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U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly period ended September 30, 2012

 

[  ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______________ to _______________.

 

Commission files number 814-00724

 

MORRIS BUSINESS DEVELOPMENT COMPANY

(Exact name of registrant as specified in its charter)

 

California

 

33-0795854

(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     

220 Nice Lane #108

   
Newport Beach, CA   92663
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code (310) 493-2244

 

Check whether the issuer (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 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]

 

Applicable only to corporate issuers:

 

As of September 30,2 012, there were 25,667,000 shares of common stock, par value $0.001, issued and outstanding.

 

 

 

 
 

 

TABLE OF CONTENTS

 PART I – FINANCIAL INFORMATION

  3
     
ITEM 1   Financial Statements   3
ITEM 2   Management’s Discussion and Analysis of Financial Condition and Results of Operations   5
ITEM 3   Quantitative and Qualitative Disclosures About Market Risk   31
ITEM 4   Controls and Procedures   32
         

 PART II – OTHER INFORMATION

  32
         
ITEM 1   Legal proceedings   32
ITEM 1A   Risk Factors   32
ITEM 2   Unregistered Sales of Equity Securities and Use of Proceeds   32
ITEM 3   Defaults Upon Senior Securities   32
ITEM 4   Submission of Matters to a Vote of Security Holders   32
ITEM 5   Other Information   32
ITEM 6   Exhibits   32

 

2
 

 

PART I – FINANCIAL INFORMATION

 

This Quarterly 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 Financial Statements and Financial Notes

 

Balance Sheets September 30, 2012 (Unaudited) and March 31, 2012   F-1
Statements of Operations for the Three Month Periods Ended September 30, 2012, 2011 and 2010 (Unaudited)   F-2
Statements of Cash Flows for the Three Month Periods Ended September 30, 2012, 2011 and 2010 (Unaudited)   F-3
Notes to Financial Statements September 30, 2012 (Unaudited)   F-4 - F-8

 

3
 

 

John Kinross-Kennedy, C.P.A.

17848 Skypark Circle, Suite C

Irvine, California

U.S.A. 92614-6401

 

The Board of Directors

Morris Business Development Company

 

The balance sheet of Morris Business Development Company as of September 30, 2012 and the related statements of income and cash flows for the six months then ended were not audited by me and accordingly, I do not express an opinion on them.

 

I performed a review in accordance with SAS 100 however I do not issue a report.

 

/s/ JOHN KINROSS-KENNEDY, C.P.A.  
JOHN KINROSS-KENNEDY, C.P.A.  

 

Irvine, California

October 29, 2012

DO NOT FILE

 

4
 

 

MORRIS BUSINESS DEVELOPMENT COMPANY
Balance Sheet
as at September 30, 2012 and March 31, 2012

 

   September 30, 2012   March 31,  2012 
   (Unaudited)     
ASSETS          
Current Assets          
Cash and Cash Equivalents  $7,894   $5,426 
Marketable Security   6,250    12,500 
Accounts Receivable   750    7,500 
           
Total Current Assets  $14,894   $25,426 
           
           
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)          
Liabilities          
Current Liabilities          
Accounts Payable and Accrued Expenses  $2,390   $2,390 
           
Total current Liabilities   2,390    2,390 
           
Stockholders’ Equity  (Deficit)          
Preferred Stock, $0.001 par value,10,000,000 shares authorized; none issued and outstanding          
Common Stock, $0.001 par value; 40,000,000 shares authorized; 23,667,000 shares issued and a outstanding as at June 30, 2011, and 25,667,000 shares issued and outstanding as at June 30, 2012.   23,667    23,667 
Additional Paid-in Capital   930,459    930,459 
Accumulated Deficit   (912,000)   (907,718)
Accumulated other comprehensive income (loss)   (29,622)   (23,372)
           
Total Stockholders’ Equity (Deficit)   12,504    23,036 
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)  $14,894   $25,426 

 

 The accompanying notes are an integral part of these financial statements.

 

F-1
 

 

MORRIS BUSINESS DEVELOPMENT COMPANY
Statement of Operations
 For the Three and Six  Months Periods Ended September 30, 2012, 2011 and 2010
 (Unaudited)

 

   For the Three Month Period Ended   For the Six Month Period Ended 
   September 30,   September 30, 
   2012   2011   2010   2012   2011   2010 
                         
Net Revenue  $3,000   $-   $6,290   $3,000   $-   $6,290 
Cost of Revenue             -    -         - 
                               
Gross Profit   3,000    -    6,290    3,000    -    6,290 
                               
Operating Expenses:                              
Professional Fees   4,656    3,169    3,020    5,118    6,519    5,681 
Consulting   -    200    3,950    -    700    4,850 
Other   691    82    1,196    2,164    1,094    6,193 
Total Operating Expenses   5,347    3,451    8,166    7,282    8,313    16,724 
                               
Loss from operations   (2,347)   (3,451)   (1,876)   (4,282)   (8,313)   (10,434)
                               
Loss before income taxes   (2,347)   (3,451)   (1,876)   (4,282)   (8,313)   (10,434)
                               
Provision for income taxes   -    -    -    -         - 
                               
Net Loss   (2,347)   (3,451)   (1,876)   (4,282)   (8,313)   (10,434)
                               
Other comprehensive loss                              
 Unrealized loss on marketable securities   -    -    -    (6,250)        - 
                               
Comprehensive Loss  $(2,347)  $(3,451)  $(1,876)  $(10,532)  $(8,313)  $(10,434)
                               
Basic and diluted net loss per common share:  $(0.00)     $(0.00)     $(0.00)     $(0.00)     $(0.00)     $(0.00)   
                               
Basic and diluted weighted average number of  common shares outstanding   13,000,000    13,000,000    13,000,000    13,000,000    13,000,000    13,000,000 

 

 The accompanying notes are an integral part of these financial statements.

 

F-2
 

  

MORRIS BUSINESS DEVELOPMENT COMPANY
Statement of Cash Flows
 for the six months ended September 30, 2012, 2011 and 2010
 (Unaudited)
 

   2012   2011   2010 
             
Cash flows from operating activities:               
Comprehensive Loss  $(10,532)   (8,313)   (10,434)
Adjustments to reconcile net loss to  net cash used by operating activities:               
Unrealized loss on marketable securities   6,250           
Change in operating assets and liabilities:               
Accounts receivable   6,750         (6,290)
Accounts payable        2,400    (32,539)
Net cash (used by) operating  activities   2,468    (5,913)   (49,263)
                
Cash flows from financing activities:               
Loans from Officers        5,125    46,543 
Receivables from related party             3,591 
Net cash provided by financing activities   -    5,125    50,134 
                
Net increase (decrease) in cash   2,468    (788)   871 
                
Cash, beginning of the period   5,426    1,415    - 
                
Cash, end of the period  $7,894   $627   $871 
                
Supplemental cash flow disclosure:               
Interest paid during the year  $-   $-   $- 
Taxes paid during the year  $-   $-   $- 

 

 The accompanying notes are an integral part of these financial statements.

 

F-3
 

 

MORRIS BUSINESS DEVELOPMENT COMPANY

 

NOTES TO FINANCIAL STATEMENTS

UNAUDITED

September 30, 2012

 

NOTE 1BASIS OF PRESENTATION AND ORGANIZATION

 

Basis of Presentation

 

These interim financial statements as of and for the six months ended September 30, 2012 reflect all adjustments which, in the opinion of management, are necessary to fairly state the Company’s financial position and the results of its operations for the periods presented in accordance with the accounting principles generally accepted in the United States of America. All adjustments are of a normal recurring nature.

 

These interim financial statements should be read in conjunction with the Company’s financial statements and notes thereto included in the Company’s fiscal year end March 31, 2012 report on form 10 K. The Company assumes that the users of the interim financial information herein have read, or have access to, the audited financial statements for the preceding period, and that the adequacy of additional disclosure needed for a fair presentation may be determined in that context. The results of operations for the six month period ended September 30, 2012 are not necessarily indicative of results for the entire year ending March 31, 2013.

 

Organization

 

On April 1, 1998, Morris Business Development Company (the Company or MBDC) was incorporated in California as Electronic Media Central Corporation (EMC) (formerly a division of Internet Infinity, Inc. (III)). The Company is engaged in providing services for the development and growth of both American public and private stock companies. The Company year end is March 31.

 

As of May 12, 2006 the Company filed Form N-54A with the United States Securities Exchange Commission to become a business development company by certifying that it is a closed-end company (mutual fund) organized and operated for the purpose of making investments in securities described in Section 55 (a)(1) through (3) of the Investment Company Act of 1940; and that it will make available significant managerial assistance to American companies with respect to issuers of such securities to the extent required by the act.

 

On March 29, 2007 the Company registered a name change to Morris Business Development Company with the California Secretary of State.

 

The Company has commenced the development of new management consulting services to assist American client companies in complying with the reporting requirements to the government and in communicating with shareholders, customers and the public and the accessing of needed growth capital. The Company has received 2.5 million shares from its first client for financial consulting work completed in the fiscal year ended March 31, 2008.

 

In June, 2009 the Company entered into an agreement with Larry Williams, a new member of the Board of Directors, operating as “More American Jobs” to help American companies prepare to access both government and private financial support. In addition, the Company will also commence a new participation relationship this month with Avalon Funding Corporation, an asset based lender focusing on accounts receivable and purchase order funding.

 

F-4
 

 

On April 7, 2010 the Company entered into a Material Definitive Agreement with Video Army, LLC, A California limited partnership, to operate a (‘NEWCO”) business named “Internet Video / Morris BDC, LLC”, a California Limited Partnership and/or other registered DBAs. The business will provide financial and internet related services primarily for both private and thinly traded public stock American based companies.

 

In September 30, 2012, the Company discontinues its relationship with Video Army, LLC, to operate a Newco with Video Army. However, our BDC will continue to provide financial and internet related consulting services to MBDE clients.

 

On September 27, 2012, an Form 8-K was filed announcing the MBDE consulting participation in a joint venture with Windsor Business Solutions. We have agreed to help a new LLC owner of a 241 room Howard Johnson Plaza hotel prepare to raise the capital and get the managerial advice to convert half the hotel into a 76 unit senior housing facility, restructure the hotel’s existing debt and carry out the business plan. MBDE would receive 50% of the net retained shares from the new LLC holder of the facility.

 

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING

 

Cash and cash equivalents

 

The Company considers all liquid investments with a maturity of three months or less from the date of purchase that are readily convertible into cash to be cash equivalents.

 

Use of estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Fair value of financial instruments

 

The Financial Accounting Standards Board issued ASC (Accounting Standards Codification) 820-10 (SFAS No. 157), “Fair Value Measurements and Disclosures" for financial assets and liabilities. ASC 820-10 provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. FASB ASC 820-10 defines fair value as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. FASB ASC 820-10 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs required by the standard that the Company uses to measure fair value:

 

  - Level 1:  Quoted prices in active markets for identical assets or liabilities.
     
  - Level 2:  Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities.
     
  - Level 3:  Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
     
  The carrying amounts of the Company’s financial instruments as of June 30, 2012 reflect
   
  - Marketable Securities: Level `1 based on quoted price in an active market.
  - Loan to Officer Level 2 based on observable inputs.

 

F-5
 

 

Income taxes

 

The Company utilizes FASB ACS 740, “Income Taxes,” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the tax basis of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

 

The Company generated a deferred tax credit through net operating loss carry-forward. However, a valuation allowance of 100% has been established.

 

Interest and penalties on tax deficiencies recognized in accordance with ASC accounting standards are classified as income taxes in accordance with ASC Topic 740-10-50-19.

 

Advertising and Marketing Costs

 

The Company expenses costs of advertising and marketing as incurred. Advertising and marketing expense for the three months ended September 30, 2012, 2011 and 2010 were negligible.

 

Basic and Diluted Earnings Per Share

 

Net loss per share is calculated in accordance with FASB ASC 260, Earnings Per Share, for the period presented. 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 all dilative convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed 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.

 

The Company has no potentially dilutive securities outstanding as of September 30, 2012.

 

Recent Accounting Pronouncements

 

In December 2011, the FASB issued ASU No. 2011-11, "Disclosures about Offsetting Assets and Liabilities." The amendments in this update require enhanced disclosures around financial instruments and derivative instruments that are either (1) offset in accordance with either ASC 210-20-45 or ASC 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with either ASC 210-20-45 or ASC 815-10-45. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The amendments are effective during interim and annual periods beginning on or after January 1, 2013. The Company does not expect this guidance to have any impact on its consolidated fi ASU 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment is applicable to fiscal years beginning after December 15, 2011. Early application is permitted. The Company does not expect this ASU has a material impact on its financial position or carrying value of its intangible assets at this time.

 

F-6
 

 

ASU 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment is applicable to fiscal years beginning after December 15, 2011. Early application is permitted. The Company does not expect this ASU has a material impact on its financial position or carrying value of its intangible assets at this time.

 

The Company has reviewed issued accounting pronouncements and plans to adopt those that are applicable to it. The Company does not expect the adoption of any other pronouncements to have a n impact on its results of operations or financial position.

Marketable Securities

 

The Company’s investments in securities are classified as available-for-sale and, as such, are carried at fair value based on quoted market prices. Securities classified as available-for-sale may be sold in response to changes in interest rates, liquidity needs, and for other purposes.

 

Equity Securities
Name and Symbol
  Number of
Shares
Held
   Cost   Market Value   Accumulated
Unrealized
Loss
   Traded on
Pink Sheets
(PK)
or Bulletin
Board (BB)
                        
Leep, Inc (LPPI)   2,500,000    21,250    6,250    (15,000)  LPPI

 

Unrealized holding gains and losses for available-for-sale securities are excluded from earnings and reported as a separate component of stockholder’s equity. Realized and unrealized gains and losses for securities classified as available-for-sale are included in the statement of operations and comprehensive gain/loss, respectively. On September 30, 2010, marketable securities have been recorded at $6,250 based upon the fair value of the marketable securities.

 

NOTE 3UNCERTAINTY OF ABILITY TO CONTINUE AS A GOING CONCERN

 

The Company's financial statements are prepared using the generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, the Company has accumulated deficit of $912,000 at September 30, 2012. Its total assets exceeds its total liabilities by $12,504.

 

In view of the matters described above, recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheets is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s ability to raise additional capital, obtain financing and to succeed in its future operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

Management has taken the following steps to revise its operating and financial requirements, which it believes are sufficient to provide the Company with the ability to continue as a going concern. The Company is actively pursuing the new business development company activities and additional funding from strategic partners, which would enhance stockholders’ investment. Management believes that the above actions will allow the Company to continue operations through the next fiscal year.

 

F-7
 

 

NOTE  4

 

On June 30, 2012, 2,000,000 shares of common stock were issued for a subscription of $100,000 from cancellation of debt. The stock was priced at $100,000 based on the closing market price of $0.05. No gain or loss on extinguishment of debt was recorded.

 

As of September 30, 2012, and 2011 the Company had authorized 10,000,000 preferred shares of par value $0.001, of which none was issued and outstanding.

 

As of September 30, 2012 and 2011 the Company had authorized 40,000,000 shares of common stock of par value $0.001, of which 25,666,667 shares were issued and outstanding on both dates.

 

NOTE 5RELATED PARTY TRANSACTIONS

 

On March 31, 2012 the President of the Company subscribed for 2,000,000 of common stock by cancellation of $100,000 of the Company’s debt to him. On June 30, 2012 the Company issued the President 2,000,000 shares of common stock for his subscription.

 

NOTE 6INCOME TAXES

 

No provision was made for federal income tax for the six months ended September 30, 2012, since the Company had net operating loss. The net operating loss carry-forwards may be used to reduce taxable income through the year 2032, unless utilized. The availability of the Company’s net operating loss carry-forwards are subject to limitation if there is a 50% or more positive change in the ownership of the Company’s stock. The provision for income taxes consists of the state minimum tax imposed on corporations.

 

The net operating loss carry-forward for federal and state income tax purposes was approximately $900,000 as of June 30, 2012.

 

The Company has recorded a 100% valuation allowance for the deferred tax asset since in the opinion of management, it is more likely than not that some or all of it will not be realized.

 

F-8
 

 

ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Disclaimer Regarding Forward Looking Statements

 

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; raw material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; 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 Quarterly 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.

 

General Overview

 

We focus on the development of opportunities to invest in eligible portfolio companies by providing either growth stage capital and/or “fix-it” capital for existing private or thinly traded public companies along with strategic guidance and operational support.

 

Our principal objective is both current consulting income and 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 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 shall currently operate as an internally managed investment company until such time as we are ready to select either an independent or affiliated external management company discussed below. Our operations may be governed by an Investment Advisory Management Agreement to be entered into between us and a new investment advisory limited liability company which may be and probably will be formed and wholly-owned by our Chairman, George Morris. We have not elected to but plan to attempt to qualify without a guarantee of success or timing, to be taxed as a regulated investment company as defined under Subchapter M of the Internal Revenue Code.

 

5
 

 

Our common stock trades on the over the counter bulletin board under the symbol “MBDE.”

 

Our financial statements have been prepared assuming we will continue as a going concern by our Board of Directors. Because we have historically incurred operating losses, and expect those losses to continue in the future, our Certified Public Accountants included an explanatory paragraph in their report raising substantial doubt about our ability to continue as a going concern. We are reducing and/or will continue to attempt control reductions of our operating cost as part of operations.

 

BUSINESS

 

General

 

Morris Business Development Company, a California corporation (referred to as “we,” “us,” “our” or the “Company”) was incorporated on March 10, 1998, in the State of California, as Electronic Media Central Corporation. Prior to our incorporation, we commenced sales distribution operations in late 1996 as a division of Internet Infinity, Inc. (“Internet Infinity”). Following our incorporation, in April 1998, we continued to provide such services as a 100% wholly owned subsidiary of Internet Infinity. Internet Infinity supplied us with management support to launch our Internet sales distribution activities.

 

On September 28, 2001, all 500,000 of our issued and outstanding shares of common stock, held by Internet Infinity, were distributed to the Internet Infinity shareholders of record as of September 18, 2001.

 

Our initial business focus in late 1996 was on distributing electronic media duplication and packaging services. These services were supplied through March 31, 2002. On May 12, 2006, 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.

 

On March 30, 2007, we changed our name to Morris Business Development Company with the intent of operating as a BDC.

 

As of March 31, 2012 George Morris, Ph.D. returned to operations as the CEO of the Company with the full motivation to build the mission of the Company. Dr. Morris and the new independent Board of Directors plan to seek revenue and profits for the Company through strategic partnering and acquisitions as a Business Development Company, (“BDC”).

 

Description of Business

 

General

 

Most Business Development Companies (“BDC”) that comply with the 1940 Investment Act are similar in their business and investment operations due to the standard compliance requirements. However, there are significant differences between individual BDC philosophies and investment strategies. Therefore, only careful reading of our BDCs SEC filings and other reports can point out our differences for the benefit of the reader.

 

Currently, we are an internally managed, non-diversified, closed-end management Investment Company that has elected to be regulated as a business development company under the Investment Company Act of 1940, as amended (the “1940 Act”). We generally have to invest at least 70% of our total assets in “qualifying assets,” including securities of American companies, cash, cash equivalents, U.S.A. government securities and high-quality debt investments. See “Regulation as a Business Development Company” below.

 

We plan to elect to be treated for tax purposes as a regulated investment company, or a RIC, under Subchapter M of the Code. However, there is no guarantee that we will be successful in obtaining or maintaining our RIC status. As a new BDC operation, we have not yet generated a taxable profit.

 

As a Fund, we focus our investments in companies that currently show net income from their operations or will show a net income from their operations in less than one year with our management and capital support.

 

However, we are a fund pursuing both investor income generation and investor capital appreciation models.

Therefore, we realize that an investment opportunity with future pay-off results may require additional risk for an investment in a portfolio company that is not currently profitable or positively cash flowing.

 

Following are the two general investment models currently guiding our investment decision process. However, these descriptions may be substantially modified in the future to pursue financial gains for our BDC.

Model 1. is not mutually exclusive to Model 2 and our BDC may actively pursue both Model 1 and 2 simultaneously with both the same and/or different portfolio companies.

 

MODEL 1. INCOME GENERATION

 

Income generation is sought from facilitating short terms secured loans to our portfolio companies and other non-portfolio companies, through affiliated and non-affiliated lending sources. Operating capital loans may be used by our investment portfolio companies for invoices, orders and inventory and may follow the factoring strategy operated for our BDC by affiliated and non-affiliated experienced factors. These are factors with existing experience, software and management systems in place. Our BDC investors may participate in the cash return yield generated by these activities.

 

Long term secured loans to refinance and acquire additional plant, equipment and/or other earnings and assets could provide cash flow income to our investors. This Lending income may pass through interest and fees paid for secured loans for such purposes. Leasing revenues and fees paid from” borrowers” as renters rather than to own assets, including sale lease backs, may also provide cash income paid to our investors.

 

We cannot guarantee any rate of return results to our investors. However, we plan to payout 98% of the BDC net lending income to seek benefit from our intended RIC tax status.

 

MODEL 2. CAPITAL APPRECIATION

 

Capital Appreciation is sought from our equity participation and profit realization from a sale of some or all of our equity in a portfolio company’s investment. We may invest cash and/or fees earned and received for providing managerial support consulting services to a client. The percentage amount of our BDC ownership may be passive at less than 10% without our Board of Director and control positions in the portfolio company. This may allow us more unrestricted sale of our investment at our sole discretion to attempt to maximize the return of this investment. Or we may own a larger percentage of the portfolio company including options to increase the size of our ownership and control stake.

 

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We may also initiate and help develop a new controlling acquisition entity (“Newco”) for a particular industry. We may partner with specific industry management “experts” to help create this portfolio acquisition company in an industry to build revenue, profits and value of a Newco. We shall not directly operate such a Newco.

 

The main strategy for value creation of portfolio companies is SEC registration for transparency with financial reporting and liquidity through subsequent SEC registration for public stock trading. A price to earnings multiple “arbitrage” ratio between public stock and private stock may increase our portfolio company holding value. This concept is based on the investment market value accretion for going from private to public status. Factors such as financial and operating transparency, quality of liquidity, management and asset, and earnings acquisition are improved when a company is publically traded versus privately owned and operated.

 

Also, under the BDC Act, we can help “fix” business net income and other financial problems for existing “thinly traded” public stock company already reporting to the SEC. Additional earnings and the factors such as improved financial and operating transparency, quality of liquidity, management and asset and further earnings acquisition can increase the value of a thinly traded portfolio company and our investment.

 

Our shareholders can participate in our portfolio income and capital appreciation with our fund that allows them to share in our potential share value increase from our investment. We believe the shares of a company we invest in should trade at a higher price when that price is based on earnings increases and/or an increased price earning multiple, of a “successful” public SEC reporting company, than on a non-reporting privately held company. Any increase share value of our portfolio investments should increase the Net Asset Value, (“NAV”) of our BDC and subsequent market price of our BDC traded shares listed under the OTCBB symbol: “MBDE.”

 

However, the success of these strategies and models by us cannot be guaranteed.

 

We commenced our portfolio company investment activities several years ago with our first acquisition. Leep Company was brought to us by one of our Board members after the formation of our BDC and we received LPPI shares and no cash as payment for consulting advice. Contrary to our expectations, the Leep Company did not file audit reports with the SEC, nor did they generate anticipated net operating income. Our BDC went dormant until this year 2012 when a new Board of Directors was created with a new strategy requiring firm net income potential and SEC reporting status commitments from the managers of our portfolio investment. A tough lesson learned.

 

Currently, we are internally managed for investment decisions by our Board of Directors, George Morris, our Chairman of the Board and Investment Committee. However, we shall consider change our Fund management to an external management advisor e.g. Morris BDC Management, LLC (“Morris Investment”) to facilitate more and new technical advice during the fiscal year ending March 31, 2013. We cannot guarantee Morris Investment will achieve registered investment adviser status but upon licensing, it shall serve as our investment adviser and also provides us with the administrative services necessary for us to operate.

 

We plan but cannot guarantee that our investment portfolio will consist of securities that typically produce some current income through interest or dividend income. One investment objective is to maximize realized capital appreciation and/or an undetermined cash income paid from our investments. We seek to accomplish our capital appreciation objective by making portfolio investments in the equity securities of companies with a growing net operating income and shares trading valued at a publically traded price earnings multiple.

 

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We seek to invest in equity securities of principally U.S.-based, private companies with a projected total enterprise value of between $2-million to $20-million and based on three to five times earnings. This same level of earnings could have an estimated public share price significantly higher after going public, but the higher price cannot be guaranteed.

 

Also, investments may be initiated in Newco target companies with under $1-million in enterprise value for strategic acquisition reasons. These new acquisition portfolio companies may be used to help create a company prepared for further earnings growth from acquisition.

 

INVESTMENT SOURCING

 

We shall generally acquire our debt and/or equity securities through direct investments in prospective portfolio companies that meet our investment criteria. We use a structured approach for our initial investment assessment and continued portfolio monitoring. Also, we rely primarily on the detailed financial and business information we receive about the portfolio company and our access to and discussions with management, both prior to and after our investment. Our equity investments are typically acquired directly from the issuer in the form of convertible preferred stock and common stock. Our debt investments shall be generally in the form of secured corporate bonds/notes.

 

The equity securities that we acquire directly from an issuer for cash or consulting services are typically the issuer’s most senior preferred stock at the time of our investment or, in cases where we acquire common shares; the issuer typically has only common stock outstanding. The proceeds of our direct investments of cash or services are used by these companies for growth and/or working capital purposes as well as in select cases for acquisitions. Debt is secured by corporate and/or personal guarantees and assets.

 

Some of our direct investments shall be sourced through venture capital funds, merger and acquisition specialists, trade associations and other financial or strategic investors that are either existing investors or co-investors with us. We may also acquire equity or debt securities of companies directly from current or former management or early stage investors in private secondary transactions, or from current or former non-management employees where the portfolio company or its management is coordinating the transaction process. The equity securities that we acquire directly from selling stockholders are typically common stock or notes and may not represent the most senior equity securities of the issuer.

 

The debt securities may be source directly from a debtor, creditor or from market traders of such securities. In these private or public secondary transactions, we usually require an opportunity to conduct due diligence discussions with the portfolio company’s management, as well as to have access to the company’s business and financial information in connection with our investment and on an ongoing basis. We may also seek to negotiate terms, such as warrants or other structural protections, which are intended to provide some additional value protection or incentive from increases in the value of the related securities.

 

By intention, our structure is that of a high risk/high return investment model. We seek long-term capital appreciation through investments in equity securities that we believe will maximize our total return. In addition, our equity investments are expected to generate some current income (i.e., dividends or interest income), which makes us typical of other business development companies that primarily make debt investments from which they receive current yield in the form of interest income.

 

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We pursue both income and capital appreciation. Along with current income, a source of investment return will be generated from net capital gains, if any, realized on the disposition of our portfolio company investments, which typically will occur after a portfolio company completes our public stock registration and subsequent acquisition strategy. The portfolio company securities that we acquire are typically illiquid until going public or a sale of the company. Therefore, , we cannot predict the regularity and time periods between dispositions of our portfolio company investments and the realizations of capital gains, if any, from such dispositions. Dispositions of our portfolio company investments are discretionary and based on our business judgment.

 

Our goal is to facilitate financing for companies in growth industries that we believe are capable of significant gains with capital and managerial support. Despite our limited track record, the transactions that we plan will establish our reputation with our transparency, funding, acquisitions and managerial advice to selected companies. We have relationships developed by our founder, George Morris after twenty five years in finance with venture capital firms, investment banks and trade associations, among others. We believe that we can source but not guarantee access to both investment opportunities and capital to reach our objectives.

 

Our strategy is to evaluate and invest in a broad range of American portfolio companies, for example but not limited to energy, green technology, health, software and media, and other growth areas. Our advisory and management teams may simultaneously develop our strategy with other affiliated and non-affiliated BDCs or non-BDCs in industry and other related areas where there is a potential conflict or support to our strategy in a specific industry or portfolio company investment.

 

We focus on financial reporting transparency prior to sourcing investment capital. Once we acquire a vested interest, we work with company management through offering significant managerial advice. This is followed by further earnings acquisitions by and with the newly acquired portfolio company to accelerate earnings growth. Then we can move forward to becoming a public stock and trading company when and if appropriate for us, with a possible increase in company and/or share value for the company. We believe in the private to public “arbitrage” concept based on earnings multiples, to further increase the capitalized earnings stream. However, we cannot guarantee successful results for the BDC with our strategy.

 

Some of the benefits to our shareholders investing in potential growth situation with income may be as follows: However, we may not be able to provide any of these benefits to our investors due to the high risk nature of our investment fund operations.

 

Public- traded investment fund:

We are a publicly listed investment fund dedicated to value creation opportunities, based on earning growth. . Also, we provide transparency and liquidity as a publically traded fund on the NASDAQ-OTCBB market.

 

Transparency of portfolio investments

Our SEC reporting status requirement of our portfolio companies should give our investors more reliable information about our investments. However, we cannot guarantee a portfolio company can achieve or maintain such SEC reporting status despite our experience with management of such reporting.

 

Liquidity is both an outcome and a driver of our investment strategy:

As a public fund, we help offer investors in our fund the ability to sell or buy interests in our fund through the public stock market. In addition, we believe there are opportunities for our fund to acquire portfolio investment positions by swapping or bartering our fund shares for discounted portfolio company shares. Proper evaluation and negotiation could provide investment shares in selected companies by swapping liquid public shares for less liquid portfolio shares until such portfolio shares can also be traded.

 

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Also, liquidity outcomes from a portfolio investment are improved by the Business Development Company negotiations during both the acquisition and disposition of a portfolio investment.

 

Additional capitals sourcing:

The Business Development Company by its assigned mission from Congress and its designs has a focus on helping provide capital to companies for growth. This financial leverage may accelerate that growth of earnings and portfolio share value.

 

Management advice support:

The Business Development Company by its assigned mission from Congress and i’s design has the opportunity and responsibility to provide substantial managerial advice to support a portfolio investment company success. This managerial advice may accelerate that growth of earnings and portfolio share value.

 

Access to investment opportunities:

With its higher profile created by Congress, a Business Development Company may get access to investments probably not directly available to non-BDC investors; including individuals and institutions.

 

Experience with SEC reporting:

The cost and managerial expertise necessary for SEC reporting and eventually ‘going public” are mitigated and controlled through the advisory experience of our Business Development Company. This advice included assistance in both going and remaining “public.” with continued compliance with SEC requirements. Our BDC management has extensive experience with the management of nearly 100 SEC filings but we cannot guarantee successful results with the SEC in any filing.

 

Value of “going public:

Although an increase in the value of a portfolio company from the application of the price-earnings ratio arbitrage concept cannot be guaranteed, it is a strategy with historical and researched support.

 

The status of the Business Development Company:

Compliance with RIC Regulations of the IRS Code may allow earnings to pass through to our investor without Federal Government tax. However, there is no guarantee that we will initially qualify or continue to qualify for this tax benefit...

 

Diversification and risk mitigation:

The Business Development Company by its investment fund nature offers diversification and risk mitigation. This is also while pursuing a higher return value creation strategy for its investment portfolio companies. There are no guarantees of positive risk to reward results from an investment strategy and/or activities of our Business Development Company; however, we believe our strategy can enhance the probability of our success to produce income and capital gains for our investors...

 

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Other strategy notes:

 

We are not subject to requirements to return invested capital to investors nor do we have finite investment horizon. Also, capital providers such as us, subject to such limitations are often required to seek liquidity events more quickly than they otherwise might, which can result in a lower overall return on investment.

 

We seek to develop our first investment beyond our current “token” holding of LPPI shares received as consulting compensation. In fact, we may write-off the $6,250 portfolio value in the future for lack of potential gain.

 

Quarterly valuation of our portfolio asset is a measure of performance necessary for the BDC investors. We use established valuation procedures and assistance consistently applied to provide investor information on the value of our portfolio.

 

We may access the capital markets from time to time in the future to raise cash to fund new portfolio investments. We also intend to help file registration statements with the SEC to offer for sale, from time to time, shares of our common stock, in one or more underwritten public offerings, at-the-market offerings, negotiated transactions, block trades, best efforts or a combination of these methods. We intend to use the proceeds from these offerings to fund additional investments in portfolio companies consistent with our investment objective. There can be no assurance that we will be able to raise additional capital for investment purposes or, if we are able to do so, on terms favorable to us.

 

Without sufficient access to the capital markets, we may be forced to curtail our business operations or we may not be able to pursue new investment opportunities, which could decrease our investment income, if any, and cause our net asset value to deteriorate. As of September 30, 2012 we had no indebtedness for borrowed money, and we currently do not desire to borrow funds in the foreseeable future to finance the purchase of our investments in portfolio companies. Our advisor and management may change this position to develop and investment opportunity.

 

If we do not generate enough current income from our portfolio company investments, our operating expenses will be financed from our capital base during periods of time between realizations of capital gains on our investments. In addition, if we are successful in disposing of a portfolio company investment, we may reinvest the principal amount of our investment in new portfolio company opportunities. Or we may distribute gains to our stockholders after we pay any incentive fees earned by our investment adviser and our operating expenses.

 

Offering of Securities

 

From April 1, 2011 through March 31, 2012, we have not raised any capital in a public offering of our common stock., However, on March 30, 2012, with the approval of our independent Board of Directors, we eliminated the balance of our debt by converting the existing up-to $100,000 debt at that time to 5,000,000 restricted common shares at $0.02 per share. The trading price per unrestricted share was $0.02 at the time of the exchange. With Board agreement, George Morris converted the $100,000 in debt for 2,000,000 restricted shares at $0.05. The holder of the debt and now converted shares is Apple Realty, Inc., owned by our Board Chairman, George Morris.

 

The shares of our common stock are listed on the Bulletin Board Capital Market (“OTCBB”). There are 25,667,000 shares outstanding as of September 30, 2012 and approximately 2,000,000 non-insider shares are in the public float. George Morris, our Chairman may “trickle-out” sell approximately one-percent per quarter of his beneficially owned shares in the near future for personal financial needs and to increase the non-insider public float shares . George has been the primary funding source of our BDC over the last five years of “hibernation.”

 

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Investment Management and Adviser

 

We are internally managed now by our Board of Directors and Independent Board of Directors Committees such as Investment and Audit Committees. However, we have the intention but cannot guarantee the success of becoming externally managed. The intended management company will be a new investment adviser created by Dr. George Morris or an independent that is registered under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). The new investment adviser will be responsible for managing our day-to-day operations including, without limitation, identifying, evaluating, negotiating, closing, monitoring and servicing our investments. The new adviser will also provide us with the selected administrative/maintenance services necessary for us to operate such as management of SEC Filings. Our investment activities will be managed by the new external advisor pursuant to an investment advisory and/or separate investment advisory and administrative maintenance services agreement (the “Investment Advisory and Administrative Services Agreement”) to be approved by our Board of Directors. We shall pay the new advisor a fee for its investment advisory services under the Investment Advisory and Administrative Services Agreement consisting of two components – atwo percent of asset value base management fee and a twenty percent realized performance incentive

 

The managing member and majority owner of the new Adviser may be George P. Morris, PhD. Our investment adviser’s principals may be George P. Morris, our President, Chief Executive Officer and Chairman of our Board of Directors, a Chief Investment Officer, a Chief Operating Officer, Chief Compliance Officer, and some members of our Board of Directors, all yet to be recruited and retained. In addition, the new external advisor organization will employ other investment professionals dedicated to portfolio company origination, due diligence and financial analysis.

 

The new Advisor shall establish an investment committee (“Investment Committee”) that must unanimously approve each new portfolio company investment that we make. Messrs. Morris and Paul Rademaker of our Board of Directors are the current members of the Investment Committee. However, as the managing member of the new Advisor, Dr. Morris has sole control over the appointment and removal of the members of the Investment Committee.

 

Our new investment adviser’s principals shall have extensive experience in taking companies public, advising micro- and small-cap companies on capital markets strategies, and developing investor relations programs.

 

George Morris currently has “hands-on” experience in these financial areas. Through our investment adviser’s experience in taking companies public, we believe the principals of our investment adviser possess valuable insights on the trends affecting the going public and merger and acquisition markets. Also, there is experience in what contributes to the completion of successful SEC registrations in the current market, going and being public, share price drivers, investor exposure and sentiment, and industries or sectors that are in and out of favor. Our investment adviser is able to use this experience and insight as part of its disciplined approach to investment assessment and adjust valuation expectations and portfolio compositions as public stock market trends are identified. However, we cannot guarantee the success of our advisor or management in these activities...

 

Governance

 

Our Board of Directors (“Board”) monitors and performs an oversight role with respect to our business and affairs, including with respect to investment practices and performance, compliance with regulatory requirements and the services, expenses and performance of our service providers. Also, our Board approves the appointment of our investment adviser and officers, reviews and monitors the services and activities performed by our investment adviser and officers, approves the engagement, and reviews the performance of, our independent registered public accounting firm, and provides overall risk management oversight. Pursuant to the requirements under the 1940 Act and to satisfy the OTCBB listing standards, our Board is composed of a majority of non-interested, independent, directors.

 

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Our Board shall create the Audit Committee, the Valuation Committee and the Nominating Committee to assist the Board in fulfilling its oversight responsibilities. Each of these committees shall be composed solely of non-interested, or independent, directors. The Audit Committee’s responsibilities include overseeing our accounting and financial reporting processes, our systems of internal controls over financial reporting, and audits of our financial statements. The Valuation Committee’s responsibilities include reviewing preliminary portfolio company investment valuations from our investment adviser and making recommendations to our Board regarding the valuation of each investment in our portfolio as an SEC reporting requirement. The Nominating Committee’s responsibilities include identifying qualified individuals to serve on our Board and to select, or recommend that the Board select, the Board nominees.

 

The Investment Environment

 

We operate within an uncontrollable environment of investment and economic market variables. Further we believe some of this uncertainty creates opportunity as well as risk. One opinion is that the American banking system has failed American business and is not providing the capital needed by business to operate and grow. And both the stock market and mergers and acquisition volatility have left the investors very uncertain about the investment market direction and value. However, we believe this same environment has created opportunity for well manage, transparent investments and the needed resources to grow value and income.

 

Further. We believe and want to provide the assistance needed by business in this time of opportunity. We further believe that we can marshal the available resources to help business get what they need as an SEC registered Business Development company as follows:

 

Sourcing Capital Opportunities –

 

We can’t “fix” a failed banking system. However, we can try to serve as a new kind of banking solution to our clients by facilitating access to needed capital. Secured debt has long been the kind of money that allowed American business to grow.

 

The expanding need for capital in areas of purchase order and accounts receivable funding, sometimes called Asset Based Lending (“ABL”) needs to be filled. What is called “hard money” had negative connotation and costs that inhibited business from using this kind of money, in the past. Today, we are seeing more acceptances such as ABL exhibitors with hard money at industry trade shows. And we are planning to be involved in the creation of an ABL Fund and developing other forms of ABL. In fact, other BDCs are specializing in “secured” loan transactions which are another form of ABL. We shall help our clients access all methods of raising operating capital, including ABL from both private and government sources.

 

Another client capital need is for acquiring plant and equipment.

 

Leasing rather than owning can help facilitate the acquisition of needed equipment. We believe we can help our clients with specialized funds looking for longer-term secured loans and/or leases. And lease disclosure is part of the improved transparency required to investors and this kind of positive financial leverage can facilitate growth for our clients. We shall help our client’s access better financial leasing sources through our BDC contacts.

 

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Sourcing equity capital for growth is most challenging and has to offer the investor a significant gain for taking the risk of ownership loss. We believe normal business growth in revenue and income may not be sufficient for the investor risk/return reward challenge. Therefore, we believe our financial model of increasing the market value of a company and its shares is another way of enhancing return to the equity investor. Specifically, our portfolio client companies moving through SEC reporting and then to SEC filing for trading their company shares is an investor opportunity. Multiplying the value received for investment in the earnings of a successful public portfolio company can help offset the risk with an increase total return. It is a matter of transparency, solid financial and operating strategies and continuing access to capital.

 

Our Investment Strategy

 

Our investment objectives are to maximize capital appreciation and pass-through interest and dividend income from our portfolio company investments to our investors. . We seek to accomplish our capital appreciation objective through equity investments appreciation accelerated by earning growth magnified by the price earnings “arbitrage” resulting for becoming a publically traded stock company, versus a non-traded private company. Therefore, a major source of investment return will be generated from net capital gains, if any, realized on the disposition of our portfolio company investments, which typically will occur after a portfolio company completes a public offering. However, our equity investments are also expected to generate some current income (i.e., dividends or interest income). Our investing strategy relies on the expertise of our investment advisers and business managerial support team to source opportunities that meet our investment income growth criteria.

 

We intend to maximize our potential for capital appreciation by taking advantage of the premium we believe is generally associated with having a more transparent and liquid asset, such as a public SEC reporting and/or reporting and/traded security. We believe investors place a premium on transparency and liquidity, or having the ability to honestly “know what is going on in a portfolio company” and to sell public stock more quickly and efficiently, Trading values should improve once the portfolio company shares are registered for trading, than through private transactions. We believe that public companies typically trade at higher valuations – generally 2 to 3 times or more – than private companies with similar financial results. By going public and listing on an exchange, we believe that our portfolio companies have the potential to receive the benefit of this information and liquidity premium. There can be no assurance that our portfolio companies will trade at these higher valuations once they are public and listed on an exchange or that they can successfully register and become trading at all.

 

Because of the value differential which we believe exists between public and private companies as a result of the liquidity and transparency premium, as discussed above, we seek to make investments that create the potential for a 2 to 3 times return on our investment once the company is publicly traded and there is sufficient time after for investors to become aware of the quality of our portfolio investment.

 

We shall pursue investments with a shorter expected investment success time, where we believe the portfolio company may file registration statements with the SEC for reporting and trading. The process of our realizing a maximum capital gain apart from the investment appreciation resulting from gains in operating earnings, could take as much as one to two years from initial SEC registration, legal market exposure and SEC “lockup” provisions prohibiting sale following a “going-public” offering.. Once this lockup restriction expires, we may sell our shares in the portfolio company in the public markets. However, we have the discretion to hold our position to the extent we believe the portfolio company is not being appropriately valued in the public markets. We may pursue investments that have a shorter expected investment hold time but we cannot guarantee the timing results for our liquidation of an investment.

 

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We are focused on the potential value transformation that we believe our portfolio companies will experience as the result of their becoming reliably transparent with SEC reports and then complete becoming publicly traded and achieve a market equity value comparable to their publicly traded peers. We target our investments in portfolio companies that we believe can complete this value transformation within our projected 12 to 36-month holding period. As a result, we may have low or negative returns in our initial years with any potential valuation accretion typically occurring in later years as our portfolio companies complete their becoming publicly traded. Growth of earnings to support an increase in portfolio company value cannot be guaranteed but we believe, good portfolio company management with aggressive merger and acquisition work by management can shorten the process of the company gains.

 

Accurate information and the willingness of major share owner along with existing desired management retention of potential portfolio investments greatly affect the selection of a company for investment by us. It is really about the valuation differential which we believe exists in a potential portfolio investment between their public and private status as a result of the transparency and liquidity premiums investors place on having the ability to know about the company and to sell stock quickly.

 

We believe that there are critical factors that will drive the success of our investment strategy, and potentially enable us to meet our expected targeted return. Follow are explanations of some of the relevant concepts but this list is not intended to be complete.

 

 

Enterprise value: We focus on companies with an enterprise value of typically between $2 million and $20 million. –We believe companies of this size are best positioned to achieve our targeted return on our investment once the company is publicly reporting and traded. This range of equity value could increase with our increased track record and increased capital available for portfolio investment.

 

    Acquisition source. We seek prospective portfolio companies where we can purchase securities directly from an issuer or from a selling stockholder and can obtain business and financial information on the portfolio company. The approach we use to assess our initial investment and monitor our portfolio investments relies primarily on the detailed financial and business information we receive about the company and our access to and discussions with management, both prior to and after our investment.

 

  Debt and/or equity: We seek to acquire secured debt with conversion privileges or options to acquire common stock or equity securities that are typically the issuer’s most senior preferred stock at the time of our investment. In cases where we acquire common shares, the issuer typically has only common stock outstanding. We believe that investing in an issuer’s most senior and/or secured debt or equity securities provides some protections and is one way to potentially mitigate the otherwise high risks investing. Since the securities that we acquire directly from selling stockholders may not represent the most senior securities of the issuer, we may seek to negotiate terms, such as warrants or other structural protections, which are intended to provide some additional value protection. Although we seek to invest in the most senior class of securities or obtain other protections, the seniority and other protections provided in these types of investments may be diminished if the portfolio company issues more senior securities in a subsequent financing round.

 

  Acquisition price: We seek the acquisition of private securities at a valuation that creates the potential for our targeted “arbitrage”return on our investment once the company is publicly traded. We believe that “buying right” at a lower price earnings multiple is one of the keys to success along with growth of earnings in our portfolio company from either or both organic growth and further acquisitions of earnings from additional investments in other related companies...

 

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As of March 31, 2012 we are reviewing the offering status of potential portfolio investments, but have not made a “firm” deal for investment or business development.

 

We do not intend to borrow funds in the foreseeable future to finance the purchase of our investments in portfolio companies, but we have the discretion to do so. However, we have reduced our debt to near zero for the fiscal year ended March 31, 2012, to facilitate our company raising additional equity or debt capital if we desire. However, in the event we do borrow funds to make investments, we are exposed to the risks of leverage, which may be considered a speculative investment technique. Borrowings, also known as leverage, magnify the potential for gain and loss on amounts invested and therefore increase the risks associated with investing in our securities. In addition, the costs associated with our borrowings, including any increase in the management fee payable to our investment adviser, will be borne by our common stockholders. We also do not intend to lend the securities of our publicly traded portfolio companies to generate fee income. 

 

Investment Criteria

 

We have identified numerous criteria we call qualifying and determining factors, to select our portfolio investments. We believe these criteria are important in meeting our investment objective. These core criteria are important for making our investment decisions; however, we may not require each prospective portfolio company in which we invest to meet all of these core criteria.

 

Business Model Validation:

Currently generate enough net income and/or cash flow that can sustain current operations.

 

Gross revenue size:

$2-million to $20-million +/for trailing 12-months or projected with high probability revenue contract.

 

Earnings acquisition is a priority for growth investment opportunities

 

Portfolio company scalability with management, operations structure and resources needed.

 

Growth industry:

Participate in upward growth momentum of an industry or within growing market segments.

 

Growth potential requires competitive plan to realize both organic and acquire growth

 

Manageable competition with industry growth and without dominance required.

 

Geographic concentration efficient with expandable opportunities.

 

Ability and desire of major stakeholders and independent directors to be a public company ASAP.

 

Management commitment to public reporting for transparency and demonstration of integrity.

 

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Management commitment to becoming a public trading company at appropriate time with our support

ROI Potential with capital and income appreciation.

 

Price earnings Ratio: of 2-5 times for portfolio acquisition to facilitate maximum PE multiple arbitrage differential gain.

 

Financial and control structure present and projected

 

Exceptions to above are acceptable for special situations at time of our investment...

 

We believe we can execute our plan to recognize gains in 12 to 36 months from our investment. Time is of the essence. However, there can be no assurance that we will be able to achieve our targeted return on each or any of our portfolio company investments in our planned time frame or beyond.

 

In addition, there are other factors outside of our control and other criteria for investment decisions in evaluating a portfolio company investment opportunity. Some of the factors we must consider include: (I) decreased demand for the company’s products or services, (ii) the company’s ability to support its competitive positions and its ability to capitalize on growth opportunities, (iii) the continued existence and availability of a competent and experienced management team, continuing operating profits and cash and lack of fraud., We cannot guarantee our ability to deal with these variables and threats to growth and survival.

 

Target Industries

 

We focus on micro-cap, small-cap and lower middle market companies across a broad range of growth industries that we believe are being transformed by technological, economic and social forces. The key directive is to find the “right” portfolio investment opportunities our BDC.

 

Diversification

 

Beyond our guidelines for satisfying the regulated investment company, or RIC, diversification requirements, we do not have fixed guidelines for portfolio diversification and, as a result, our investments could be concentrated in relatively few industry sectors, geographic areas or other descriptions of concentration. Further, we also expect that all or a substantial portion of our portfolio may be invested in illiquid securities.

 

During our initial investment period, the size of each of our investments will be generally based on our prevailing low level of our gross assets. Therefore, these investments typically represented more than our target size for each portfolio company investment of about 10% or less of gross assets if we are not seeking a control position.

 

Based on the early level of our total assets, we expect that the size of our individual portfolio company investments could range from approximately $500,000 to $5 million +/-, but we may invest more than this amount in certain situations. Depending on whether we are able to increase the amount of our invested capital or leverage our investment with the cooperation of our portfolio company,the range of our potential investment size may increase. We expect that most of our portfolio company investments will represent about 5% to 10% of our gross assets at the time of investment. However, based on our investment adviser’s assessment of each portfolio company’s relative quality, fundamentals and valuation, we may make company investments that could represent up to 20% or more of our gross assets at the time of investment. We expect these percentages will fluctuate over time based on a variety of factors including, but not limited to, additional follow-on investments in existing portfolio companies, dispositions, unrealized appreciation or depreciation, an increased asset base as a result of the issuance of additional equity, or a decreased asset base as a result of repurchases of our own equity. An unplanned series of events or opportunities could lead to a substantially higher percentage of ownership in a portfolio investment.

 

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We do not choose specific investments based on an allocation strategy of industry diversification and do not intend to rebalance our portfolio if one of our portfolio company investments increases in value relative to the remaining portion of the portfolio. As a result, our portfolio may be more vulnerable to events affecting a single economic sector, industry or portfolio company and, therefore, subject to greater potential volatility than a company that follows a more diversified strategy.

 

With our focus on companies based with headquartered in California and the Southwestern United States, our investments in these areas will likely continue to comprise a large portion of our portfolio. While not a matter of portfolio management personal convenience, our management timely interaction with these portfolio companies is facilitated by this strategy. However, special opportunity circumstance may lead us to invest in portfolio companies outside California and outside the Southwestern United States. Also, we expect that many of the California-based portfolio companies that we may invest in will have significant operations and customers outside of California.

 

Further, as a business development company, we may invest in certain limited number of non-U.S. companies that otherwise meet our investment criteria, subject to the requirements of the 1940 Act. However, we do not plan at this time to invest beyond America.

 

Our Investment Sourcing

 

We believe that we have a structured approach to source qualified investing opportunities from an established developed network of investors, advisers, and private companies that are very interested in participating with us in our transactions. We believe in a very open system to us composed primarily of venture capital firms, investment banking firms, and groups of law firms and accounting firms. Our management through George Morris has developed relationships over twenty five years with these leading participants to help us “prospect” for investment opportunities.

 

Through these relationships, our investment network will help us locate qualified investment opportunities that may meet our investment criteria. We believe this approach will allow us to source the most attractive companies committed to working with our investment models. Our investing strategy relies on our expertise to source opportunities that we can validate as meeting our investment criteria. Our structure requires evaluation of company-provided business and financial information and access to management. Our BDC management will source our investments through its principal office located in Newport Beach, California as well as through other actual and virtual offices and other organizations located throughout the United States.

 

We expect that the primary source of our future portfolio company investment opportunities will be from our relationships with various members of the investment and business communities...

 

With over twenty-five years’ experience in the in the investment banking community, the network available to us through George Morris, our Chairman and President is established and open to our need for portfolio companies investments. The goals of this network are mutually compatible and profitable for legal compliance and motivation.

 

As a micro to smaller middle market BDC, we can complement the efforts of larger BDCs, venture capital firms and other investors in a larger targeted portfolio company. In addition, where we do not seek control features of the portfolio company, we may allow the private company’s existing management and board to focus on executing its business strategy. We will, however, make available significant managerial assistance on both a free and for a fee basis to our portfolio companies as the BDC law requires. We may also seek to negotiate terms, such as warrants or other structural protections, which are intended to provide some additional value protection and profit.

 

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We also shall source investment opportunities from our direct outreach to private companies. We have implemented a proactive marketing program to communicate with our referral network and with companies that meet our investment criteria. In addition, we shall continue to build our reputation as a leading source of investment opportunity.

 

Portfolio Company Analysis and Selection

 

We use a structured approach to our initial investment assessment which relies primarily on the detailed financial and business information we receive about the company and our access to and discussions with management, both prior to and after our investment. We use this company information to prepare our initial valuation analysis, leveraging its experience in taking companies public. We also use our initial discussions with our portfolio company management teams to discuss their commitment to completing registration and going public to determine which are best positioned to meet or exceed their performance targets and correspondingly achieve a market equity value comparable to their publicly traded peers.

 

Once we identify those companies that we believe meet our criteria and have indicated an interest in our value improvement model, we utilize an investment analysis and selection process as follows:

 

Qualifying factors

 

We start with information from the company’s management and/or placement agent and conduct a preliminary evaluation of the opportunity with primary focus on understanding the business, historical and projected financial information, industry, competition and valuation. From here we try to determine whether we believe the prospective portfolio company will be able to satisfy our targeted return on investment.

 

The results of this preliminary evaluation are presented to our Investment Committee, and typically a decision is made whether to pursue the opportunity further based on the relative attractiveness of the opportunity, the expected investment horizon and our assessment of the potential return on our investment, and our core investment criteria, compared to other opportunities currently available. The Investment Committee will select those portfolio company investment opportunities that best meet our investment criteria and present the greatest potential for achieving our target return on investment.

 

Determining factors

 

After Investment Committee selects a portfolio company investment opportunity for further analysis, we will conduct research on the company’s prospects and industry, participate in additional discussions with the company’s management, placement agent and existing investors, and prepare an internal investment memorandum which discusses our evaluation findings and recommendations, together with an internal valuation analysis outlining our acceptable valuation ranges for an investment.

 

As part of our analysis, we will have discussions with the company’s management and advisers, and we usually request to have access to the company’s major stockholders. These discussions generally are centered on a review of the company’s financial history and projections to understand key supporting assumptions, verification of the company’s commitment to go public and the timing thereof, and the primary considerations, metric achievements being used by the company to justify its pre-money valuation.

 

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At this stage, we prepare an in-depth valuation analysis focused primarily on comparable private transactions; market multiples of public companies that we believe are most comparable, and a discounted cash flow analysis. Based on our comprehensive valuation assessment, the Investment Committee typically makes a decision whether to proceed with an investment at a price and, the terms and conditions that we will propose for further negotiation. Each new portfolio company investment that we make requires the unanimous approval of our investment adviser’s Investment Committee.

 

Variables and Negotiations

 

We believe that negotiating investment terms that are expected to provide an enhanced return upon complete execution of our model is one additional important way to mitigate the otherwise high risks associated with this transaction...Such structural protections could include conversion rights which would result in our receiving shares of common stock at a discount to any public offering upon conversion at the time of starting public trading, or warrants that would result in our receiving additional shares for a nominal exercise price at the time of public trading. In some cases, our decision to pursue an investment opportunity will be dependent on obtaining some structural protections that are expected to enhance our ability to meet our targeted return on the investment.

 

Due Diligence and Closing

 

Prior to closing an investment, we conduct further due diligence with a focus on verifying or validating the primary considerations used by our Investment Committee in approving the investment, contacting where possible key suppliers, customers or industry sources, and verifying the company’s capitalization table and equity structure. The consummation of each investment will be subject to the satisfactory completion of our due diligence investigation, our confirmation and acceptance of the investment pricing and structure, our review and acceptance of definitive agreements and, the exercise of any applicable veto rights or rights of first refusal.

 

Our Board of Directors and advisers have extensive experience negotiating, structuring and closing these specialized equity purchase transactions with issuers and selling stockholders. As part of its due diligence process, our investment committee analyzes the complex capital structures which companies typically possess including multiple classes of common and preferred equity securities with differing rights with respect to voting, dividends, redemptions, liquidation, and conversion rights. Our investment committee and principals also have experience in negotiating matters relating to rights, restrictions of transfer, etc.

 

Portfolio Company Investment Structure

 

Our portfolio company investments will to be composed of, investments primarily in the form of secured notes, preferred securities that are convertible into common stock, common stock, and warrants exercisable into common or preferred stock.

 

At the time of our investment, the equity securities we acquire are generally illiquid due to restrictions on resale and/or to the lack of an established trading market. Our investments are sometimes non-controlling but we may seek observation rights or other control features. We offer significant managerial assistance to our portfolio companies on a free or a fee basis. We expect many of our portfolio company investments to be in the form of debentures or loans that are convertible into or settled with common stock,

 

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The equity securities that we acquire directly from an issuer are typically the issuer’s most senior preferred stock at the time of our investment or, in cases where we acquire common shares, the issuer typically has only common stock outstanding. The equity securities that we acquire directly from selling stockholders are typically common stock and may not represent the most senior equity securities of the issuer. However, in each case, we may seek to negotiate terms, such as warrants or other structural protections, which are intended to provide some additional value protection or opportunity in the event of SEC registration and/or going public.

 

The proceeds of our direct investments are used by these companies for growth or working capital purposes as well as for acquisitions. In many of our portfolio companies, venture capital funds or other financial or strategic investors are either existing investors or co-investors in the round in which we invest in.

 

We believe, if requested, to establish the price and other terms where existing venture capital investors, who are also likely to have board seats and as such may be conflicted, prefer to have a new investor lead the financing round without granting a board seat to us. Since we may not require board seats, or other control provisions, we allow the current management and board to remain focused on executing the company’s business strategy.

 

There is no assurance that we will be successful in negotiating structural protections and, if we are able to obtain these structural protections, it is possible that these protections may be diminished if the portfolio company issues more senior securities in a subsequent financing round.

 

Where we are not a lead investor, we typically we will not have structural protections, although some variation may be included in certain investments to the extent negotiated by the lead investor in such transactions.

 

Our convertible preferred stock investments typically carry fixed or adjustable rate dividends and will generally have a preference over common equity in the payment of dividends and the liquidation of a portfolio company’s assets. This preference means that a portfolio company must pay dividends on preferred stock before paying any dividends on its common equity and, in some cases, the holders of all outstanding series of preferred stock would receive any preferred dividends based on their respective preference amount on a pro rata basis. However, in order to be payable, dividends on such preferred stock must be declared by the portfolio company’s board of directors. In the event dividends on our preferred stock investments are non-cumulative, or if the board of directors of a portfolio company does not declare a preferred dividend for a specific period, then we will not be entitled to such a preferred dividend for such period...

 

We cannot be guaranteed to receive dividend income on our preferred stock investments. Cumulative dividend payments on preferred equity means dividends will accumulate even if not declared by the board of directors or otherwise made payable. In such a case, all accumulated dividends must typically be paid before any dividend on the common equity can be paid. However, there is no assurance that any dividends will be paid by a portfolio company even in the case of cumulative preferred dividends and, in most cases, the payment of any accumulated preferred dividends is likely to be deferred until conversion and, if paid, may be paid in shares of the issuer’s preferred or common stock.

 

As of September 30 September, 2012, we have not made any cash investments

 

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Our Investment Goals

 

We seek to invest in micro-cap, small-cap and lower middle market companies that we believe will be able to file an audited registration statement with the SEC within approximately 6 months or less after our initial investment, and complete a registration to issue portfolio company shares within approximately 12 months after the closing of our initial investment. However, there may be delays due to completion of auditor requirements or a strategy decision to delay trading of our portfolio company shares at our sole discretion.

 

After, registration with the SEC, the portfolio company may seek and obtain an exchange listing when it is strategically advantageous. However, we typically will be subject to a lockup restriction which prohibits us from selling our investment during the customary 180-day period following the exchange listing. Once this lockup restriction expires, we expect to sell some or all of our shares in the portfolio company in the public markets as are strategically advantageous. However, we have the sole discretion to hold our position to the extent we believe the portfolio company is not being appropriately valued in the public markets or is adversely affected by market or industry cyclicality. Accordingly, we anticipate our typical investment horizon for portfolio investments will be 12 to 36 months. We may pursue investments with a shorter expected investment horizon, where we believe the portfolio company may file for public trading of shares sooner than 12 months or has a registration statement filed at the time of our investment. In each case, we have the discretion to hold securities for a longer period. There can be no assurance that we will be able to achieve our targeted return on our investments in portfolio companies once they go public.

 

If the private companies in which we invest do not perform as planned, they may be unable to successfully complete a security public registration within our typical targeted 12 -month time frame, or at all, or may decide to abandon their plans. In such cases, we will likely exceed our targeted 36-month holding period and the value of these investments may decline substantially if the going public exit is no longer viable. We may also be forced to take other steps to exit these investments, including the use of the trading platforms of private secondary marketplaces that specialize in the trading of private company securities.

 

Although we expect that some of our equity investments may trade on these trading platforms, the securities we hold will typically be subject to legal and other restrictions on resale that may prevent us from using these trading platforms or otherwise selling our securities, and will otherwise be less liquid than publicly traded securities. Furthermore, trading in private securities markets involves risks given the possible imbalance of information between such transaction participants. In addition, while some portfolio companies may trade on the trading platforms of private secondary marketplaces, we can provide no assurance that such a trading market will be available for particular companies, will continue or remain active, or that we will be able to sell our position in any portfolio company at the time we desire to do so and at the price we anticipate.

 

Since we may not seek to control a portfolio company, we may not expect to have input as to when, or if, our portfolio companies choose to pursue a SEC share trading registration. In certain cases, our portfolio companies may choose to delay the registration because of either adverse conditions in their particular industry or the equity markets generally. In other cases, our portfolio companies may be performing poorly or not achieving the milestones that an investment bank would require to underwrite a share offering. In such cases, our portfolio companies may need to raise additional capital, which may cause dilution to, or adversely affect, our ownership interests, or we may have to make additional follow-on investments pro rata with other investors in order to preserve our rights and preferences of our initial investment.

 

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In certain situations, our portfolio companies may abandon the pursuit of registration altogether, because the completion of registration is no longer a realistic possibility or because another company seeks to acquire our portfolio company. If a portfolio company has abandoned plans to pursue registration and we are not able to liquidate our shares privately, the portfolio company may consider a sale or merger with a strategic buyer as a possible alternative to registration or pursue a strategic sale and exit strategy.

 

Portfolio Company Progress

 

As part of our portfolio company investment, we typically require information rights that give us access to the company’s quarterly and annual financial statements as well as the company’s annual budget. Although we may not have a control position through our ownership or board seats, we attempt to have an on-going dialogue, on at least a quarterly basis, with our private portfolio company management teams to review the company’s business prospects, financial results, and exit strategy plans. We also monitor our portfolio for compliance with the requirements for maintaining our status as a business development company under the 1940 Act and a RIC for tax purposes.

 

Since we may not be in a position to control the management, operation and strategic decision-making of the companies we invest in, a portfolio company may make business decisions with which we disagree, and the stockholders and management of such a portfolio company may take risks or otherwise act in ways that are adverse to our interests. Due to the lack of liquidity for the equity investments that we will typically hold in our portfolio companies, we may not be able to dispose of our investments in the event that we disagree with the actions of a portfolio company or its substantial stockholders, and may therefore suffer a decrease in the value of our investments.

 

We also use our ongoing discussions with our portfolio company management teams to monitor their continued commitment to completing a registration and, when requested, to provide our insights on the current investment market and what we believe are the key differentiators for successful registration and share offering.

 

We also offer significant managerial assistance to our portfolio companies as requires for registered business development companies under the Act... We expect that this managerial assistance will likely involve consulting and advice for the going and staying public and public capital markets. As a business development company, we are required to offer, and in some cases provide and be paid for, such managerial assistance.

 

Disposition of Investments in Publicly Traded Portfolio Companies

 

Our primary source of investment return will be generated from net capital gains realized on the disposition of our portfolio company investments, which typically will occur after a portfolio company completes a share trading registration... We are also typically prohibited from exiting investments in our publicly traded portfolio company until the expiration of the customary post-public lockup agreement. These agreements, which we are required to enter into as part of our initial investment, prohibit us and other significant existing investors from selling stock in the portfolio company or hedging such securities during the customary 180 days following an effective registration..

 

Also, the market prices of portfolio companies that have recently completed a trading registration typically experience high volatility and are driven by such factors as overall market conditions, the industry conditions for the particular sector in which the portfolio company operates, the portfolio company’s performance, the relative size of the public float, and the potential selling activities of other pre-registration investors and possibly management.

 

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Following the lockup period, we may be forced to compete with other selling stockholders for a limited availability of liquidity in our publicly traded portfolio companies, which volume may be inadequate, and could result in significant market price volatility and a decline in the value of our investment. In such cases, the value of our investments may decline substantially or we may be forced to hold our positions for longer than we anticipated, or both.

 

For our portfolio company investments where the lockup period has expired and the stock becomes freely tradable, we may not begin selling automatically upon expiration of the lockup period. We expect to sell our positions over a period of time, typically during the 12 months following the expiration of our lockup, although we may sell more rapidly or slowly in one or more block transactions. Factors that we may consider include, but are not limited to, the following:

 

The target price determined by our investment adviser based on its business judgment and what it believes to be the portfolio company’s intrinsic value.

 

The application of public company multiples and our proprietary analysis to a variety of operating metrics for each portfolio company.

 

The primary operating metrics that we typically consider are revenue, EBITDA and net income.

 

Other factors that may be adversely or favorably affecting a particular portfolio company’s stock price, including overall market conditions, industry cyclicality, or issues specific to the portfolio company.

 

While we do not intend to purchase stock in a portfolio company’s initial offering or in open market transactions thereafter, under certain circumstances, we may consider making additional investments in a publicly traded portfolio company in open market purchases, which will increase our position in the company. However, we may be unable to make follow-on investments in our publicly traded portfolio companies as a result of certain regulatory restrictions on a business development company’s investments in publicly traded securities with market capitalizations in excess of $250 million.

 

Because the portfolio company securities that we acquire are typically illiquid until a public trading registration or sale of the company, we generally cannot predict the regularity and time periods between dispositions of our portfolio company investments and the realizations of capital gains, if any, from such dispositions. Dispositions of our portfolio company investments are discretionary and based on our business judgment. Since we may not generate current income from our portfolio company investments, our operating expenses and any dividend to our shareholders will be financed from our capital base during periods of time between realizations of capital gains on our investments. In addition, if we are successful in disposing of a portfolio company investment, may reinvest the principal amount of our investment in new portfolio company opportunities, with any gain that we may realize being distributed to our stockholders after we pay any incentive fees earned by our investment adviser and our operating expenses.

 

The trading platforms of private secondary marketplaces have also emerged as an alternative to traditional public equity exchanges to provide liquidity principally to the stockholders of venture capital-backed, private companies. While these trading platforms have more limited transaction volume than public exchanges, they may provide us with access to potential purchasers interested in privately acquiring our positions in our portfolio companies that are unable to dispose of within our targeted time frame.

 

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Due to the nature of our corporate structure, we believe that we can be a patient investor in our portfolio companies allowing them flexibility to access what may be shorter and more unpredictable share trading registration options, when the timing and pricing may be best for the company and us. In the event of a prolonged closure of the new share issue public trading markets, we can be flexible as our portfolio companies wait for a market recovery or seek alternative exist strategies. Since we are not subject to requirements to return invested capital to investors, we typically are not forced to seek a liquidity event more quickly than they otherwise might, which can result in a lower overall return on an investment.

 

Competition

 

A large number of entities compete with us to make the types of investments that we target as part of our business strategy. We compete for such investments with a large number of venture capital funds, other equity and non-equity based investment funds such as business development companies, investment banks and other sources of financing, including traditional financial services companies such as commercial banks and specialty finance companies. Many of our competitors are substantially larger than us and have considerably greater financial, technical and marketing resources than we do. In addition, some of our competitors may require less information than we do and/or have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than we can. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a business development company and, as a result, such companies may be more successful in completing their investments.

 

There can be no assurance that the competitive pressures we face will not have a material adverse effect on our business, financial condition, and results of operations. Also, as a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time, and we can offer no assurance that we will be able to identify and make investments that are consistent with our investment objective.

 

Investment Advisory and Administrative Services Agreements

 

ADVISORY AGREEMENT

 

We are internally managed presently by our Investment Committee and Board of Directors until such time within in approximately 12 to 24 months, our Board of Director may select an external Adviser. Our future external investment advisor could be (“Morris Advisement”) or another licensed adviser company selected by our Board of Directors.

 

It is expected that our external Advisor elected by our Board will be registered with the SEC and/or by State regulation according to the current law.

 

As an investment adviser under the Advisers Act,although we are not aware of any current plans for our Investment Adviser to do so, our Adviser may also in the future provide similar investment advisory services to other entities in addition to us including other BDCs. In the event that our Advisor provides investment advisory services to other entities, our Adviser intends to allocate investment opportunities in a fair, logical and equitable manner as it solely determines pursuant to its allocation policies and procedures and in any event consistent with the fiduciary duties owed to us.

 

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Subject to the overall supervision of our Board of Directors, our Adviser shall manage our day-to-day investment operations and provides us with needed investment advisory services. Under the terms of the Investment Advisory Agreement, as shall be in effect, our adviser Investments:

 

Determines the composition of our portfolio, the nature and timing of the changes to our portfolio and the manner of implementing such changes;

 

Determines which securities we will purchase, retain or sell;

 

Identifies, evaluates and negotiates the structure of the investments we make; and closes monitors and services the investments we make.

 

Our external Adviser’s services under the Investment Advisory Agreement will not be exclusive to us and the adviser is free to furnish similar services to other entities so long as its services to us are not impaired. Further, our investment Adviser, its principals, investment professionals and the members of its Investment Committee mayserve as investment advisers, officers, directors or principals of entities or investment funds that operate in the same or a related line of business as us and/or of investment funds managed by our affiliates.

 

We pay our Advisor a fee for its investment advisory services under the Investment Advisory Agreement consisting of two components – a base management fee and an incentive fee. The cost of both the base management fee payable to our Adviser and any incentive fees earned by our Adviser is ultimately borne by our common stockholders. Our officers do not receive any compensation directly from us. However, the principals and officers of the investment adviser who also serve as the Company’s officers receive compensation from, or may have financial interests in, the investment adviser, which may be funded by or economically related to the investment advisory fees paid by us to the investment adviser under to the Investment Advisory Agreement.

 

The base management fee (the “Base Fee”) is calculated at an annual rate of 2% of our gross assets, where gross assets also include any borrowings for investment purposes. The Base Fee is payable monthly in arrears, and is calculated based on the value of our gross assets at the end of the most recently completed calendar quarter, and appropriately adjusted for any equity capital raises or repurchases during the current calendar quarter.

 

The incentive fee is payable in arrears as of the end of each calendar year and equals 20% of our realized capital gains, if any, on a cumulative basis from inception through the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid incentive fees. For purposes of determining the incentive fee to be paid, realized capital gains, realized capital losses and unrealized capital depreciation are each determined without regard to the holding period for our investments and include both long-term (held more than 12 months) and short-term holdings.

 

ADMINSTRATIVE SERVICES AGREEMENT

 

Pursuant to the Administrative Services Agreement, our Administrator, who may also be our Advisor.Both our Advisor and Administrator amy, but necessarily, may furnish us with equipment and clerical, bookkeeping and record-keeping services. Under the Administrative Services Agreement, our Administrator facilitates the performance of certain administrative services, which includeswith Advisor assistance, being retentionof the financial records which we are required to maintain and preparing reports to our stockholders and reports filed with the SEC. In addition, our Administrator shall assist us in monitoring our portfolio accounting and bookkeeping, managing portfolio collections and reporting, performing internal audit services, determining and publishing our net asset value as calculated and provided from the Advisor, overseeing the preparation and filing of our tax returns and the printing and dissemination of reports to our stockholders, providing support for our risk management efforts and generally overseeing the payment of our expenses and the performance of administrative and professional services rendered to us by others. The Administrator will not directly create or produce the work necessary for the above but will retain and supervise at the Fund expense, the necessary licensed where available or non-licensed professional as independent contractors to the Fund.

 

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The BDC Fund shall reimburse our Adviser and Administrator for our allocable portion of overhead and other expenses incurred by it/them performing advisory and administrative obligations under the Investment Advisory and Administrative Services Agreements. The Advisor and Administrator shall credit the Fund for our allocable portion of the compensation of our Chief Financial Officer and Chief Compliance Officer, and their respective staff used by the Advisor and Admiistrator. The fees paid to the Administrator for the administrative supervision services shall be computed as 20% of the Advisory fee amount and terms but no less than $40,000 annually, on a five year $200,000 contract basis or shorter for the life of the fund. Some or all of these supervision fees shall be paid by our Fund and/or deducted from the 2% fees due to the Advisor.. The Administrative contract shall be automatically renewable at the option of the Administratorand/or assignable to a competent substitute selected exclusively by theAdministrator.

 

Our primary operating expenses include the payment of: (I) investment advisory fees to our investment adviser, (ii) our administrator fees and allocable portion of overhead and other expenses incurred by our Administrator, in performing its administrative obligations under the both the Administrative Services Agreement, and (iii) other operating expenses which we have detailed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below. Our investment advisory fee compensates our investment adviser for its work in identifying, evaluating, negotiating, closing, monitoring and servicing our investments. We bear all other expenses of our operations and transactions. Our Fund Administrator fee compensates our administrator for its work in supervising the maintenance of sub-contractors for their fund maintenance to support the legal operation of the fund.

 

We believe the investment advisory fees that we shall pay our Adviser fairly compensates it for the specialized knowledge that its principals and investment professionals have in managing our specialized pool of private and public equity investments. Specifically, we believe our investment adviser has a superior origination platform and approach based on company-provided information and access to company management, a unique understanding of the financial markets and the underwriting of risks associated with investing, and a structured portfolio monitoring process to evaluate our specific portfolio companies and ensure the integrity and reliability of our Board of Directors’ determination of the fair value of our portfolio company investments.

 

We believe the investment administrator fees that we shall pay our Administrator fairly compensates it for the specialized knowledge in fund supervision maintenance for the operation of a 1940’s Act Business Development Company, (“BDC”), including the compliance and reporting requirements necessary. Further, the support of the Administrator to the Board of Directors of the BDC helps Board awareness and advises future challenges with changing government regulations and compliance from government regulators, along with the Fund’s legal counsel.

 

The Advisor is not responsible for the compliance of the Fund and the Board maintains the sole responsibility for timely and appropriate action for the Fund.

 

Both, our amended and/or restated Investment Advisory and Administrative Supervision Agreements, which shall be in effect, will be approved by our Board of Directors (including the non-interested directors) and by our stockholders with the retention of our external Adviser. Any new Investment Advisory Agreements will remain in effect from year to year thereafter if approved annually by (i) the vote of our Board of Directors, by the vote of a majority of our outstanding voting securities and a majority of our preferred shareholders, and (ii) the vote of a majority of our directors who are not interested persons. An affirmative vote of the holders of a majority of our outstanding voting securities and a majority preferred shareholder is also necessary in order to make material amendments to the current Investment Advisory and Administrative Services Agreement.

 

The Investment Advisory Agreement will automatically terminate in the event of its assignment. As required by the 1940 Act, the Investment Advisory Agreement provides that we may terminate the agreement without penalty upon 60 days written notice to our Advisor. Such written notice or any request by the external Adviser for shareholders contact information shall include a complete list of BDC shareholder including their addresses and all other contact information known to our BDC and provided to the Adviser with seven days at the our BDCs expense.

 

If our Adviser wishes to voluntarily terminate the Investment Advisory and Administrative Services Agreement, it must give stockholders a minimum of 120 days’ notice prior to termination. The Investment Advisory may also be terminated, without penalty, upon the vote of a majority of our outstanding voting securities and preferred shareholders.

 

The Administrative Services Agreement may be assigned by the Administrator with notification to the Board of Directors in the event of its assignment. If our Administrator wishes to voluntarily terminate assign the Administrative Services Agreement, it must give Board of Directors a minimum of 60 days’ notice prior to termination or assignment.

 

In addition, should we or our Adviser elect to terminate the Investment Advisory a new investment adviser may not be appointed without approval of a majority of our outstanding common stock and preferred stock shareholders, except in limited circumstances where a temporary adviser may be appointed without stockholder consent, consistent with the 1940 Act.

 

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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 sourcing capital and 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 (“EPC”) 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 the portfolio company or its officers, directors, or affiliates.

 

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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 subsidiaries or EPC’s; however we do hold shares of “LPPI” granted to us for consulting services. We are actively seeking quality eligible portfolio companies in which to make an investment and provide managerial assistance.

 

Three Months ended September 30, 2012 compared to the Six Months ended September 30, 2011 and September 30, 2010

 

Results of Operations

 

Introduction

 

During the three months ended September 30, 2006, we elected to become subject to certain sections of the Investment Company Act of 1940 by becoming a Business Development Company. Our consulting services continued to be our sole source of revenues for the quarter.

 

Revenues and Income (Loss) from Operations

 

Our revenue, cost of revenue, total operating expenses and income (loss) from operations for the six months ended September 30, 2012, as compared to the three months ended September 30, 2011 and 2010 are as follows:

 

   

3 Months Ended

September 30, 2012

   

3 Months Ended

September 30, 2011

   

Percentage

Change

Increase

(Decrease)

   

3 Months Ended

September 30, 2010

 

 

Revenue

  $ 3,000-     $ -     100.0      $ —0  
Cost of revenue     3,000-       -     (100.0  )     -  
Total operating expenses     (5,347)       (3,451 )   (54.9) %     8,166  
                               
Income (loss) from operations   $ (2,347 )   $ (3,451 )   (32.0) %   $ (1,876 )

  

Our revenues for the three months ended September 30, 2012 increased to $3,000 compared to $0 for the three months ended September 30, 2011 and $0 for the three months ended September 30, 2010. This change in revenues was a result of the new activity for our business development consulting services.

 

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Our total operating expenses increased by 54.9% to $5,347 for the three months ended September 30, 2012 compared to $3,451 for the three months ended September 30, 2011 and $8,166 for the three months ended September 30, 2010.

 

As a result of the above, our loss from operations decreased 32.0% for the three months ended September 30, 2012 was $2,347, compared to a loss of $3,451 for the three months ended September 30, 2011, and a loss of $1,876 for the three months ended September 30, 2010.

 

Non-Operating Income (Expense) and Net Income (Loss)

 

Our other income, interest expense, and net income (loss) for the three months ended September 30, 2012, as compared to the three months ended September 30, 2011 and 2010 are as follows:

 

   

3 Months Ended

September 30, 2012

   

3 Months Ended

September 30, 2011

   

Percentage

Change

Increase

(Decrease)

    3 Months Ended September 30, 2010  
Other income   $ -     $ -     -     $ -  
Interest expense     (0 )     -       %     - )
Beneficial conversion expense     -       -     -       ( )
Net income (loss)   $ (2,347 )   $ (3,451 )   (32.0) %   $ (1,876 )

 

On September 20, 2009, the board of directors authorized George Morris, the chairman, director and officer of the Company, to convert up to $415,000 of the outstanding debt of the company to him into 6,916,667 shares of common stock at the price of $0.06 per share. The Company recorded the right of converting the debt into shares amounting to $415,000 as an expense in the accompanying financial statements as of September 30, 2009 Since George Morris did not convert his debt as of June 30, 2011, at the Board at a meeting of August 11, 2012, the independent Board of Director members again authorized and encouraged George Morris to convert at the current market price of $0.03 to reduce the debt of the Company. The decision to reduce the debt is based on the plan to seek more capital through an equity or debt raise for operations. The current principal balance of George Morris and his affiliate Apple Realty would convert into 3,333,333 shares at $0.03 per share. However, George Morris agreed to convert all of debt his based on his tax accountant advice and Morris did in fact convert his debt receivable from our Company for 2,000,000 shares at $0.05 per restricted share.

 

Liquidity and Capital Resources

 

Introduction

 

During the three months ended September 30, 2012, we had a negative cash flow from operating activities of $2,468 and $0 cash out-flow from financing activities. We anticipate these numbers will improve.

 

Our cash and cash equivalents, accounts receivable, total current assets, total current liabilities, and total liabilities as of September 30, 2012, compared to September 30, 2011 and March 31, 2012, are as follows:

 

   September 30, 2012   September 30, 2011   March 30, 2012 
Cash  $7,894   $627    5,426 
Accounts receivable   750    0-    7,500 
Marketable Securities   6,250    12,500    12,500 
Total assets   14,894    12,627    25,426 
Total liabilities   2,390    77,855    2,390 

 

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Cash Requirements

 

Our cash requirements are expected to remain stable over the next 12 months. Our cash is utilized primarily for professional fees associated with being a public, reporting company and with the acquisition of eligible portfolio companies.

 

Sources and Uses of Cash

Operations and Financing

 

During the three months ended September 30, 2012, we generated positive cash flow of $2,468. This was a result of net cash generated by operating activities of $2,468), and $-0- net cash used in financing activities. We anticipate that we will continue to operate at a small net loss and generate a small positive cash flow from the operations of our business services and consulting and loans from officers.

 

Critical Accounting Policies

 

Our accounting policies are fully described in Note 2 to our consolidated financial statements. The following describes the general application of accounting principles that impact our consolidated financial statements.

 

Our results of operations are based upon our 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 us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debt, inventories, investments, intangible assets, income taxes, financing operations, and contingencies and litigation.

 

We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

 

Since we have very few assets and only one operating division there is no quantitative information, as of September 30, 2012, about market risk that has any impact on our present business. Once we begin making investments in additional eligible portfolio companies we anticipate 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.

 

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ITEM 4. Controls and Procedures

 

Evaluation of disclosure controls and procedures. The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective and are designed to provide reasonable assurances of achieving their objectives. Further, the Company’s officers concluded that its disclosure controls and procedures are also effective to ensure that information required to be disclosed in the reports that it files or submits under the Exchange Act is accumulated and communicated to its management, including its chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure. There were no significant changes in the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.

 

PART II - OTHER INFORMATION

 

ITEM 1. Legal proceedings

 

In the ordinary course of business, we may be from time to time involved in various pending or threatened legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon our financial condition and/or results of operations. However, in the opinion of our management, matters currently pending or threatened against us are not expected to have a material adverse effect on our financial position or results of operations.

 

ITEM 1A Risk Factors

 

At the time we filed our last Annual Report on Form 10-K, we were a Small Business Issuer as defined in Regulation S-B, and thus did not include risk factors in our filing.

 

 

ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds

 

2,000,000 Common Shares were exchanged for $100,000 in debt owed to our Chairman George Morris to eliminate all debt from our Balance Sheet.

 

ITEM 3 Defaults Upon Senior Securities

 

There have been no events which are required to be reported under this Item.

 

ITEM 4 Submission of Matters to a Vote of Security Holders

 

There have been no events which are required to be reported under this Item.

 

ITEM 5 Other Information

 

There have been no events which are required to be reported under this Item.

 

ITEM 6 Exhibits

 

3.1 (1)   Articles of Incorporation of Electronic Media Central Corporation
3.2 (4)   Articles of Amendment to Articles of Incorporation
3.3 (1)   Bylaws
10.1 (2)   Distribution Agreement Between Electronic Media Central and L&M Media, Inc., dba Apple Media
14.1 (3)   Code of Ethics
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.

 

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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.
     
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema Document
101.CAL   XBRL Taxonomy Extension Definition Linkbase  Document
101.DEF   XBRL Taxonomy Extension Definition Linkbase  Document
101.LAB   XBRL Taxonomy Extension Label Linkbase  Document
101.PRE   XBRL Taxonomy Extension Presentation  Linkbase Document

 

    (1) Incorporated by reference to our Form 10-SB, Commission file number 000-32345, filed with the Commission on February 13, 2001.
    (2) Incorporated by reference to the Registrant’s Registration Statement on Form 10-SB/A, filed on April 13, 2001.
    (3) Incorporated by reference to the Registrant’s Annual Report on Form 10-KSB, filed on July 13, 2004.
    (4) Incorporated by reference to the Registrant’s Annual Report on Form 10-K, filed on July 3, 2007.
    * Filed herewith

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Dated: November 9, 2012    
  By: George P. Morris
    Its: Chief Executive Officer
    /s/ George P Morris

 

Dated: November 9, 2012    
  By: George P. Morris
    Its: Chief Financial Officer
    /s/ George P Morris

 

A signed original of this written statement required by Section 906 has been provided to Morris Business Development Company and will be retained by Morris Business Development Company and furnished to the Securities and Exchange Commission or its staff upon request.

 

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