible portfolio companies, we will have to fund
operations from the sale of our stock and from loans. We have been successful in
obtaining the necessary funding in the past, and anticipate that we will be able
to continue to do so in the future.
14
Our cash, total current assets, total assets, total current liabilities,
and total liabilities as of December 31, 2005 and September 30, 2005 are as
follows:
December 31, September 30,
2005 2005 Change
----------------- ----------------- ---------------
Cash $ - $ - $ -
Total current assets - - -
Total current assets 25,000 25,000 -
Total current liabilities 21,947 13,062 8,885
Total liabilities 21,947 13,062 8,885
Cash Requirements
-----------------
Currently, our cash requirements are minimal, related only to the cost of
maintaining the Company in good standing. Last year we raised a small amount of
capital through an offering under Regulation E, which covered our expenses for
approximately next twelve (12) months. If necessary, we anticipate raising
additional funds through another offering under Regulation E to fund our
operations until we begin making investments into eligible portfolio companies
or for the next twelve (12) months. Additionally, our two primary shareholders,
Mr. Berg and Mr. Lebrecht, have verbally agreed to advance funds to us to fund
our minimal cash requirements that cannot otherwise be covered by the proceeds
from the offering. For the year ended December 31, 2005 our net cash used in
operating activities was ($34,604). Due to our lack of substantial operations to
date we do not believe this is necessarily indicative of our cash flow needs for
future years when we may be actively providing managerial assistance to eligible
portfolio companies, or we close the transaction with China Agro.
Sources and Uses of Cash
------------------------
Operations
We did not receive any cash from operations for the year ended December
31, 2005. As noted above, we used $34,604 in cash for operating activities
during this period. We anticipate that both our cash generated from operations
and used for operations will increase as soon as we have investments in eligible
portfolio companies or we close the transaction with China Agro. Until that time
we believe this figure will be fairly indicative our cash generation and cash
used for operations in a twelve month period.
Financing
During the year ended December 31, 2005 we paid our operating expenses
primarily from an advance from a shareholder totaling $17,201. We anticipate
that we will have to continue to pay our operating expenses out of the proceeds
from financing activities or from advances from our shareholders until we begin
to realize a return from our investments in eligible portfolio companies or we
close the China Agro transaction.
Debt Instruments, Guarantees, and Related Covenants
---------------------------------------------------
Currently, we do not have any debt instruments, guarantees or related
covenants.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of the Company's financial condition and
results of operations are based upon its consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses.
15
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements that are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is deemed by our management to be
material to investors.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since we have very few assets and do not have any investments in eligible
portfolio companies there is no quantitative information, as of the end of
December 31, 2005, about market risk that has any impact on our present
business. Once we begin making investments in eligible portfolio companies we
there will be market risk sensitive instruments and we will disclose the
applicable market risk information at that time.
Our primary financial instruments are cash in banks and money market
instruments. We do not believe that these instruments are subject to material
potential near-term losses in future earnings from reasonably possible near-term
changes in market rates or prices. We do not have derivative financial
instruments for speculative or trading purposes. We are not currently exposed to
any material currency exchange risk.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Report of Independent Certified Public Accountants
Balance Sheet F-1
Statement of Operations F-2
Statement of Stockholders Equity F-3
Statement of Cash Flows F-4
Notes to Financial Statements F-5
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no events required to be reported by this Item 9.
16
ITEM 9A - CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer (or
those persons performing similar functions), after evaluating the effectiveness
of the Company's disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended)
as of a date within 90 days of the filing of this annual report (the "Evaluation
Date"), have concluded that, as of the Evaluation Date, the Company's disclosure
controls and procedures were effective to ensure the timely collection,
evaluation and disclosure of information relating to the Company that would
potentially be subject to disclosure under the Securities Exchange Act of 1934,
as amended, and the rules and regulations promulgated thereunder. There were no
significant changes in the Company's internal controls or in other factors that
could significantly affect the internal controls subsequent to the Evaluation
Date.
ITEM 9B - OTHER INFORMATION
All information required to be filed on a Form 8-K during the three months
ended December 31, 2005 was filed with the Commission on a Form 8-K.
17
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names and ages of the current directors
and executive officers of the Company, the principal offices and positions with
the Company held by each person and the date such person became a director or
executive officer of the Company. The executive officers of the Company are
elected annually by the Board of Directors. The directors serve one-year terms
until their successors are elected. The executive officers serve terms of one
year or until their death, resignation or removal by the Board of Directors.
Unless described below, there are no family relationships among any of the
directors and officers.
Name Age Position(s)
----------------------- ---------- ------------------------------------
Carl M. Berg 36 Chairman of the Board, President,
Secretary, and Treasurer (2001)
Kevin J. Gadawski 38 Director (2003)
Mark Stewart 38 Director (2003)
CARL M. BERG has served as our director and officer since our inception.
He also currently serves as a company executive with STSN, Inc., a provider of
wired and wireless broadband communications for business travelers, where he has
served since 2003. Prior to STSN, from 1999 to 2003, he was a company executive
with Sandlot Corporation, a startup subscription management software company.
Sandlot is involved in managing subscription-based e-commerce. Mr. Berg directed
business initiatives as the Business Development Manager, which resulted in
growth of the company from 10 to 75 employees worldwide with offices in the U.S.
and Windsor, United Kingdom. Prior to Sandlot Corporation, from 1992 to 1999,
Mr. Berg served in various management positions in the technology division of
Ameritech Corporation. His roles varied from the overall management of library
automation implementation projects to directing the implementation division of
roughly 75 technical staff. Job titles included Project Coordinator, Project
Manager and Director of Implementation.
KEVIN J. GADAWSKI joined our Board of Directors in May 2003. He also
serves as the President of Worldwide Medical in Lake Forest, California, where
he previously served as the Chief Operating Officer and Chief Financial Officer
for Worldwide Medical Corporation from May of 2002. From May of 2001 to May of
2002, Mr. Gadawski served as the Chief Financial Officer of California Software
Corporation in Irvine, California. From June of 2000 through May of 2001, Mr.
Gadawski was the Chief Financial Officer for e-net Financial.com in Costa Mesa,
California. His primary duties included financial reporting and financial
management. For the five years prior to that, Mr. Gadawski served in various
capacities including Director of Internal Audit and Divisional Controller with
Huffy Corporation in Miamisburg, Ohio. Mr. Gadawski began his career in the
audit department of KMPG Peat Marwick, LLP.
MARK STEWART joined our Board of Directors in November 2003. Mr. Stewart
has been a principal with Mark Stewart Securities, Inc., a NASD broker-dealer,
since 1996. Mr. Stewart started his career with American Express Financial
Advisors (IDS) in 1991, and served as head trader at numerous firms from 1991 to
1996.
18
Audit Committee
---------------
On May 16, 2003, an Audit Committee of the Board of Directors, established
in accordance with section 3(a)(58)(A) of the Exchange Act, was formed. The
directors who are members of the Audit Committee are Kevin J. Gadawski and Mark
Stewart, with Mr. Gadawski considered an audit committee financial expert and an
independent director.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
--------------------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers and persons who own more than ten
percent of a registered class of the Company's equity securities to file with
the SEC initial reports of ownership and reports of changes in ownership of
Common Stock and other equity securities of the Company. Officers, directors and
greater than ten percent shareholders are required by SEC regulations to furnish
the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, none of the required parties are delinquent in
their 16(a) filings.
Code of Ethics
--------------
We have not adopted a written code of ethics, primarily because we believe
and understand that our officers and directors adhere to and follow ethical
standards without the necessity of a written policy.
ITEM 11 - EXECUTIVE COMPENSATION
None of our employees are subject to a written employment agreement. Our
president elected to forego a salary during the early developmental stages, and
also provided office space. We estimate the value of these services to be $6,000
for each year for the years ended December 31, 2005 and 2003. As of December 31,
2004 we did not have any amounts owed to our president as he elected to forgive
any outstanding amounts he was owed and to forego a salary until further notice.
On May 15, 2001, our directors and shareholders approved the M-GAB, Inc.
2001 Stock Option Plan, effective June 1, 2001. The plan offers selected
employees, directors, and consultants an opportunity to acquire our common
stock, and serves to encourage such persons to remain employed by us and to
attract new employees. The plan allows for the award of stock and options, up to
600,000 shares of our common stock. In November 2003, we agreed to issue options
to acquire 600,000 shares under the Plan to our two independent directors;
however, these options will not be issued until such time as approved by the
Commission in accordance with rules and regulations applicable to BDC's. Our
Application For an Order Pursuant to Section 61(a)(3)(B) of The Investment
Company Act of 1940 to Permit the Issuance of Stock Options to Non-Interested
Directors is currently pending before the Commission. We hope to receive
approval to issue the options to our non-interested directors during the second
quarter of our fiscal year ended December 31, 2005.
The Summary Compensation Table shows certain compensation information for
services rendered in all capacities for the fiscal years ended December 31, 2004
and 2003. Other than as set forth herein, no executive officer's salary and
bonus exceeded $100,000 in any of the applicable years. The following
information includes the dollar value of base salaries, bonus awards, the number
of stock options granted and certain other compensation, if any, whether paid or
deferred.
19
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------------------ -----------------------------------------------------------
AWARDS PAYOUTS
------------------------------ -------------------------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
NAME AND SALARY BONUS COMPENSATION AWARDS OPTIONS SARS PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
Carl M. Berg 2005 -0- -0- $-0- -0- -0- -0- -0-
Chairman, President, 2004 -0- -0- $-0- -0- -0- -0- -0-
Secretary, Treasurer
Kevin J. Gadawski 2005 -0- -0- $5,000 (2) -0- -0- -0- -0-
Director 2004 -0- -0- $5,000 (3) -0- -0- -0- -0-
Mark Stewart 2005 -0- -0- $-0- -0- -0- -0- -0-
Director 2004 -0- -0- $-0- -0- -0- -0- -0-
(1) This amount was accrued until March 26, 2004, when Mr. Berg elected for
forgive all amounts owed to him, as well as any future salary until
further notice.
(2) As of December 31, 2005, Mr. Gadawski received $3,750 of this amount. The
other $1,250 has been accrued. (3) Mr. Gadawski received $2,500 of this
amount in the year end December 31, 2004. The other $2,500 was paid in the
year ended December 31, 2005.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
NUMBER OF SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS/SARS GRANTED EXERCISE OR
OPTIONS/SARS GRANTED TO EMPLOYEES IN FISCAL BASE PRICE
NAME (#) YEAR ($/SH) EXPIRATION DATE
Carl M. Berg -0- N/A N/A N/A
Kevin J. Gadawski -0- N/A N/A N/A
Mark Stewart -0- N/A N/A N/A
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
SHARES ACQUIRED SECURITIES UNDERLYING OPTION/SARS
ON VALUE OPTIONS/SARS AT FY-END AT FY-END
EXERCISE REALIZED (#) ($)
NAME (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
Carl M. Berg N/A N/A N/A N/A
Kevin J. Gadawski N/A N/A N/A N/A
Mark Stewart N/A N/A N/A N/A
20
COMPENSATION OF DIRECTORS
In November 2003, we agreed to issue to each of Mr. Gadawski and Mr.
Stewart options to acquire 300,000 shares of our common stock for serving as
directors of the Corporation. The issuance of the options is subject to approval
of the SEC pursuant to provisions of the Investment Company Act of 1940, and
will not be issued until the issuance is approved by the SEC. The options are to
be exercisable for a period of ten years from their grant date, at an exercise
price equal to the fair market value on the grant date, and will expire upon
their resignation from the Board. Our Application For an Order Pursuant to
Section 61(a)(3)(B) of The Investment Company Act of 1940 to Permit the Issuance
of Stock Options to Non-Interested Directors is currently pending before the
Commission. We hope to receive approval to issue the options to our
non-interested directors during the second quarter of our fiscal year ended
December 31, 2006.
In addition, we have agreed to pay Mr. Gadawski $1,250 per quarter for
additional consulting services.
Mr. Berg has not received any compensation for serving as a director.
Other than as set forth herein, no compensation has been given to any of the
directors, although they may be reimbursed for any pre-approved out-of-pocket
expenses.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth, as of March 30, 2006, certain information
with respect to the Company's equity securities owned of record or beneficially
by (i) each Officer and Director of the Company; (ii) each person who owns
beneficially more than 5% of each class of the Company's outstanding equity
securities; and (iii) all Directors and Executive Officers as a group.
Percentage of
Nature of Common Stock Common Stock
Name and Address (1) Affiliation Ownership Ownership (2)
------------------------------ ------------------- -------------------- ---------------------
Carl M. Berg Chairman of the 5,550,000 (3) 84.7%
Board, President,
Secretary and
Treasurer
Brian A. Lebrecht (4) 5% Shareholder 450,000 6.8%
Kevin J. Gadawski Independent 300,500 (5)(6) 4.6% (5)
Director
Mark Stewart Independent 300,000 (5) 4.6% (5)
Director
All Officers and Directors 6,150,500 (3)(5)(6) 93.9% (5)
as a Group
(3 Persons)
21
(1) Unless stated otherwise, the address of each affiliate is c/o M-GAB
Development Corporation, 9900 Research Drive, Irvine, CA 92618.
(2) Unless otherwise indicated, based on 6,550,512 shares of common
stock issued and outstanding. Shares of common stock subject to
options or warrants currently exercisable, or exercisable within 60
days, are deemed outstanding for purposes of computing the
percentage of the person holding such options or warrants, but are
not deemed outstanding for purposes of computing the percentage of
any other person.
(3) Includes 3,000,000 shares held of record by Sadie, LLC, an entity
wholly-owned and controlled by Mr. Berg. Mr. Berg is our sole
officer.
(4) Mr. Lebrecht is President of The Lebrecht Group, APLC, which serves
as our securities counsel.
(5) Includes options to acquire 300,000 shares of common stock which
will be granted to each of Mr. Gadawski and Mr. Stewart upon
approval by the Commission in compliance with the Investment Company
Act of 1940.
(6) Includes 500 shares held by Mr. Gadawski's spouse.
The issuer is not aware of any person who owns of record, or is known to
own beneficially, five percent or more of the outstanding securities of any
class of the issuer, other than as set forth above. The issuer is not aware of
any person who controls the issuer as specified in section 2(a)(1) of the
Investment Company Act of 1940. There are no classes of stock other than common
stock issued or outstanding. There are currently warrants outstanding to acquire
333,334 shares of our common stock at $0.15 per share, and other than as set
forth herein, there are no options, warrants, or other rights to acquire common
stock outstanding. The Company does not have an investment advisor.
Subsequent to our fiscal year end, on March 15, 2006, we entered into an
Agreement and Plan of Merger with China Agro Sciences Corp., a Florida
corporation ("China Agro") whereby, at the closing, China Agro will merge with
DaLian Acquisition Corp., a Florida corporation that is our wholly-owned
subsidiary. As a result of the merger, China Agro will become a wholly-owned
subsidiary of M-GAB, and we will issue 13,349,488 shares of M-GAB common stock
to the former owners of China Agro. At the same time, certain of the China Agro
shareholders will acquire 5,500,000 M-GAB shares directly from our majority
shareholder, director, and sole officer, Carl M. Berg, and his holding company.
Following the closing, the China Agro shareholders will own 18,849,488 shares of
our common stock, or 94.2% of our then-outstanding 20,000,000 shares. As a
condition precedent to the closing, we are required to take certain steps that
will require shareholder approval, including terminating our status as a
Business Development Company under the Investment Company Act of 1940. We
anticipate that a closing will take place in late April 2006. If this
transaction closes it will result in a change of control.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 20, 2001, our founder, Carl M. Berg, purchased 2,550,000 shares
of common stock for $255.00. On April 20, 2001, Sadie, LLC, an entity
wholly-owned and controlled by Mr. Berg, purchased 3,000,000 shares of common
stock for $300.00. Also on April 20, 2001, Brian A. Lebrecht, our legal counsel,
purchased 450,000 shares of common stock for $45.00. The total purchase price
from these transactions was $600.00.
We have engaged one of our shareholders, Mr. Lebrecht, as our corporate
counsel. For the twelve months ended December 31, 2005, we did not incur any
legal fees to Mr. Lebrecht's law firm since he has agreed to forego all fees for
legal services related to our Company until further notice. Mr. Lebrecht also
agreed to forgive amounts due to his law firm in 2004.
22
Our President, Mr. Berg, has elected to forego a salary during our early
development stages. He also provided office space for us. We estimate the value
of these services to be $6,000 per year for the twelve months ended December 31,
2005 and 2003. As of December 31, 2004, we did not have any amounts owed to Mr.
Berg as he has agreed to forgive all amounts we owed to him until further
notice. In addition, one of our directors, Mr. Gadawski, provides consulting
services to us
In November 2003, we agreed to issue to each of Mr. Gadawski and Mr.
Stewart options to acquire 300,000 shares of our common stock for serving as
directors of the Corporation. The issuance of the options is subject to approval
of the SEC pursuant to provisions of the Investment Company Act of 1940. The
options are to be exercisable for a period of ten years from their grant date,
at an exercise price of $0.15 per share, and will expire upon their resignation
from the Board. In addition, we have agreed to pay Mr. Gadawski $1,250 per
quarter for consulting services.
ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES
AUDIT FEES
During the fiscal years ended December 31, 2005 and 2004, Ramirez
International billed us $19,000 and $18,860, respectively, in fees for
professional services for the audit of our annual financial statements and
review of financial statements included in our Forms 10-KSB and 10-QSB.
AUDIT - RELATED FEES
During the fiscal years ended December 31, 2005 and 2004, Ramirez
International billed us $$19,000 and $18,860, respectively, in fees for
assurance and related services related to the performance of the audit and
review of the Company's financial statements.
TAX FEES
During the fiscal years ended December 31, 2005 and 2004, Ramirez
International billed us $1,020 and $800, respectively, in fees for professional
services for tax planning and preparation.
ALL OTHER FEES
During the fiscal years ended December 31, 2005 and 2004, Ramirez
International did not bill the Company for any other fees.
Of the fees described above for the fiscal year ended December 31, 2005,
100% were approved by the by the Audit Committee of the Board of Directors of
the Company. Of the fees described above for the fiscal year ended December 31,
2004, 100% were either approved in advance by the Audit Committee if it was in
existence at the time of approval, or subsequently ratified by the Audit
Committee.
23
PART IV
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
3.1(1) Articles of Incorporation of M-GAB Development Corporation
3.2(1) Bylaws of M-GAB Development Corporation
10.1(2) M-GAB Development Corporation Amended and Restated 2001
Omnibus Securities Plan
10.2(2) M-GAB Development Corporation 2004 Omnibus Securities Plan
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
32.1 Chief Executive Officer Certification Pursuant to 18 USC,
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer Certification Pursuant to 18 USC,
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(1) Incorporated by reference from our Registration Statement on Form
SB-2 filed with the Commission on August 31, 2001.
(2) Incorporated by reference from our annual Form 10-KSB dated
December 31, 2005, as filed with the Commission on March 25,
2005.
(B) REPORTS ON FORM 8-K
We made no 8-K filings during the quarter ended December 31, 2005.
24
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
M-GAB Development Corporation
Dated: March 30, 2006 /s/ Carl M. Berg
------------------------
By: Carl M. Berg
Its:President, Chief Executive Officer,
Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Dated: March 30, 2006 /s/ Carl M. Berg
------------------------
By: Carl M. Berg, Director
Dated: March 30, 2006 /s/ Kevin J. Gadawski
------------------------
By: Kevin J. Gadawski, Director
Dated: March 30, 2006 /s/ Mark Stewart
------------------------
By: Mark Stewart, Director
25
M-GAB DEVELOPMENT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM
DECEMBER 31, 2005 AND 2004
REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM
-----------------------------------------------------------------
To: The Board of Directors of
M-GAB DEVELOPMENT CORPORATION
We have audited the accompanying balance sheets of M-GAB DEVELOPMENT CORPORATION
(the "Company") (a Development Stage Company) as of December 31, 2005 and 2004
and the related statements of operations, stockholders' equity and cash flows
for each of the years then ended and the period from inception (March 27, 2001)
through December 31, 2005. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2005 and 2004 and the results of its operations and its cash flows for each of
the years then ended and the period from inception (March 27, 2001) through
December 31, 2005, in conformity with accounting principles generally accepted
in the United States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company has no established source of revenue and is dependent on
its ability to raise substantial amounts of capital. Management's plans in
regard to these matters are also described in Note 2. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
RAMIREZ INTERNATIONAL
FINANCIAL & ACCOUNTING SERVICES, INC.
March 30, 2006
Irvine, CA
M-GAB DEVELOPMENT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
DECEMBER 31,
2005 2004
-----------------------------
ASSETS
Current assets:
Cash $ -- $ 17,403
Non current assets:
Investment in stock 25,000 --
--------------------------
Total assets $ 25,000 $ 17,403
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 4,746 $ 9,324
Payable to stockholder 17,201 --
--------------------------
Total current liabilities 21,947 9,324
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, $0.001 par value;
5,000,000 shares authorized; No shares
issued or outstanding -- --
Common stock, $0.001 par value; 100,000,000
shares authorized; 6,550,512 and 6,383,845
shares issued and outstanding 6,550 6,384
Additional paid in capital 89,674 64,840
Deficit accumulated during the development stage (93,171) (63,145)
--------------------------
Total stockholders' equity
3,053 8,079
--------------------------
Total liabilities and stockholders' equity $ 25,000 $ 17,403
==========================
The accompanying notes are an integral part of these financial statements.
F-1
M-GAB DEVELOPMENT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
Cumulative from Year Year
inception (March Ended Ended
27, 2001) through December December
December 31, 2005 31, 2005 31, 2004
--------------------------------------------------------
Revenue $ -- $ -- $-
General and administrative expenses 176,526 30,026 26,296
Other income 83,355 -- 83,355
--------------------------------------------------------
Net income (loss) $ (93,171) $ (30,026) $ 57,059
========================================================
Basic and diluted net income (loss) per share $ (0.01) $ 0.01
Weighted average shares outstanding 6,507,130 6,321,699
The accompanying notes are an integral part of these financial statements.
F-2
M-GAB DEVELOPMENT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
Deficit
Common Stock Additional Accumulated During
------------------------- Paid-in the Development
Shares Par Value Capital Stage Total
----------- ------------- -------------- ------------ ------------
Issuance of common stock to
founders on April 20, 2001 6,000,000 $ 6,000 $ (5,400) $ -- $ 600
Issuance of common stock for
cash in August 2001 13,000 13 1,287 1,300
Contributed capital-services 14,199 14,199
Net loss (19,575) (19,575)
--------- --------- ---------- --------- ---------
Balance, December 31, 2001 6,013,000 6,013 10,086 (19,575) (3,476)
Issuance of common stock for
cash in September 2002 10,000 10 990 1,000
Net loss (37,376) (37,376)
--------- --------- ---------- --------- ---------
Balance, December 31, 2002 6,023,000 $ 6,023 $ 11,076 $ (56,951) $ (39,852)
========= ========= ========== ========= =========
Net loss ($ 63,253) $ (63,253)
--------- --------- ---------- --------- ---------
Balance, December 31, 2003 6,023,000 $ 6,023 $ 11,076 $(120,204) $(103,105)
========= ========= ========== ========= =========
Issuance of common stock for 360,385 361 46,547 46,908
cash in March 2004
Issuance of common stock for
cash in March 2004 7,217 7,217
Net income 57,059 57,059
--------- --------- ---------- --------- ---------
Balance, December 31, 2004 6,383,385 $ 6,384 $ 64,840 $ (63,145) $ 8,079
========= ========= ========== ========= =========
Shares issued in stock exchange 166,667 166 24,834 25,000
Net loss (30,026) (30,026)
--------- --------- ---------- --------- ---------
Balance, December 31, 2005 6,550,052 $ 6,550 $ 89,674 $ (93,171) $ 3,053
========= ========= ========== ========= =========
The accompanying notes are an integral part of these financial statements.
F-3
M-GAB DEVELOPMENT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
Cumulative from
inception (March
27, 2001) to Year Ended Year Ended
December 31, December 31, December 31,
2005 2005 2004
--------------------------------------------------
Cash flows from operating activities:
Net income (loss) (93,171) $(30,026) $ 57,059
Adjustments to reconcile net loss to cash used in
operating activities:
Contributed capital for services rendered 14,199 -- --
Forgiveness of accounts payable and payable
to stockholder (83,355) -- (83,355)
Increase (decrease) in accounts payable
and accrued liabilities 78,101 (4,578) (10,426)
--------------------------------------------------
Net cash used by operating activities (84,226) (34,604) (36,722)
--------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of stock 57,025 -- 54,125
Advance from shareholder 27,201 17,201 --
--------------------------------------------------
Net cash provided by financing activities
84,226 -- 54,125
Net increase (decrease) in cash -- (17,403) 17,403
--------------------------------------------------
Cash and cash equivalents, beginning of period -- 17,403 --
--------------------------------------------------
Cash and cash equivalents, end of period $ -- $ -- $ 17,403
==================================================
The accompanying notes are an integral part of these financial statements.
F-4
1. NATURE OF OPERATIONS AND ACCOUNTING POLICIES
--------------------------------------------
Nature of Operations. The Company incorporated in Florida on March 27, 2001. The
fiscal year end of the Company is December 31. Planned principal operations of
the Company have not yet commenced; activities to date have been limited to
forming the Company, developing its business plan, and obtaining initial
capitalization. On May 16, 2003, the Company filed an election to be treated as
a business development company ("BDC") under the Investment Company Act of 1940
(the "1940 Act"), which became effective on the date of filing. Subsequent to
the BDC election the Company's principal business is to make venture capital
investments in early-stage and/or developing enterprises that are principally
engaged in the development or exploitation of inventions, technological
improvements, and new or unique products and services.
Principles of Accounting. The accompanying financial statements have been
prepared in conformity with generally accepted accounting principles.
Accounting Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates.
Shares Issued in Exchange for Services. The fair value of shares issued in
exchange for services rendered to the Company is determined by the Company's
officers and directors, as there is currently no market for the Company's stock.
Cash and Cash Equivalents. The Company includes cash on deposit and short-term
investments with original maturities less than ninety days as cash and cash
equivalents in the accompanying financial statements.
General and Administrative Expenses. The Company's general and administrative
expenses consisted primarily of legal and accounting fees for the years ended
December 31, 2005 and 2004.
Research and Development. Research and development costs are expensed as
incurred as required by Statement of Financial Accounting Standards No. 2,
"Accounting for Research and Development Costs." As of December 31, 2005, no
research and development costs have been incurred.
Advertising. Advertising costs are charged to operations when incurred. The
Company has not incurred any advertising costs.
Stock-Based Compensation. Statement of Financial Accounting Standards No. 123,
Accounting for Stock Based Compensation, encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to account for stock-based
compensation using the intrinsic value method prescribed in previously issued
standards. Accordingly, compensation cost for stock options issued to employees
is measured as the excess, if any, of the fair market value of the Company's
stock at the date of grant over the amount an employee must pay to acquire the
stock. Compensation is charged to expense over the shorter of the service or
vesting period. Stock options issued to non-employees are recorded at the fair
value of the services received or the fair value of the options issued,
whichever is more reliably measurable, and charged to expense over the service
period.
Income Taxes. The Company has not made a provision for income taxes because of
its financial statement and tax losses since its inception on March 27, 2001. A
valuation allowance has been used to offset the recognition of any deferred tax
assets related to net operating loss carryforwards due to the uncertainty of
future realization. The use of any tax loss carry-forward benefits may also be
limited as a result of changes in Company ownership.
Fair Value of Financial Instruments. The Company considers all liquid
interest-earning investments with a maturity of three months or less at the date
of purchase to be cash equivalents. Short-term investments generally mature
between three months and six months from the purchase date. All cash and
short-term investments are classified as available for sale and are recorded at
market using the specific identification method; unrealized gains and losses are
reflected in other comprehensive income. Cost approximates market for all
classifications of cash and short-term investments.
F-5
Net Income (Loss) per Common Share. Net loss per share is calculated in
accordance with Statement of Financial Accounting Standards No. 128, Earnings
Per Share. Basic net loss per share is based upon the weighted average number of
common shares outstanding. Diluted net loss per share is based on the assumption
that options are included in the calculation of diluted earnings per share,
except when their effect would be anti-dilutive. Dilution is computed by
applying the treasury stock method. Under this method, options and warrants are
assumed to be exercised at the beginning of the period (or at the time of
issuance, if later), and as if funds obtained thereby were used to purchase
common stock at the average market price during the period.
Recently Enacted Accounting Standards. Statement of Financial Accounting
Standards ("SFAS") No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities", SFAS No. 147, "Acquisitions of Certain Financial
Institutions - an Amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9", SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure - an Amendment of FASB Statement No. 123", SFAS No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities", and SFAS No. 150, "Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity", were recently issued. SFAS
No. 146, 147, 148, 149 and 150 have no current applicability to the Company or
their effect on the financial statements would not have been significant.
2 GOING CONCERN
-------------
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company has no established source of revenue, and as of December 31, 2005,
the Company had limited working capital. In addition, the Company has been in
the development stage since its inception in 2001 and is dependent on outside
financing to fund its operations. These factors, among others, raise substantial
doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are to continue to raise
additional capital from selling the Company's stock. However, there is no
assurance that the Company will be able to obtain such financing. Management
believes actions currently being taken provide the opportunity for the Company
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
3. STOCKHOLDERS' EQUITY
--------------------
Founders' Stock. The Company issued 6,000,000 shares of common stock on April
20, 2001 for cash totaling $600.
2001 Private Placement Memorandum. On June 1, 2001, the Company began an
offering to sell up to 100,000 shares of common stock at $0.10 per share
pursuant to a Private Placement Memorandum. In August 2001, the Company sold
13,000 shares of its common stock at $0.10 under this private placement. All
proceeds from this offering were used for pre-incorporation expenditures,
consulting fees and working capital.
Registered Stock Offering. During the quarter ended December 31, 2002, the
Company sold 10,000 shares of its common stock at $0.10 per share for total
proceeds of $1,000. The stock offering was pursuant to the Company's effective
Form SB-2/A registration statement dated November 15, 2001. The Company used the
proceeds to repay advances and general and administrative expenses. The
Company's registered offering expired on October 30, 2002.
2004 Private Placement Memorandum. On March 2, 2004, the Company sold 360,845
stock units at $0.15 each for net proceeds of $54,125. Each stock unit consists
of one share of common stock and a warrant to purchase one share of common
stock. The stock warrants are exercisable at any time before March 8, 2007 at
$0.15 per share of common stock. The Company's net proceeds of $54,125 from this
stock sale will be used to fund Company operations.
The Company has computed the fair value of the stock warrants issued to be $0.02
per warrant. The Company recorded the total fair value of the warrants of $7,217
as an increase to its additional paid in capital in the accompanying financial
statements. The Company used the Black-Sholes option pricing model to value the
warrants with the following assumptions: risk-free interest rate of 6.0%,
expected dividend yield of 0, expected life of 3 years, and expected volatility
of 1.0.
Stock Exchange Agreement. On April 1, 2005, the Company entered into a Stock
Exchange Agreement with NuQuest, Inc. ("NuQuest"). Pursuant to the agreement,
the Company agreed to issue a total of 166,667 shares of its common stock to
NuQuest in exchange for a total of 20,000 shares of restricted NuQuest common
stock. The value of the stock to be exchanged by both parties was agreed to be
$25,000. NuQuest further agreed to declare a dividend and distribute the shares
of the Company's exchanged common stock pro-rata to all of their shareholders
except for three, who agreed to forego the dividend. The Company has recorded
the NuQuest shares as a long term asset on the enclosed balance sheet as of
December 31, 2005. As of December 31, 2005, the Company has not established a
valuation allowance relative to the NuQuest shares.
F-6
Amended and Restated 2001 Stock Option Plan. The Company's Board and
shareholders approved a Stock Option Plan, effective June 1, 2001. The plan was
amended by the Board and shareholders to the Company's Amended and Restated 2001
Omnibus Securities Plan, effective May 27, 2004 ("2001 Plan"). The 2001 Plan
limits the aggregate number of shares available to 600,000. Each award under the
2001 Plan will be evidenced by a Stock Purchase Agreement; each agreement will
establish the vesting requirements and the maximum term of the options granted.
On November 4, 2003, the Company agreed to issue 600,000 stock options to two
directors under the 2001 Plan. In accordance with the Company's status as a
business development company, the stock options will not be issued until the
Securities and Exchange Commission ("SEC") approves the issuances, which the
Company believes will occur during the next quarter. If approved by the SEC, the
exercise price of the stock options will be at or above the fair market value of
the Company's common stock on the issuance date.
2004 Omnibus Securities Plan. The Company's Board and shareholders approved the
Company's 2004 Omnibus Securities Plan, effective May 27, 2004 ("2004 Plan").
The 2004 Plan limits the aggregate number of shares that can issue under the
plan to 650,000 shares. Each award under the 2004 Plan will be evidenced by a
Stock Purchase Agreement; each agreement will establish the vesting requirements
and the maximum term of the options granted. The Company has not issued, or
agreed to issue, any stock or options under the 2004 Plan. In accordance with
the Company's status as a business development company, no stock or options will
be issued under the Plan until the SEC approves the 2004 Plan. If approved by
the SEC, any stock or option issuances under the 2004 Plan will be at or above
the fair market value of the Company's common stock on the date of issuance.
4. INCOME (LOSS) PER SHARE
-----------------------
The following data show the amounts used in computing net income (loss) per
share for the periods presented:
For the Years Ended
December 31,
-------------------
2005 2004
--------- ---------
Income (loss) from continuing
operations available to common
shareholders (numerator)
$ (30,026) $ 57,059
---------- ----------
Weighted average number of common
shares outstanding used in loss per
share during the period
(denominator)
6,507,130 6,321,699
---------- ----------
Dilutive loss per share was not presented, as the Company had no common
equivalent shares for all periods presented that would effect the computation of
diluted loss per share.
5. INCOME TAXES
------------
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" which requires the
liability approach for the effect of income taxes.
F-7
The Company has available at December 31, 2005, unused operating loss
carryforwards of approximately $93,000, which may be applied against future
taxable income and which expire in various years through 2025. If certain
substantial changes in the Company's ownership should occur, there could be an
annual limitation on the amount of net operating loss carryforward which can be
utilized. The amount of and ultimate realization of the benefits from the
operating loss carryforwards for income tax purposes is dependent, in part, upon
the tax laws in effect, the future earnings of the Company and other future
events, the effects of which cannot be determined. Because of the uncertainty
surrounding the realization of the loss carryforwards, the Company has
established a valuation allowance equal to the tax effect of the loss
carryforwards, therefore, no deferred tax asset has been recognized for the loss
carryforwards. The net deferred tax assets were approximately $32,000 and
$21,000 at December 31, 2005 and 2004, respectively, with an offsetting
valuation allowance of the same amount resulting in a change in the valuation
allowance of approximately $11,000 during the year ended December 31, 2005.
6. RELATED PARTY TRANSACTIONS
--------------------------
The Company has engaged one of its shareholders, Mr. Lebrecht, as its corporate
counsel. For the years ended December 31, 2005 and 2004, the Company incurred
total legal services and out of pocket costs to Mr. Lebrecht's firm of $1,567
and $324, respectively. As of December 31, 2005 and 2004, the Company had
amounts due to Mr. Lebrecht of approximately $17,000 and $24, respectively,
which are recorded in accounts payable and accrued liabilities in the
accompanying financial statements. In addition, the Company received an advance
of $10,000 from Mr. Lebrecht for organizational costs. The Company recorded this
advance as a payable to stockholder as of December 31, 2003. On March 26, 2004,
The Lebrecht Group, APLC, agreed to forgive amounts owed to them of $73,955,
including the $10,000 advance. The forgiveness of these amounts was recorded as
other income in the accompanying financial statements for the year ended
December 31, 2004.
The Company's President, Mr. Berg, has elected to forego a salary during its
early development stages. Mr. Berg has also provided office space to the
Company. In prior years, the Company estimated the value of these services to be
$6,000 for the year ended December 31, 2004. As of December 31, 2003, the
Company had amounts due to Mr. Berg of $9,400, which were recorded in accounts
payable and accrued liabilities in the accompanying financial statements. On
March 26, 2004, the Company's director and officer agreed to forgive $9,400 of
the Company's debt owed to him. As of December 31, 2005, there were no amounts
due Mr. Berg. The forgiveness of debt was recorded as other income in the
accompanying financial statements for the year ended December 31, 2004.
In addition, one of the Company's directors, Mr. Gadawski, provided consulting
services to the Company in 2005 and 2004. As of December 31, 2005, the Company
had $1,250 due to Mr. Gadawski for services rendered during the year ended
December 31, 2005.
In November 2003, the Company agreed to issue to each of Mr. Gadawski and Mr.
Stewart options to acquire 300,000 shares of our common stock for serving as
directors of the Corporation. As of December 31, 2005, the Company has not
issued these options, as this issuance of options is subject to approval of the
SEC pursuant to provisions of the Investment Company Act of 1940.
7. SUBSEQUENT EVENTS
-----------------
On February 10, 2006, the Company entered into a letter of intent with the
shareholders of DaLian RunZe Chemurgy Co., Ltd (the "Purchasers.") The
Purchasers agreed to pay a total of $515,000 to The Lebrecht Group, APLC
("TLG,") legal counsel for the Company, the Company and its controlling
shareholders. Upon signing the letter of intent, the Purchasers paid $300,000 as
a deposit and the remaining amount will be paid at the closing of the
Transaction. Subsequent to entering into this letter of intent, the Purchasers
were replaced with China Agro Sciences Corp., a Florida corporation, and the
terms of the letter of intent remained the same.
On March 15, 2006, the Company entered into an Agreement and Plan of Merger (the
"Agreement") with China Agro Sciences Corp., a Florida corporation ("China
Agro") whereby, at the closing, China Agro will merge with DaLian Acquisition
Corp, a Florida corporation that is a wholly-owned subsidiary created by the
Company in 2006 for this merger. As a result of the merger, China Agro will
become a wholly-owned subsidiary of the Company, and the Company will issue
13,349,488 shares of its common stock to the former owners of China Agro. At the
same time, certain of the China Agro shareholders will acquire 5,500,000 shares
of the Company's common stock directly from the Company's majority shareholder,
director, and sole officer, Carl M. Berg, and his holding company. Following the
closing, the China Agro shareholders will own 18,849,488 shares of the Company's
common stock, or 94.2% of the Company's then-outstanding 20,000,000 shares. As a
condition precedent to the closing, the Company is required to take certain
steps that will require shareholder approval, including terminating its status
as a Business Development Company under the Investment Company Act of 1940. The
closing of the Agreement shall take place no later than May 31, 2006, unless
extended by a written agreement.
F-8