AS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON April 25,
2007
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-SB
GENERAL
FORM FOR REGISTRATION OF SECURITIES
OF
SMALL BUSINESS ISSUERS
Under
Section 12(b) or 12(g) of the Securities Exchange Act of
1934
ANCHOR
FUNDING SERVICES, INC.
(Name
of Small Business Issuer in Its Charter)
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Delaware
(State
or Other Jurisdiction of
Incorporation
or Organization)
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20-5456087
(I.R.S.
Employer
Identification
No.)
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2201-E
Crownpoint Executive Drive
Charlotte,
NC
(Address
of Principal Executive Offices)
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28227
(Zip
Code)
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(866)
789-3863
(Issuer’s
Telephone Number)
Securities
to be Registered under Section 12(b) of the Act:
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Title
of Each Class to be
so
Registered
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Name
of Each Exchange on
Which
Each Class is to be Registered
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None.
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Securities
to be Registered under Section 12(g) of the Act:
Common
Stock, par value $0.001 per share
(Title
of Class)
ANCHOR
FUNDING SERVICES, LLC
INDEX
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PART
I
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Item
1.
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Description
of Business
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Item
2.
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Management’s
Discussion and Analysis or Plan of Operation
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Item
3.
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Description
of Property
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Item
4.
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Security
Ownership of Certain Beneficial Owners and Management
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Item
5.
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Directors,
Executive Officers, Promoters and Control Persons
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Item
6.
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Executive
Compensation
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Item
7.
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Certain
Relationships and Related Transactions
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Item
8.
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Description
of Securities
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PART
II
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Item
1.
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Market
Price and Dividends on the Registrant’s Common Equity and Related
Shareholder Matters
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Item
2.
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Legal
Proceedings
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Item
3.
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Changes
in and Disagreements With Accountants
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Item
4.
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Recent
Sales of Unregistered Securities
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Item
5.
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Indemnification
of Directors and Officers
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41
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FINANCIAL
STATEMENTS
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Audited
Financials - Statements of Anchor Funding Services LLC for the
years ended
December 31, 2006 and 2005
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F-1 | |
| Unaudited Condensed Consolidated Pro-Forma Financial Information | P-1 | |||||
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PART
III
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Item
1.
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Index
to Exhibits
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SIGNATURES
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2
FORWARD-LOOKING
STATEMENTS
Some
of
the statements under “Item 1. Description of Business,” “Item 2. Management’s
Discussion and Analysis or Plan of Operation” and included elsewhere in this
Registration Statement contain forward-looking statements. All statements other
than statements of historical facts contained in this Registration Statement,
including statements regarding our plans, objectives, goals, strategies, future
events, capital expenditures, future results, our competitive strengths, our
business strategy and the trends in our industry are forward-looking statements.
The words “believe,” “may,” “could,” “will,” “estimate,” “continue,”
“anticipate,” “intend,” “should,” “plan,” “expect,” “appear,” “forecast,”
“future,” “likely,” “probably,” “suggest” and similar expressions, as they
relate to the Company, are intended to identify forward-looking
statements.
Forward-looking
statements reflect only our current expectations. We may not update these
forward-looking statements, even though our situation may change in the future.
In any forward-looking statement, where we express an expectation or belief
as
to future results or events, such expectation or belief is expressed in good
faith and believed to have a reasonable basis, but there can be no assurance
that the statement of expectation or belief will be achieved or accomplished.
Our actual results, performance or achievements could differ materially from
those expressed in, or implied by, the forward-looking statements due to a
number of uncertainties, many of which are unforeseen, including:
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the
timing and success of our acquisition strategy;
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the
timing and success of our expanding our market presence in our current
locations, successfully entering into new markets, adding new services
and
integrating acquired businesses;
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the
timing, magnitude and terms of a revised credit facility to accommodate
our growth;
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competition
within our industry; and
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the
availability of additional capital on terms acceptable to
us.
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In
addition, you should refer to the “Risk Factors” section of this Registration
Statement commencing in Item 1 for a discussion of other factors that may cause
our actual results to differ materially from those implied by our
forward-looking statements. As a result of these factors, we cannot assure
you
that the forward-looking statements in this Registration Statement will prove
to
be accurate. Furthermore, if our forward-looking statements prove to be
inaccurate, the inaccuracy may be material. In light of the significant
uncertainties in these forward-looking statements, you should not regard these
statements as a representation or warranty by us or any other person that we
will achieve our objectives and plans in any specified time frame, if at all.
Accordingly, you should not place undue reliance on these forward-looking
statements.
We
qualify all the forward-looking statements contained in this Registration
Statement by the foregoing cautionary statements.
3
PART
I
Item
1. Description of Business.
Corporate
Structure
Anchor
Funding Services, Inc. (formerly BTHC XI, Inc.) was originally organized in
the
State of Texas as BTHC XI LLC. On September 29, 2004, BTHC XI LLC and its sister
companies filed an amended petition under Chapter 11 of the United States
Bankruptcy Code. On November 29, 2004, the court approved BTHC XI LLC’s Amended
Plan of Reorganization. On August 16, 2006, and in accordance with its Amended
Plan of Reorganization, BTHC XI LLC changed its state of organization from
Texas
to Delaware by merging with and into BTHC XI, Inc., a Delaware corporation
formed solely for the purpose of effecting the reincorporation.
Anchor
Funding Services LLC, a limited liability company, was originally formed under
the laws of the State of South Carolina in January 2003 and later reorganized
under the laws of the State of North Carolina on August 29, 2005. Anchor Funding
Services, LLC was formed for the purposes of providing factoring and back office
services to businesses located in the United States and Canada. On
January 31, 2007, the former BTHC XI, Inc. and certain principal
stockholders entered into a Securities Exchange Agreement (the “Securities
Agreement”) with Anchor Funding Services, LLC and its members for Anchor Funding
Services, LLC to become a wholly-owned subsidiary of the former BTHC XI, Inc.
in
exchange for 8,000,000 shares of Common Stock of BTHC XI, Inc. (the
“Exchange”).
At
the
time of the Exchange, the former BTHC XI, Inc. had limited operations and
limited assets or liabilities. Because the members of Anchor Funding Services,
LLC exchanged their equity ownership interests for an aggregate 67.7% equity
ownership interest in the former BTHC XI, Inc. (computed immediately after
the
completion of the Exchange and before the consummation of a financing), this
transaction was for accounting purposes, treated as if Anchor Funding Services,
LLC was the surviving entity, as if a merger occurred between the parties.
Accordingly, for the periods prior to the Exchange, our financial statements
are
based upon the financial position, results of operations and cash flows of
Anchor Funding Services LLC. The assets, liabilities, operations and cash flows
of the former BTHC XI, Inc. are included in our consolidated financial
statements from January 31, 2007, the effective date of the Exchange, onward.
On
April
4, 2007, the former BTHC XI, Inc. changed its corporate name to Anchor Funding
Services, Inc. Anchor Funding Services, Inc. is currently a holding corporation
for its wholly-owned subsidiary, Anchor Funding Services, LLC. Except as
otherwise provided in this Registration Statement, unless the context otherwise
requires, references in this Form 10-SB to the “Company,” “Anchor,” “we,” “us”
and “our” refers collectively to the consolidated business and operations of
Anchor Funding Services, Inc. and its wholly-owned operating subsidiary, Anchor
Funding Services LLC.
Business
Overview
Anchor’s
business has grown since its commencement in 2003 with minimal marketing and
limited financing. Our investment objective is to create a well-recognized,
national financial services firm for small businesses providing accounts
receivable funding (factoring), outsourcing of accounts receivable management
including collections and the risk of customer default and other specialty
finance products including, but not limited to domestic and international
purchase order financing, credit card financing, lawsuit financing, trade
finance and government contract funding. For certain service businesses, Anchor
also provides back office support including payroll, payroll tax compliance
and
invoice processing services. We provide our services to clients nationwide
and
may expand our services internationally in the future. We plan to achieve our
growth objectives as described below through a combination of strategic and
add-on acquisitions of other factoring and related specialty finance firms
that
serve small businesses in the United States and Canada and internal growth
through mass media marketing initiatives. Our corporate headquarters and back
office operations are located in Charlotte, North Carolina.
4
Factoring
is the purchase of a company’s accounts receivable, which provide businesses
with critical working capital so they can meet their operational costs and
obligations while waiting to receive payment from their customers. Factoring
services also provide businesses with credit and accounts receivable management
services. Typically, these businesses do not have adequate resources to manage
internally their credit and accounts receivable functions. Factoring services
are typically a non-recourse arrangement whereby the factor take the entire
credit risk if the customer does not pay due to insolvency for any period of
time or on a partial non-recourse basis where the factor takes the credit risk
for a period of time, which could be 30 to 90 days after the factor purchases
an
account receivable such that if a client’s customer becomes insolvent during
this specific period of time, the factor bears the loss. Under partial
non-recourse factoring, after a specific period of time, if the accounts
receivable invoice is not collected, the client is required to purchase the
accounts receivable invoice back from Anchor. We typically advance our clients
75% to 90% of the face value of invoices that we approve in advance on a partial
non-recourse basis and pay them the difference less our fees when the invoice
is
collected. For our year ended December 31, 2006, our fees for services averaged
4.9% of the invoice value and are tiered such that the longer it takes us to
collect on the accounts receivable invoice, the greater our fee. Since our
inception, Anchor has not incurred any credit losses. To increase our service
offerings, we anticipate providing full non-recourse factoring to clients in
the
near future.
A
summary
of some of the advantages of factoring for a small business is as
follows:
| · |
Faster
application process since factoring is focused on credit worthiness
of the
accounts receivable as security and not the financial performance
of the
company;
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Unlimited
funding based on “eligible” and “credit worthy” accounts receivable;
and
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No
financial covenants.
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We
provide our services to any type of business where we can verify and
substantiate an accounts receivable invoice for delivery of a product or
performance of a service. Examples of current clients include a magazine
publisher, commercial baker, transportation company, medical staffing firm,
IT
consulting company and a shipper of luxury autos. Current clients range in
size
from start-up to $5 million in annual sales. We believe that this market is
under served by banks and other funding institutions that find many of these
companies not “bankable” because of their size, limited operating history, thin
capitalization, seasonality patterns or poor/ inconsistent financial
performance. Anchor’s focus is providing funding based on the quality of our
clients’ customers’ ability to pay and the validity of the account receivable
invoice. Anchor utilizes credit and verification processes to assist in assuring
that customers are creditworthy and invoices are valid. We secure our funding
by
having a senior first lien on all clients’ accounts receivable and other
tangible and intangible assets. We also often obtain personal and validity
guarantees from our clients’ owners.
GROWTH
OPPORTUNITIES AND STRATEGIES
Our
strategy is to become a nationally recognized brand for accounts receivable
funding and other related financial services for small businesses. This
expansion is expected to be accomplished with media marketing campaigns
targeting small businesses and through accretive acquisitions of competitive
firms and add-on purchases which broaden our mix of services, brands, customers
and geographic and economic diversity. Our focus is to increase revenues and
profits, through a combination of internal growth and acquisitions, primarily
within our core disciplines and expansion into new service offerings. The key
elements to our acquisition growth strategy include the following:
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Acquire
companies that provide factoring services to small businesses.
Our
primary strategy is to increase revenues and profitability by acquiring
the accounts receivable portfolios and possibly the business development
and management teams of other local and regional factoring firms.
Significant operating leverage and reduced costs are achieved by
consolidating back office support functions. Increased revenues across
a
larger accounts receivable portfolio is anticipated to lead to lower
costs
of capital, which may enhance profitability. We have hired a merger
and
acquisition advisory firm to assist us in our acquisition strategy.
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We
intend
to evaluate acquisitions using numerous criteria including historical financial
performance, management strength, service quality, diversification of customer
base and operating characteristics. Our senior management team has prior
experience in other service industries in identifying and evaluating attractive
acquisition targets and integrating acquired businesses.
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Expand
our service offerings by acquiring related specialty finance firms
that
serve small businesses.
These specialty firms will broaden the services that we provide so
that we
can fulfill additional financial service needs of existing clients
and
target additional small businesses in different industries. For example,
manufacturers have a need for purchase order financing in addition
to
factoring. The following are types of specialty finance firms that
we will
target and is not all-inclusive:
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Purchase
order financing;
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Import/export
financing;
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Credit
card financing;
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Government
contract financing;
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Agricultural
receivable financing; and
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Construction
receivable financing.
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Expand
our discount factoring business by creating a national factoring
brand.
Inform and educate small businesses owners that factoring can increase
cash flow and outsource credit risk and accounts receivable management.
Our
experience has been that many small businesses have limited awareness
that
factoring exists and is a viable financing alternative option for
them. We
are currently searching for a marketing manager to assist us in creating
a
national factoring brand identity. This is expected to be accomplished
through various marketing initiatives and business alliances that
will
create in-bound sales leads. These marketing strategies
include:
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Media
advertising in key metropolitan
markets;
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Increase
our pay-per-click internet advertising which to-date has been a successful
strategy for Anchor; and
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Radio
- test market selective radio spot advertising on talk radio and
sports
oriented programming whose primary demographic are small business
owners.
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Establish
cross-selling alliances with other small business providers
including:
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Small
business accounting and tax preparation service firms;
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Small
business service centers, providing packing and shipping;
and
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Commercial
insurance brokers.
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Develop
a referral network of business brokers, consultants and accountants
and
attorneys;
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Attend
cash flow trade shows and advertise in cash flow trade
publications.
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Expand
into the growing Hispanic business market.
We continue to seek opportunities to expand the reach of our brands
into
new markets, including the Hispanic business market. We plan to create
a
Spanish language version of our website, advertise in Hispanic media
publications and enter into alliances with Hispanic commercial banks
for
small business referral prospects who do not meet the banks’ suitability
requirements.
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INDUSTRY
OVERVIEW
Factoring
as it functions today has been in existence for nearly 200 years. Its historical
focus has been in the textile and apparel industries, which provides products
to
major retailers. The factoring industry has expanded beyond the textile and
apparel industries into other mainstream businesses. Anchor may provide funding
to businesses where the performance of a service or the delivery of a product
can be verified. We have the ability to check a company’s credit and evaluate
its ability to pay across most industries. Hence, Anchor’s target prospects are
most small businesses. According to the U.S. Small Business Administration’s
(SBA) 2004 statistics, there were 19.5 million “nonemployers” (i.e.
self-employed persons) and 5.3 million small businesses with less than 20
employees.
According
to the Commercial Finance Association (CFA), an industry trade association
for
asset based lending and factoring companies, factoring volume (the dollar value
of invoices purchased) in 2005 in the United States achieved its highest
year-to-year growth since 2000. Factoring volume grew to $112.8 billion in
the
U.S. representing a 9.3% increase over 2004. The CFA survey highlights that
the
growth is attributable to a number of factors including a greater acceptance
of
the factoring product.
6
Management
estimates, based on examination of Dun & Bradstreet data and a market
overview provided by a merger and acquisition advisory firm, that there are
approximately 2,900 accounts receivable factoring and financing firms in the
United States with over 2,000 with revenues of less than $1 million. Management
believes that the fragmentation of the market among other factors, make this
industry attractive for consolidation. Driving factors for consolidation
include:
| o |
Limited
growth capital for small factors.
Small factoring firms may have credit availability constraints limiting
the business volume which they can factor. The financial leverage
that
banks typically provide a finance company is a function of the capital
in
the business. The opportunity to combine their businesses with Anchor’s
capital and possible lower cost of funds, back office support and
potentially a larger credit facility are incentives to sell their
business, particularly where they would receive our capital stock
in
return as part or all of the transaction
price.
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| o |
Anchor
would provide an exit strategy for owners of small factoring firms
who may
have much of their personal wealth tied to the business and want
to
retire.
A
cash sale of a factoring firm would provide liquidity to the owner
of a
factoring firm and the opportunity to receive a price over the factoring
firm’s book value.
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OPERATIONS
Our
executive officers, namely Morry F. Rubin, CEO and Brad Bernstein, President,
manage our day to day operations and internal growth and oversee our acquisition
strategy. We have two full-time account executives that provide daily support
for our current clients. These individuals also handle in-bound sales calls
and
underwrite prospective funding transactions for credit committee review. We
have
a bookkeeper that maintains our books and records and wires funds daily to
clients.
We
temporarily utilize a credit manager from an affiliated company to assist in
managing credit and making collection calls. At times in the past, we used
other
accounting personnel from an affiliated company for certain back office
functions. In the past through April 23, 2007, this affiliated company charged
a
fee of .25% of the value of accounts receivable purchased for credit and
collection services only and .5% for credit, collection, invoicing, payroll
and
other bookkeeping services. The fees charged by this affiliated company were
$28,668 and $20,352 for the years ended December 31, 2006 and 2005.
respectively. Since April 23, 2007, Anchor pays a portion of the affiliated
company’s shared employees salaries based upon actual time incurred. This is a
temporary arrangement that is likely to cease within a month or two, as we
expect to expand our support staff and fill key positions including a credit
manager, account executives and collections personnel. In the near future,
we
anticipate performing all of our own back office operations, including, without
limitation, credit and collection services, payroll and other bookkeeping
services. See “Certain Relationships and Related Transactions.”
Underwriting
Process
We
have
developed and utilize standard underwriting procedures, which are controlled
in
a checklist format that is reviewed and approved by the credit committee. The
credit committee is presently comprised of our executive officers, although
these functions may be delegated to other responsible personnel in the future
as
our company expands our operations. The credit committee approves all new
accounts and conducts periodic credit review of the client portfolio.
Underwriting criteria include the following:
7
| o |
Background
and credit checks are performed on the
owners.
|
| o |
Personal
or validity guarantees are sometimes obtained from the
owners.
|
| o |
We
“Notify” all accounts that are purchased. Anchor is a notification factor,
which means that we notify in writing all accounts purchased that
we have
purchased the account and payments are to be made to Anchor’s central
lockbox. Our client’s invoices also provide Anchor’s lockbox as address
for payments. We also have a notification statement on our clients’
invoices that indicate we have purchased the account and payment
is to be
made to Anchor.
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| o |
Initially
we attempt to verify most of a new customer’s accounts. Verification
includes review of third-party documentation and telephone discussions
with the client’s customer so that we may substantiate that invoices are
valid and without dispute.
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| o |
We
typically evaluate the creditworthiness on accounts with more than
a
$2,500 balance.
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| o |
Other
standard diligence testing includes payroll tax payment verification,
company status with state of incorporation, pre and post filing lien
searches and review of prior years’ corporate tax
returns.
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| o |
We
require that our clients enter into a factoring and security agreement
with Anchor and file a first senior lien on purchased accounts, and
on a
case-by-case basis, sometimes on all of our clients’ tangible and
intangible assets.
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Anchor
has not had incurred any credit losses since inception, although we can provide
no assurances that credit losses will not be incurred in the
future.
Credit
Management
To
efficiently and quickly determine the credit worthiness of an account, Anchor
has an instant credit checking system, Creditguard,
whereby
Anchor utilizes a proven credit formula that combines various Dun &
Bradstreet credit data elements. This formula and system provide an initial
credit limit so that accounts can be approved or rejected quickly. If additional
credit is necessary beyond the initial credit limit, we then independently
check
three vendor references and a bank reference to determine if additional credit
can be extended. Collection calls are usually made within 14 days of purchasing
an invoice to secure a commitment or estimated time to receive payment.
In
conjunction with potentially providing full-non-recourse factoring, Anchor
is
examining the cost and benefits of obtaining credit insurance estimated to cost
one-half of one percent of the invoiced amount.
CLIENTS
Our
clients are all small businesses that range in size from start-up to $5 million
in annual sales. We provide our services to any type of business where we can
verify and substantiate an accounts receivable invoice for delivery of a product
or performance of a service. Examples of current clients include a coupon
magazine publisher, commercial baker, transportation company, medical staffing
firm, IT consulting company and a shipper of luxury autos. Anchor targets all
small businesses to educate and convert them to factoring if it will help our
business and their businesses. We believe that this small business market is
under served by banks and other funding institutions that find many of these
companies not “bankable” because of their size, limited operating history, thin
capitalization or poor / inconsistent financial performance. Anchor’s focus is
funding based on the quality of our clients’ customer’s ability to pay and the
validity of the accounts receivable invoice. Anchor has credit and verification
processes to assist in assuring that customers are creditworthy and invoices
are
valid. We secure our funding by having a senior first lien on all clients’
accounts receivable and other tangible and intangible assets. We also often
obtain personal guarantees from our clients’ owners.
In
addition, there are certain specific small business sectors that Anchor believes
also have limited working capital options and are targets for factoring.
Examples of these include:
| o |
Not-for-profit
entities; we recently factored a foster home’s invoice to a local
county.
|
| o |
Companies
with tax liens by providing funding based upon its eligible accounts
receivable; we were successful in paying off the IRS for a client
that had
tax liens by funding its accounts
receivable.
|
| o |
Free
lance consultants and independent contractors that cannot wait to
receive
payment from their client.
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SALES
AND MARKETING
We
plan
to hire a marketing manager to assist Anchor in creating a national brand
identity through various marketing and business alliance strategies that will
create in-bound sales leads. These marketing strategies include, without
limitation, the following:
8
| o |
Media
advertising in key metropolitan
markets;
|
| § |
Increase
our pay-per-click internet advertising which to-date has been a successful
strategy for Anchor; and
|
| § |
Radio
- test market selective radio spot advertising on talk radio and
sports
oriented programming whose primary demographic are small business
owners.
|
| o |
Establish
cross-selling alliances with other small business providers
including:
|
| § |
Small
business accounting and tax preparation service
firms;
|
| § |
Small
business service centers, providing packing and shipping;
and
|
| § |
Commercial
insurance brokers.
|
| o |
Develop
a referral network of business brokers, consultants and accountants
and
attorneys;
|
| § |
Attend
cash flow trade shows and advertise in cash flow trade
publications.
|
In
key
metropolitan areas, we plan on hiring business development officers to follow
up
on in-bound sales leads in person and develop additional business by networking
with other small business providers including traditional bankers, accountants,
lawyers and insurance brokers.
MANAGEMENT
INFORMATION SYSTEMS
We
utilize a factoring industry software program designed to effectively manage
and
operate a factoring company. This system currently manages multiple functions
from purchasing invoices, advancing funds, recording collections and rebating
clients. The system generates, on demand, numerous management reports including
purchase activity, collections activity, return on capital, advances
outstanding, accounts receivable trends, and credit reports which provide us
with the ability to track, monitor and control the collateral (purchased
accounts receivable). In addition, the software integrates with our general
ledger accounting package, which enables us to meet our financial reporting
requirements. Each month we upload key management reports that our clients
can
retrieve on-line.
Our
current software platform can support our growth in the short term. Based upon
anticipated growth we intend to upgrade our factoring software platform, which
will enable additional users access to the system. There are multiple factoring
software vendors who provide products which will support our growth objectives.
Hardware
redundancy, backup strategies and disaster recovery have been planned to reduce
the risk of downtime. We will utilize a portion of the net proceeds allocated
toward capital expenditures for this purpose.
GOVERNMENT
REGULATIONS
In
some
instances, our operations are subject to supervision and regulation by federal,
state, and various foreign governmental authorities. Additionally, our
operations may be subject to various laws and judicial and administrative
decisions imposing various requirements and restrictions. These laws may:
|
•
|
regulate
credit granting activities, including establishing licensing requirements,
if any, in various jurisdictions,
|
|
•
|
establish
maximum interest rates, finance charges and other
charges,
|
|
•
|
require
disclosures to customers,
|
|
•
|
govern
secured transactions,
|
|
•
|
Set
collection, foreclosure, repossession and claims handling procedures
and
other trade practices,
|
|
•
|
prohibit
discrimination in the extension of credit, and
|
|
•
|
regulate
the use and reporting of information related to a seller’s credit
experience and other data
collection.
|
COMPETITION
The
factoring industry is highly fragmented and competitive. Competitive factors
vary depending upon financial services products offered, customer, and
geographic region. Our competitors include national, regional and local
independent and bank owned factoring and finance companies. Some of these
competitors are larger than we are and may have access to capital at a lower
cost than we do. Management estimates, based on examination of Dun &
Bradstreet data and a market overview provided by a merger and acquisition
advisory firm, that there are approximately 2,900 accounts receivable factoring
and/or business financing firms in the United States with over 2,000 with
revenues less than $1 million. To our knowledge, no single firm dominates the
small business segment of the industry.
9
FACILITIES
We
currently lease office space in a small business park from an affiliated company
in Charlotte, North Carolina. We plan to move our current accounting, credit
and
account personnel to a separate office facility in Charlotte, North Carolina.
We
have also entered into a lease in Boca Raton, FL to accommodate our executive
and sales personnel.
EMPLOYEES
As
of the
date hereof, we have four full-time employees and one part-time employee.
History
of former BTHC
XI, LLC
Anchor
Funding Services, Inc., formerly known as BTHC XI, Inc., was organized on August
16, 2006 as a Delaware corporation to effect the reincorporation of BTHC XI,
LLC, a Texas limited liability company, mandated by the plan of reorganization
discussed below.
In
September 1999, Ballantrae Healthcare LLC and its affiliated limited liability
companies including BTHC XI, LLC, or collectively Ballantrae, were organized
for
the purpose of operating nursing homes throughout the United States. Ballantrae
did not own the nursing facilities. Instead, they operated the facilities
pursuant to management agreements and/or real property leases with the owners
of
these facilities. Although Ballantrae continued to increase the number of
nursing homes it operated and in June 2000 had received a substantial equity
investment, it was unable to achieve profitability. During 2001 and 2002,
Ballantrae continued to experience severe liquidity problems and did not
generate enough revenues to cover its overhead costs. Despite obtaining
additional capital and divesting unprofitable nursing homes, by March, 2003,
Ballantrae was out of cash and unable to meet its payroll obligations.
On
March
28, 2003, Ballantrae filed a petition for reorganization under Chapter 11 of
the
United States Bankruptcy Code. On November 29, 2004, the bankruptcy court
approved the First Amended Joint Plan of Reorganization, as presented by
Ballantrae, its affiliates and their creditors (the “Plan”). On August 16,
2006, pursuant to the Plan, BTHC XI, LLC was merged into BTHC XI, Inc., a
Delaware corporation, which later changed its name to Anchor Funding Services,
Inc., effective on April 4, 2007.
On
January 31, 2007, we entered into a Securities Exchange Agreement and acquired
100% of the membership (ownership) interests of Anchor Funding Services LLC
in
exchange for 8,000,000 shares of our Common Stock (the “Anchor Transaction”).
The Securities Exchange Agreement was entered into by and among Anchor Funding
Services, LLC, its members, Anchor funding Services, Inc. (formerly BTHX XI,
Inc.) and certain stockholders (the “Company Stockholders”). The Anchor
Transaction was subject to our receipt in escrow of a private placement of
our
Series 1 Preferred Stock of at least $2,500,000 which was successfully completed
immediately after the Exchange on January 31, 2007. The private placement
offering was terminated on April 5, 2007 after the raise of $6,712,500 in gross
proceeds from the sale of 1,342,500 shares of Series 1 Preferred Stock.
The
Anchor Transaction
As
a
result of the Anchor Transaction, Anchor became a wholly-owned subsidiary of
former BTHC XI. Prior to the completion of the Anchor Transaction, former BTHC
XI had no operations and had no material assets or liabilities.
The
Anchor Transaction was closed on January 31, 2007. The closing of the Anchor
Transaction was conditioned on, among other things: (a) the approval of Anchor’s
members, (b) the various representations and warranties of the parties being
true and correct as provided in the Securities Exchange Agreement, (c) the
parties performing their various covenants and agreements as provided in the
Securities Exchange Agreement, (d) the parties delivering certain agreements,
certificates and other instruments, (e) the Escrow Agent’s receipt of at least
$2,500,000 in cleared funds available for the initial closing of the Offering
immediately upon the effectiveness of the Securities Exchange, and (f) the
entry
into 18 month lock-up agreements by members of Anchor.
10
The
Securities Exchange Agreement contains various representations and warranties
and covenants of the Company and the Company Stockholders. Generally, the
representations and warranties of the Company and the Company Stockholders
survive until the first anniversary of the closing date. The Securities Exchange
Agreement provides for indemnification by Company Stockholders for breaches
or
failure to perform covenants of the Company or the Company Stockholders
contained in the Securities Exchange Agreement and for any claims by brokers
or
finders for fees or commissions alleged to be due in connection with the Anchor
Transaction. Additionally, certain Company Stockholders agreed to indemnify
Anchor for any damages arising from or in connection with the operation or
ownership of the Company from and including November 29, 2004, the date the
Plan
was confirmed by the bankruptcy court through and including December 7, 2006.
Certain other Company Stockholders agreed to indemnify Anchor for any damages
arising from any breach of any representation or warranty of the Company, or
the
Company Stockholders contained in the Securities Exchange Agreement resulting
from the operation or ownership of the Company from and including their
acquisition date of control of the Company (i.e. December 7, 2006) through
and
including the January 31, 2007 closing date of the Securities Exchange.
Annual
Reports to Security Holders
We
intend
to make available to each of our shareholders, copies of our annual report
on
Form 10-KSB, which will include audited financial statements.
Where
You Can Find Additional Information
We
are
filing this Form 10-SB pursuant to Regulation S-B for the purpose of becoming
a
“fully reporting issuer” under Section 12(g) of the Securities Exchange Act of
1934, as amended. Once this Form 10-SB is declared effective by the Securities
and Exchange Commission, or SEC, we will be required to file annual, quarterly,
and current reports, proxy statements and other information with the SEC.
The
public may read and copy any materials we file with the SEC at the SEC’s Public
Reference Room at 100 F Street, N.E. (Washington, D.C. 20549). The public may
obtain information on the operation of the Public Reference Room by calling
the
SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports,
proxy and information statements, and other information regarding issuers that
file electronically with the SEC. The address of that site is
http://www.sec.gov.
Risk
Factors
In
addition to the other information included in this Registration Statement,
the
following factors should be carefully considered in evaluating our business,
financial position and future prospects. Any of the following risks, either
alone or taken together, could materially and adversely affect our business,
financial position or future prospects. If one or more of these or other risks
or uncertainties materialize, or if our underlying assumptions prove to be
incorrect, our actual results may vary materially from what we have projected.
There may be additional risks that we do not presently know or that we currently
believe are immaterial which could also materially adversely affect our
business, financial position or future prospects.
Limited
operating history. Anchor
Funding Services, LLC was formed in 2003 and has only a limited operating
history upon which investors may judge our performance. Future operating results
will depend upon many factors, including, without limitation our ability to
keep
credit losses to a minimum, fluctuations in the economy, the degree and nature
of competition, demand for our services, and our ability to integrate the
operations of acquired businesses, to expand into new markets and to maintain
margins in the face of pricing pressures. We can provide no assurances that
our
operations will be profitable.
Our
past operating losses may occur in the future.
Anchor
Funding Services, LLC was formed in 2003 and historically operated at a loss
until 2006 which was our first year of profitable operations. We can provide
no
assurances that our operations and consolidations with any companies that we
acquire will result in us meeting our anticipated level of projected profitable
operations, if at all.
Competition
for customers in our industry is intense, and if we are not able to effectively
compete, our financial results could be harmed and the price of our Shares
could
decline. The
factoring and financial service industry is highly competitive. There are many
large full-service and specialized financing companies, as well as local and
regional companies, which compete with us in the factoring industry. Competition
in our markets is intense. These competitive forces limit our ability to raise
fees to our customers. Pressure on our margins is intense, and we cannot assure
you that we will be able to successfully compete with our competitors, many
of
whom have substantially greater resources than we do. If we are not able to
effectively compete in our targeted markets, our operating margins and other
financial results will be harmed and the market price of our securities could
decline.
11
If
we are not able to obtain expanded lines of credit on commercially reasonable
terms, our financial condition or results of operations could suffer.
We
have a
$1 million line of credit with an institutional asset based lender which
advances funds against “eligible accounts receivable” as defined in Anchor’s
agreement with its institutional lender. This facility, which is secured by
our
assets, contains certain covenants related to tangible net worth and change
in
control. In the event that we do not comply with the covenant(s) and the lender
does not waive such non-compliance, including the change in control resulting
from the Anchor Transactions and this Offering, we will be in default of our
credit agreement, which could subject us to penalty rates of interest and
accelerate the maturity of the outstanding balances. We are in the process
of
seeking to revise and expand our credit facility and we are attempting to obtain
better lending terms. In the event we are not able to obtain a sufficient line
of credit for our factoring needs on commercially reasonable terms, our ability
to operate our business would be significantly impacted and our financial
condition and results of operations could suffer.
We
may acquire companies in the future and these acquisitions could disrupt our
business or adversely affect our earnings. Further, we may complete acquisitions
without first obtaining stockholder approval under applicable Delaware Law.
We
intend
to acquire small and/or medium local and/or regional factoring and financial
service businesses. Our ability to complete acquisitions in the future may
be
impacted by many factors, including, without limitation, companies available
for
acquisition and the ability to achieve favorable terms. Entering into an
acquisition entails many risks, any of which could harm our business, including,
without limitation, failure to successfully integrate the acquired company
with
our existing business, retention of key employees, alienation or impairment
of
relationships with substantial customers or key employees of the acquired
business or our existing business, and assumption of liabilities of the acquired
business. Any acquisition that we consummate also may have an adverse affect
on
our liquidity or earnings and may be dilutive to our earnings. Adverse business
conditions or developments suffered by or associated with any business we
acquire additionally could result in impairment to the goodwill or intangible
assets associated with the acquired businesses, and a related write down of
the
value of these assets, and adversely affect our earnings. Further, we may
complete acquisitions without first obtaining stockholder approval under
applicable Delaware Law.
Risks
Associated with our Growth Strategy. Our plans
for
growth, both internal and through acquisition of other factoring and financial
service companies, are subject to numerous and substantial risks. We can provide
no assurances that we will be able to expand our market presence in our current
locations, successfully enter new markets, add new services and/or integrate
acquired businesses into our operations. Our continued growth is dependent
upon
a number of factors, including the availability of working capital to support
such growth, our response to existing and emerging competition, our ability
to
maintain sufficient profit margins while experiencing pricing pressures, our
efforts to develop and maintain customer and employee relationships, and the
hiring, training and retention of qualified personnel. We can provide no
assurances that we will be able to identify acceptable acquisition candidates
on
terms favorable to us in a timely manner, if at all. A substantial portion
of
our capital resources is anticipated to be used primarily for these
acquisitions. We expect to require additional debt or equity financing for
future acquisitions, which additional financing may not be available on terms
favorable to the Company, if at all. We can provide no assurances that any
acquired business will be profitable.
We
will seek to make acquisitions that may prove unsuccessful or strain or divert
our resources. We
intend
seek to expand our business through the acquisition of competitors’ factoring
and service businesses and assets. We may not be able to complete any
acquisitions on favorable terms, if at all. Acquisitions present risks that
could materially and adversely affect our business and financial performance,
including:
| · |
the
diversion of our management's attention from our everyday business
activities;
|
| · |
the
contingent and latent risks associated with the past operations of,
and
other unanticipated problems arising in, the acquired business;
and
|
| · |
the
need to expand management, administration, and operational
systems.
|
If
we
make, or plan to make, such acquisitions we cannot predict whether:
12
| · |
we
will be able to successfully integrate the operations and personnel
of any
new businesses into our business;
|
| · |
we
will realize any anticipated benefits of completed acquisitions;
|
| · |
there
will be substantial unanticipated costs associated with acquisitions,
including potential costs associated with liabilities undiscovered
at the
time of acquisition; or
|
| · |
stockholder
approval of an acquisition will be
sought.
|
In
addition, future acquisitions by us may result in:
| · |
potentially
dilutive issuances of our equity
shares;
|
| · |
the
incurrence of additional debt;
|
| · |
restructuring
charges; and
|
| · |
the
recognition of significant charges for depreciation and amortization
related to intangible assets.
|
Risks
Related to Our Factoring Activities
In our
history, we have not experienced any material credit losses. If we were to
experience material
losses on our accounts receivable portfolio, they would have a material adverse
effect on (i) our ability to fund our business and, (ii) to the extent the
losses exceed our provision for credit losses, our revenues, net income and
assets.
We
purchase accounts receivable primarily from privately owned small companies,
which present a greater risk of loss than purchasing accounts receivable from
larger companies. Our
portfolio consists primarily of accounts receivable purchased from small,
privately owned businesses with annual revenues ranging from start-up to
$5 million. Compared to larger, publicly owned firms, these companies
generally have more limited access to capital and higher funding costs, may
be
in a weaker financial position and may need more capital to expand or compete.
These financial challenges may make it difficult for our clients to continue
as
a going concern. Accordingly, advances made to these types of clients entail
higher risks than advances made to companies who are able to access traditional
credit sources.
In
part because of their smaller size, our clients may:
• experience
significant variations in operating results;
• have
narrower product lines and market shares than their larger
competitors;
• be
particularly vulnerable to changes in customer preferences and market
conditions;
• be
more
dependent than larger companies on one or more major customers, the loss of
which could materially impair their
business,
financial condition and prospects;
• face
intense competition, including from companies with greater financial, technical,
managerial and marketing resources;
• depend
on
the management talents and efforts of a single individual or a small group
of
persons for their success, the
death,
disability or resignation of whom could materially harm the client’s financial
condition or prospects;
• have
less
skilled or experienced management personnel than larger
companies; or
• do
business in regulated industries, such as the healthcare industry, and could
be
adversely affected by policy or
regulatory
changes.
Accordingly, any of these factors could impair a client’s cash flow or result in
other events, such as bankruptcy, which could limit our ability to collect
on
this client’s purchased accounts receivable, and may lead to losses in our
portfolio and a decrease in our revenues, net income and assets.
We
may be adversely affected by deteriorating economic or business conditions.
Our
business, financial condition and results of operations may be adversely
affected by various economic factors, including the level of economic activity
in the markets in which we operate. Delinquencies and credit losses generally
increase during economic slowdowns or recessions. Because we fund primarily
small businesses, many of our clients may be particularly susceptible to
economic slowdowns or recessions and could impair a client’s cash flow or result
in other events, such as bankruptcy, which could limit our ability to collect
on
this client’s purchased accounts receivable, and may lead to losses in our
portfolio and a decrease in our revenues, net income and assets. Unfavorable
economic conditions may also make it more difficult for us to maintain both
our
new business origination volume and the credit quality of new business at levels
previously attained. Unfavorable economic conditions also could increase our
funding costs, limit our access to the capital markets or result in a decision
by lenders not to extend credit to us. These events could significantly harm
our
operating results.
Our
limited operating history makes it difficult for us to accurately judge the
credit performance of our portfolio and, as a result, increases the risk that
our allowance for credit losses may prove inadequate. Our
business depends on the creditworthiness of our clients’ customers and our
clients. While we conduct due diligence and a review of the creditworthiness
of
most of our clients’ customers and all of our clients, this review requires the
application of significant judgment by our management. Our judgment may not
be
correct. We maintain an allowance for credit losses on our financial statements
in an amount that reflects our judgment concerning the potential for losses
inherent in our portfolio. Management periodically reviews the appropriateness
of our allowance considering economic conditions and trends, collateral values
and credit quality indicators. We cannot assure you that our estimates and
judgment with respect to the appropriateness of our allowance for credit losses
are accurate. Our allowance may not be adequate to cover credit losses in our
portfolio as a result of unanticipated adverse changes in the economy or events
adversely affecting specific clients, industries or markets. If our allowance
for credit losses is not adequate, our net income will suffer, and our financial
performance and condition could be significantly impaired.
13
We
may not have all of the material information relating to a potential client
at
the time that we make a credit decision with respect to that potential client
or
at the time we advance funds to the client. As a result, we may suffer credit
losses or make advances that we would not have made if we had all of the
material information. There
is
generally no publicly available information about the privately owned companies
to which we generally purchase accounts receivable from. Therefore, we must
rely
on our clients and the due diligence efforts of our employees to obtain the
information that we consider when making our credit decisions. To some extent,
our employees depend and rely upon the management of these companies to provide
full and accurate disclosure of material information concerning their business,
financial condition and prospects. If we do not have access to all of the
material information about a particular client’s business, financial condition
and prospects, or if a client’s accounting records are poorly maintained or
organized, we may not make a fully informed credit decision which may lead,
ultimately, to a failure or inability to collect our purchased accounts
receivable in their entirety.
We
may make errors in evaluating accurate information reported by our clients
and,
as a result, we may suffer credit losses. We
underwrite our clients and clients’ customers based on certain financial
information. Even if clients provide us with full and accurate disclosure of
all
material information concerning their businesses, we may misinterpret or
incorrectly analyze this information. Mistakes by our staff and credit committee
may cause us to make advances and purchase accounts receivable that we otherwise
would not have purchased, to fund advances that we otherwise would not have
funded or result in credit losses.
A
client’s fraud could cause us to suffer material losses. A
client
could defraud us by, among other things:
• directing
the proceeds of collections of its accounts receivable to bank accounts other
than our established lockboxes;
• failing
to accurately record accounts receivable aging;
• overstating
or falsifying records showing accounts receivable or
inventory; or
• providing
inaccurate reporting of other financial information.
14
As
of
December 31, 2006, our ten largest clients collectively accounted for
approximately 95% of
the
aggregate outstanding balance of our accounts receivable portfolio and our
largest client accounted for approximately 33% of the aggregate funds employed.
A client’s fraud could cause us to suffer material losses.
We
may be unable to recognize or act upon an operational or financial problem
with
a client in a timely fashion so as to prevent a credit loss of purchased
accounts receivable from that client. Our
clients may experience operational or financial problems that, if not timely
addressed by us, could result in a substantial impairment or loss of the value
of our purchased accounts receivable from the client. We may fail to identify
problems because our client did not report them in a timely manner or, even
if
the client did report the problem, we may fail to address it quickly enough
or
at all. As a result, we could suffer credit losses, which could have a material
adverse effect on our revenues, net income and results of
operations.
The
security interest that we have in the purchased accounts receivable may not
be
sufficient to protect us from a partial or complete loss if we are required
to
foreclose. While
we
are secured by a lien on specified collateral of the client, there is no
assurance that the collateral will protect us from suffering a partial or
complete loss if we move to foreclose on the collateral. The collateral is
primarily the purchased accounts receivable. Factors that could reduce the
value
of accounts receivable that we have a security interest in include among other
things:
| • |
problems
with the client’s underlying product or services which result in greater
than anticipated returns or disputed accounts;
|
| • |
unrecorded
liabilities such as rebates, warranties or
offsets;
|
| • |
the
disruption or bankruptcy of key customers who are responsible for
material
amounts of the accounts receivable;
and
|
|
• the
client misrepresents, or does not keep adequate records of, important
information concerning the accounts
receivable.
|
15
Any
one
or more of the preceding factors could materially impair our ability to collect
all of the accounts receivable we may purchase from a client.
Errors
by or dishonesty of our employees could result in credit losses.
We
rely
heavily on the performance and integrity of our employees in making our initial
credit decision with respect to our clients and on-going credit decisions on
our
clients’ customers. Because there is generally little or no publicly available
information about our clients or clients’ customers, we cannot independently
confirm or verify the information our employees provide us for use in making
our
credit and funding decisions. Errors by our employees in assembling, analyzing
or recording information concerning our clients and clients’ customers could
cause us to engage clients and purchase accounts receivable that we would not
otherwise fund or purchase. This could result in losses. Losses could also
arise
if any of our employees were dishonest. A dishonest employee could collude
with
our clients to misrepresent the creditworthiness of a prospective client or
client customers or to provide inaccurate reports or invoices. If, based on
an
employee’s dishonesty, we may have funded a client and purchased accounts that
were not creditworthy, which could result in our suffering suffer credit
losses.
We
may incur lender liability as a result of our funding activities.
In
recent
years, a number of judicial decisions have upheld the right of borrowers to
sue
lending institutions on the basis of various evolving legal theories,
collectively termed “lender liability.” Generally, lender liability is founded
on the premise that a lender has either violated a duty, whether implied or
contractual, of good faith and fair dealing owed to the borrower or has assumed
a degree of control over the borrower resulting in the creation of a fiduciary
duty owed to the borrower or its other creditors or shareholders. We may be
subject to allegations of lender liability if it were determined that our
advances were in fact loans and the relationship between Anchor and a client
was
that of lender and borrower rather than purchaser and seller. We cannot assure
you that these claims will not arise or that we will not be subject to
significant liability if a claim of this type did arise.
We
may incur liability under state usury laws or other state laws and regulations
if any of our factoring arrangements are deemed to be loans or financing
transactions instead of a true purchase of accounts
receivable. Various
state laws and regulations limit the interest rates, fees and other charges
lenders are allowed to charge their borrowers. If any of the factoring
transactions entered into by us are deemed to be loans or financing transactions
instead of a true purchase of accounts receivable, such laws and regulations
may
become applicable to us and could limit the interest rates, fees and other
charges we are able to charge our customers and may further subject us to any
penalties under such state laws and regulations. This could have a material
adverse effect on our business, financial condition, liquidity and results
of
operations.
We
are in a highly competitive business and may not be able to take advantage
of
attractive funding opportunities. The
factoring industry is highly competitive. We have competitors who offer the
same
types of services to small privately owned businesses that are our target
clients. Our competitors include a variety of:
| • |
specialty
and commercial finance companies;
and
|
| • |
national
and regional banks that have factoring divisions or
subsidiaries.
|
Some
of
our competitors have greater financial, technical, marketing and other resources
than we do. They also have greater access to capital than we do and at a lower
cost than is available to us. Furthermore, we would expect to face increased
price competition if other factors seek to expand within or enter our target
markets. Increased competition could cause us to reduce our pricing and advance
greater amounts as a percentage of a client’s eligible accounts receivable. Even
with these changes, in an increasingly competitive market, we may not be able
to
attract and retain new clients. If we cannot engage new clients, our net income
could suffer, and our financial performance and condition could be significantly
impaired.
Our
information and computer processing systems are critical to the operations
of
our business and any failure could cause significant problems.
Our
information technology systems, located at our headquarters, are essential
for
data exchange and operational communications to service our clients. Any
interruption, impairment or loss of data integrity or malfunction of these
systems could severely hamper our business and could require that we commit
significant additional capital and management resources to rectify the
problem.
The
loss of any of our key personnel could harm our business. Our
future financial performance will depend to a significant extent on our ability
to motivate and retain key management personnel. Competition for qualified
management personnel is intense and in the event we experience turnover in
our
senior management positions, we cannot assure you that we will be able to
recruit suitable replacements. We must also successfully integrate all new
management and other key positions within our organization to achieve our
operating objectives. Even if we are successful, turnover in key management
positions may temporarily harm our financial performance and results of
operations until new management becomes familiar with our business. At present,
we do not maintain key-man life insurance on any of our executive officers,
although we entered into three-year employment contracts with each of Morry
F.
Rubin, Chief Executive Officer, and Brad Bernstein, President, on January 31,
2007. Our Compensation Committee of the Board of Directors will be responsible
for approval of all future employment contracts with our executive officers.
We
can provide no assurances that said future employment contracts and/or their
current compensation is or will be on commercially reasonable terms to us in
order to retain our key personnel. The
loss
of any of our key personnel could harm our business.
16
Risks
associated with intangible assets. A
substantial portion of our future assets may consist of intangible assets
including goodwill (excess of cost over fair value of net assets acquired and
other intangible assets) relating to the potential acquisition of businesses.
In
the event of any sale or liquidation of us, there can be no assurance that
the
value of such intangible assets will be realized. In addition, any significant
decrease in the value of such intangible assets could have a material adverse
effect on us.
We
are continually subject to the risk of new regulation, which could harm our
business and/or operating results. In
recent
years, a number of bills have been introduced in Congress and/or various state
legislatures that would add new regulations governing the financial services
industry. The enactment of any such new laws or regulations may negatively
impact our business, financial condition and/or our financial results.
Control
of the Company. Our
executive officers and directors have a significant block of voting control
of
our capital stock. As a result, such persons will likely have the ability to
affect the election of all of our directors and the outcome of substantially
all
issues submitted to our stockholders. Such concentration of ownership could
limit the price that certain investors might be willing to pay in the future
for
shares of Common Stock, and could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from attempting
to acquire, control of us. See “Securities Ownership of Principal Stockholders
and Management.”
Risks
associated with the development of the Company’s management information and
internal control systems. Our
data
processing, accounting and analysis capabilities are important components of
our
business. As we make acquisitions, we will convert certain systems of the
acquired companies to our systems. These conversions and the continued
development and installation of such systems involve the risk of unanticipated
complications and expenses. We can provide no assurances that we will be
successful in this regard.
We
have no public market for our Securities. Our
outstanding Common Stock and Series 1 Convertible Preferred Stock (collectively
the “Securities”) are not currently traded in the Over-the-Counter Market and
quoted on the OTC Bulletin Board. In the event that trading does commence in
the
future for our Common Stock, it may be very limited and sporadic. We also may
have a limited public float which could result in a high degree of volatility
in
the market price of our Common Stock. The availability for sale of restricted
securities pursuant to Rule 144 or otherwise could adversely affect the market
for our Common Stock, if any. We can provide no assurances that an established
public market will ever develop or be sustained for our Common Stock in the
future. Further, we do not anticipate a public market will ever develop for
our
Series 1 Convertible Preferred Stock.
The
price of our common stock may fluctuate significantly. The
market price for our common stock, if any, can fluctuate as a result of a
variety of factors, including the factors listed above, many of which are beyond
our control. These factors include: actual or anticipated variations in
quarterly operating results; announcements of new services by our competitors
or
us; announcements relating to strategic relationships or acquisitions; changes
in financial estimates or other statements by securities analysts; and other
changes in general economic conditions. Because of this, we may fail to meet
or
exceed the expectations of our shareholders or others, and the market price
for
our common stock could fluctuate as a result.
Our
Common Stock may be considered to be a “penny stock” and, as such, the market
for our Common Stock may be further limited by certain Commission rules
applicable to penny stocks. To
the
extent the price of our Common Stock remains below $5.00 per share or we have
a
net tangible assets of $2,000,000 or less, our common shares will be subject
to
certain “penny stock” rules promulgated by the Commission. Those rules impose
certain sales practice requirements on brokers who sell penny stock to persons
other than established customers and accredited investors (generally
institutions with assets in excess of $5,000,000 or individuals with net worth
in excess of $1,000,000). For transactions covered by the penny stock rules,
the
broker must make a special suitability determination for the purchaser and
receive the purchaser’s written consent to the transaction prior to the sale.
Furthermore, the penny stock rules generally require, among other things, that
brokers engaged in secondary trading of penny stocks provide customers with
written disclosure documents, monthly statements of the market value of penny
stocks, disclosure of the bid and asked prices and disclosure of the
compensation to the brokerage firm and disclosure of the sales person working
for the brokerage firm. These rules and regulations adversely affect the ability
of brokers to sell our common shares in the public market should one develop
and
they limit the liquidity of our Shares.
17
An
investment in the Company is subject to dilution.
We may
require substantial additional financing in order to achieve our business
objectives. The Company may generate such financing through the sale of
securities (including potentially to the owners of businesses we acquire) that
would dilute the ownership of its existing security holders. In subsequent
rounds of financing, the Company will likely issue securities that will have
rights, preferences or privileges senior to our outstanding securities and
that
will include financial and other covenants that will restrict the Company’s
flexibility.
We
have never declared or paid cash dividends on our capital stock and we do not
anticipate paying any cash dividends on our common stock in the foreseeable
future. We
have
never declared or paid cash dividends on our common stock and we do not
anticipate paying any cash dividends on our common stock in the foreseeable
future. We currently intend to retain future earnings, if any, to fund the
development and growth of our business. Except for the rights of holders of
the
shares of Series 1 Convertible Preferred Stock as described herein, any future
determination to pay dividends will be dependent upon the our financial
condition, operating results, capital requirements, applicable contractual
restrictions and other such factors as our board of directors may deem
relevant.
THE
FOREGOING RISK FACTORS DO NOT PURPORT TO BE A COMPLETE EXPLANATION OF THE RISKS
INHERENT IN AN INVESTMENT IN THE COMPANY. INVESTORS SHOULD READ THIS ENTIRE
FORM
10-SB BEFORE DECIDING TO PURCHASE SHARES OF SERIES 1 PREFERRED
STOCK.
|
Management’s
Discussion and Analysis or Plan of Operation.
|
You
should read the following discussion and analysis of our financial condition
and
plan of operation together with our consolidated financial statements and the
related notes appearing at the end of this Registration Statement. Some of
the
information contained in this discussion and analysis or set forth elsewhere
in
this Registration Statement, including information with respect to our plans
and
strategy for our business and related financing, includes forward-looking
statements that involve risks and uncertainties. You should review the “Risk
Factors” section of this Registration Statement for a discussion of important
factors that could cause actual results to differ materially from the results
described in or implied by the forward-looking statements contained in the
following discussion and analysis.
This
Form
10-SB contains forward-looking statements. These statements relate to our
expectations for future events and future financial performance.
Generally, the words “anticipate,” “expect,” “intend” and similar expressions
identify forward-looking statements. Forward-looking statements involve
risks and uncertainties, and future events and circumstances could differ
significantly from those anticipated in the forward-looking statements.
These statements are only predictions. Actual events or results may differ
materially. Factors which could affect our financial results are described
in the “Risk Factors” included herein. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. Moreover, neither we nor
any other person assumes responsibility for the accuracy and completeness of
the
forward-looking statements. We undertake no duty to update any of the
forward-looking statements after the date of this report to conform such
statements to actual results or to changes in our expectations.
Executive
Overview
Anchor
Funding Services, LLC was founded in January 2003. Anchor’s business has grown
with limited marketing and financing. Our objective is to create a
well-recognized, national financial services firm for small businesses providing
accounts receivable funding (factoring), outsourcing of accounts receivable
management including collections and the risk of customer default and other
specialty finance products including, without limitation, purchase order
financing, trade finance, government contract funding and lawsuit financing.
For
certain service businesses, Anchor also provides back office support including
payroll, payroll tax compliance and invoice processing services. We provide
our
services to clients nationwide. We plan to achieve our growth objectives through
a combination of strategic and add-on acquisitions of other factoring and
specialty finance firms that serve small businesses in the United States and
Canada and internal growth through mass media marketing initiatives. Our
corporate headquarters and back office operations are located in Charlotte,
North Carolina.
18
Summary
of Critical Accounting Policies
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
discusses our financial statements, which have been prepared in accordance
with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. On an on-going basis, management evaluates its estimates and
judgments, including those related to credit provisions, intangible assets,
contingencies and litigation and income taxes. Management bases its
estimates and judgments on historical experience and on various other factors
that are believed to be reasonable under the circumstances, the results of
which
form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results
may
differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies, among others,
reflect the more significant judgments and estimates used in the preparation
of
our financial statements.
Estimates
-
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates 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.
Revenue
Recognition - Revenue
is recognized when the fee is earned and consists primarily of
non-refundable transaction and time-based fees. Non-refundable transaction
fees are charged when the Company purchases an accounts receivable. Time-based
fees are charged until the Company collects the purchased accounts receivable.
The amount charged as transaction and time-based fees is specified in each
customer’s Factoring and Security Agreement and these amounts can vary between
customers.
Retained
Interest in Purchased Accounts Receivable -
Retained
interest in purchased accounts receivable represents the gross amount of
invoices purchased from factoring customers less amounts maintained in a reserve
account. The Company purchases a customer’s accounts receivable and advances
them a percentage of the invoice total. The difference between the purchase
price and amount advanced is maintained in a reserve account. The reserve
account is used to offset any potential losses the Company may have related
to
the purchased accounts receivable.
The
Company’s factoring and security agreements with their customers include various
recourse provisions requiring the customers to repurchase accounts receivable
if
certain conditions, as defined in the factoring and security agreement, are
met.
Senior
management reviews the status of uncollected purchased accounts receivable
monthly to determine if any are uncollectible. The Company has a security
interest in the accounts receivable purchased and on a case-by-case basis,
may
have additional collateral. The Company files security interests in the property
securing their advances. Access to this collateral is dependent upon the laws
and regulations in each state where the security interest is filed.
Additionally, the Company has varying types of personal guarantees from their
factoring customers relating to the purchased accounts receivable.
Management
did not consider any of the December 31, 2006 and 2005 retained interest in
purchased accounts receivable uncollectible based on their analysis of the
portfolio.
Management
believes the fair value of the retained interest in purchased accounts
receivable approximates its recorded value because the majority of these
invoices have been subsequently collected.
Property
and Equipment -
Property
and equipment consisting primarily of computers and software, are stated at
cost. Depreciation is provided over the estimated useful lives of the
depreciable assets using the straight-line method. Estimated useful lives range
from 2 to 5 years.
Advertising
Costs -
The
Company charges advertising costs to expense as incurred. Total advertising
costs were approximately $68,200 and $68,400 for 2006 and 2005,
respectively.
19
Earnings
per Share -
The
Company computes net income per share in accordance with SFAS No. 128 “Earnings
Per Share.” Basic net income per share is computed by dividing the net income
for the period by the weighted average number of common shares outstanding
during the period. Basic and diluted per share results are the same since the
Company did not have any common stock equivalents outstanding at December 31,
2006 or 2005.
Stock
Based Compensation -
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard (“SFAS”) No. 123(R), “Accounting for
Stock-Based Compensation.” SFAS No. 123(R) establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments
for goods or services. This statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. SFAS No. 123(R) requires that the fair value of such equity
instruments be recognized as an expense in the historical financial statements
as services are performed. Prior to SFAS No. 123(R), only certain pro forma
disclosures of fair value were required. The provisions of this statement were
effective for the first interim reporting period that began after December
15,
2005. We adopted the provisions of SFAS No.123(R) in the first quarter of Fiscal
2006. Reference is made to the Notes to Financial Statements for a description
of certain other recently issued accounting pronouncements.
Fair
Value of Financial Instruments -
The
carrying value of cash equivalents, retained interest in purchased accounts
receivable, due to financial institution, accounts payable, accrued liabilities
and subordinated related party demand notes approximates their fair
value
Cash
and cash equivalents - Cash
and
cash equivalents consist primarily of highly liquid cash investment funds with
original maturities of three months or less when acquired.
Results
of Operations
Year
Ended December 31, 2006 Compared to Year Ended December 31,
2005
The
year
ended December 31, 2006 was highlighted by a 124.1% increase in finance revenue
to $569,285 compared to finance revenue of $253,999 for the year ended December
31, 2005. This revenue growth resulted in increased net income for the
year ended December 31, 2006 of $152,354 compared to a net loss of $17,497
for
the year ended December 31, 2005. The change in revenue was primarily due
to an increase in the number of Anchor’s clients and the addition of a client
that provided Anchor with approximately $228,000 in finance revenues during
the
year ended December 31, 2006. Finance revenues net of interest expense and
credit provisions as a percentage of gross finance revenues improved to 66.0%
for the year ended December 31, 2006 from 62.1% for the year ended December
31,
2005. This increase is primarily the result of Anchor receiving a higher
return for the period on its purchases of accounts receivable. Operating
expenses as a percentage of gross finance revenue were 39.2% for the year ended
December 31, 2006 compared to 69.0% for the year ended December 31, 2005.
This decrease was primarily attributable to the 124.1% increase in revenues
while operating expenses increased by 27.4%.
20
The
following table compares the operating results for the year ended December
31,
2006 and December 31, 2005:
|
|
Year
Ended December 31,
|
|
|
||||||||||
|
|
2006
|
2005
|
$
Change
|
%
Change
|
|||||||||
|
|
|
|
|
|
|||||||||
|
Finance
revenue
|
$
|
569,285
|
$
|
253,999
|
$
|
315,286
|
124.1
|
%
|
|||||
|
Interest
expense
|
(193,595
|
) |
(96,193
|
) |
(97,402
|
) |
101.3
|
%
|
|||||
|
Net
finance revenue
|
375,690
|
157,806
|
217,884
|
138.1
|
%
|
||||||||
|
Provision
for credit losses
|
-
|
-
|
-
|
||||||||||
|
Finance
revenue net of interest expense and credit
provision
|
375,690
|
157,806
|
217,884
|
138.1
|
%
|
||||||||
|
|
|||||||||||||
|
Operating
expenses
|
223,336
|
175,303
|
48,033
|
27.4
|
%
|
||||||||
|
|
|||||||||||||
|
Net
income (loss)
|
$
|
152,354
|
$
|
(17,497
|
)
|
$
|
169,851
|
-
|
|||||
Finance
revenue.
The increase in finance revenue is primarily due to an increase in the number
of
Anchor’s clients and the engagement of a client that provided Anchor with
approximately $228,000 of finance revenues during the year ended December 31,
2006. This client has been inactive and has not presented invoices for factoring
since March 21, 2006. In 2005, Anchor increased its Internet marketing on
various search engines resulting in an increase in clients. This growth through
Internet marketing continued into 2006.
Interest
expense.
Interest expense increased 101.3% due to the increase in borrowings to purchase
accounts receivable from more clients. While Anchor’s cost of funds increased
with increases in the Prime rate, interest expense as a percentage of finance
revenues decreased from 37.9% to 34.0%. This decrease may be attributable to
Anchor earning a higher return on its purchases of accounts receivable and
from
minimizing its borrowings on its line of credit.
Effective
November 30, 2006, $456,000 of loans payable to two of the Company’s members
were contributed to members’ equity. These loans bore interest at 15% per annum.
This conversion of debt to equity will result in savings in interest expense
of
approximately $68,000 per annum.
Provision
for credit losses. Anchor
has reviewed its portfolio of accounts receivable purchased and determined
that
it had no credit losses for the years ended December 31, 2006 and
2005.
Operating
expenses.
Operating expenses are primarily selling, general and administrative
(“SG&A”) expenses. Operating expenses as a percentage of gross finance
revenue were 39.2% for the year ended December 31, 2006 compared to 69.0% for
the year ended December 31, 2005. This decrease was primarily attributable
to the 124.1% increase in revenues while operating expenses increased by 27.4%.
Anchor was able to support the increases in finance revenues without significant
increases in its operating expenses. However, Management did not receive any
cash compensation for the years ended December 31, 2006 and December 31, 2005.
See “Executive Compensation” for a discussion of executive compensation to be
paid to our executive officers who will become full-time employees of our
Company upon the completion of the Anchor Transaction.
Liquidity
and Capital Resources
Cash
Flow Summary
Cash
Flows from Operating Activities
Net
cash
provided by operating activities was $682,558 for the year ended December 31,
2006 and was due primarily to the growth in our net income and a decrease in
purchased accounts receivable. For the year ended December 31, 2005 we used
$893,225 in operating activities primarily due to an increase in purchased
accounts receivable. As of December 31, 2005 we purchased a single invoice
from
a client, which totaled approximately $372,000. This invoice contributed to
the
higher purchased accounts receivable balance as of December 31, 2005 and it
was
subsequently paid in 2006. Our net income for the year ended December 31, 2006
was $152,354 compared to a net loss of $17,497 for the year ended December
31,
2005.
21
Cash
Flows from Investing Activities
For
the
year ended December 31, 2006, net cash provided by investing activities was
$94,126 primarily representing repayment of funds that had been loaned to a
related party.
For
the
year ended December 31, 2005, net cash used in investing activities was $104,603
of which $94,455 was loans made to a related party and $9,148 was for the
purchase of property and equipment.
Cash
Flows from Financing Activities
Net
cash
used in financing activities was $757,423 for the year ended December 31, 2006.
This was the result of a number of items including (a) the reduction in
purchased accounts receivable which requires less borrowing from a financial
institution (b) the reduction of our borrowing from a financial institution
by
using retained profits for the period and (b) short-term funds from a related
party.
Net
cash
provided by financing activities was $955,453 for the year ended December 31,
2005. This was the result of a number of items including (a) the increase in
purchased accounts receivable which requires more borrowing from a financial
institution (b) short-term funds from related parties
Between
January 31, 2007 and April 5, 2007, we raised $6,712,500 in gross proceeds
from
the sale of 1,342,500 shares of our Series 1 Convertible Preferred Stock. We
intend to utilize the net proceeds of this offering to expand our operations
both internally and through acquisitions as more fully described under Item
!.
Capital
Resources
We
have a
line of credit with an institutional asset based lender which advances funds
against the lower of $1,000,000 or “eligible accounts receivable” as defined in
Anchor’s agreement with its institutional lender. The institution receives a fee
of .3% of the receivables financed. The interest on the borrowings is paid
monthly at the institution’s prime plus 1%. The facility agreement, which
currently expires in September 2007, is collateralized by all current and future
Anchor assets and is guaranteed by three shareholders who are also directors.
This facility contains certain covenants related to tangible net worth and
change in control. In the event we are not able to obtain a sufficient line
of
credit for our factoring needs on commercially reasonable terms, our ability
to
operate our business would be significantly impacted and our financial condition
and results of operations could suffer. As of April 12, 2007, we have had no
outstanding debt under our line of credit.
|
Description
of Property.
|
We
currently lease office space in a small business park from an affiliated company
in Charlotte, North Carolina. We plan to move our current accounting, credit
and
account personnel to a separate office facility in Charlotte, North Carolina.
We
have also entered into a lease in Boca Raton, FL to accommodate our executive
and sales personnel.
|
Item
4.
|
Security
Ownership of Certain Beneficial Owners and
Management.
|
| · |
each
of our stockholders who is known by us to beneficially own more than
5% of
our common stock;
|
| · |
each
of our executive officers; and
|
| · |
each
of our directors.
|
22
Beneficial
ownership is determined based on the rules and regulations of the Commission.
A
person has beneficial ownership of shares if the individual has the power to
vote and/or dispose of shares. This power can be sole or shared, and direct
or
indirect. In computing the number of shares beneficially owned by a person
and
the percentage ownership of that person, shares of common stock subject to
options held by that person are counted as outstanding in such cases where
the
option holder may exercise the options within 60 days of the date hereof. These
shares, however, are not counted as outstanding for the purposes of computing
the percentage ownership of any other person. Except as indicated in the
footnotes to the table below, each person named in the table has sole voting
and
dispositive power with respect to the shares set forth opposite that person’s
name.
|
Name
of Beneficial Owner
|
Shares
of Common Stock Beneficially
Owned
|
%
of Shares of Common Stock
Beneficially
Owned
|
||
|
Morry
F. Rubin (1)
|
3,816,667
|
31.7%
|
||
|
George
Rubin (1)
|
2,472,000
|
20.8%
|
||
|
Ilissa
and Brad Bernstein (2)
|
2,316,667
|
19.1%
|
||
|
Frank
DeLape (3)(4)
|
1,360,000
|
11.4%
|
||
|
Kenneth
Smalley (3)(4)
|
60,000
|
.5%
|
||
|
All
officers and directors as a group (five persons) (5)
|
10,025,334
|
80.0%
|
||
|
William
Baquet(6)
|
2,842,500
|
21.6%
|
||
|
Buechel
Family Ltd partnership (7)
|
1,000,000
|
7.2%
|
||
|
Buechel
Patient Care Research & Education Fund (7)
|
1,000,000
|
7.2%
|
||
______________________
|
(1)
|
Morry
Rubin’s beneficial ownership includes options to purchase 216,667 shares
of Common Stock of a total of 650,000 options granted to him
and 72,000
shares in which Morry Rubin’s wife and George Rubin are co-trustees of
certain family trusts. Morry Rubin’s options vested one-third on January
31, 2007 and will vest one-third on February 29, 2008 and one-third
on
February 28, 2009. George Rubin’s beneficial ownership includes 72,000
shares in which Morry Rubin’s wife and George Rubin are co-trustees of
certain family trusts.
|
|
(2)
|
Of
the 2,316,667 shares beneficially owned by them, 2,000,000 common
are
owned by Illissa Bernstein, Brad Bernstein’s wife. The remaining 316,667
shares represent options to purchase a like amount of shares of Common
Stock of a total of 950,000 options granted to Brad
Bernstein.
|
|
(3)
|
Includes
options to purchase 60,000 shares of Common Stock of a total of 180,000
options.
|
|
(4)
|
Includes
700,000 common shares owned by Benchmark Equity Group, and 600,000
shares
held in three family trusts.
|
|
(5)
|
Includes
all options referenced above.
|
|
(6)
|
The
shares held by William Baquet include 1,500,000 shares which are
directly
beneficially owned by him and warrants to purchase 1,342,500 shares
of our
Common Stock, exercisable at a purchase price of $1.10 per share
through
January 31, 2012, which warrants were issued to Fordham Financial
Management, Inc. in connection with the completion of our recent
private
placement of Series 1 Convertible Preferred Stock. William Baquet
is an
executive officer, director and principal of Fordham Financial Management,
Inc.
|
|
(7)
|
Represents
200,000 shares of Series 1 Preferred Stock convertible into 1,000,000
shares of Common Stock. Each beneficial owner has the right to vote
at
each stockholder meeting the equivalent of 1,157,542 shares of Common
Stock. These beneficial owners are under common
control.
|
23
Item
5. Directors, Executive Officers, Promoters and Control
Persons.
The
following sets forth certain information with respect to our executive officers
and directors, each of whom became an officer and/or director of our company
on
January 31, 2007.
|
Name
|
Age
|
Position(s)
|
|
George
Rubin
|
78
|
Co-Chairman
and Co-Founder
|
|
Morry
F. Rubin
|
47
|
Co-Chairman,
CEO, Director, Co-Founder
|
|
Brad
Bernstein
|
41
|
President,
CFO & Co-Founder
|
|
Frank
Delape
|
52
|
Director
|
|
Kenneth
Smalley
|
44
|
Director
|
Executive
Officers and Directors
George
Rubin has served as Co-Chairman of Anchor Funding Services, LLC since its
formation in 2003. Since October , 1998, George Rubin
has
been a director and a principal owner of Preferred Labor LLC, which completed
the sale if its business on April 23, 2007. Mr. Rubin will devote to Anchor
such
time as is necessary for the performance of his duties. George
Rubin was Chairman of the Board of ATC Group Services, Inc., a publicly held
Company, from 1988 to 1998. ATC was sold to a financial investor group for
approximately $160 million. From 1961 to 1987, Mr. Rubin served as President,
Treasurer and Director of Staff Builders, Inc. During that time, Staff Builders,
Inc. was a publicly held corporation engaged in providing temporary personnel
in
the healthcare, light industrial and clerical fields. While he served as
President, Staff Builders, Inc. operated through approximately 100 offices
and
generated revenues in excess of $100 million.
Morry
F.
Rubin has served as Co-Chairman and Chief Executive Officer of Anchor funding
Services, LLC since its formation in 2003. Since 1998, Morry
F.
Rubin also has been Chairman, Chief Executive Officer and principal owner of
Preferred Labor LLC which completed the sale if its business on April 23, 2007.
On January 31, 2007, Mr. Rubin became a full-time employee of our
company.
Prior to
his involvement with Preferred Labor, Mr. Rubin was President, Chief Executive
Officer, Treasurer and a director of ATC Group Services, Inc. (“ATC”), a
publicly held company, from 1988 to 1998. In January 1998, ATC was sold to
a
financial investor group for approximately $160 million. Mr. Rubin was also
President, Chief Executive Officer and Treasurer of Aurora Environmental, Inc.
from May 1985 to June 1995, and was a director of Aurora from September 1983
to
June 1995. In 1995, Morry Rubin was selected as a finalist for the Ernst &
Young Entrepreneur of the Year under 40 Award for the New York City Region.
From
1981 to 1987, Mr. Rubin was employed in sales and as director of acquisitions
for Staff Builders, Inc., a publicly held company engaged in providing temporary
personnel in the healthcare, light industrial and clerical fields.
Brad
Bernstein has served as President and Chief Financial Officer of Anchor Funding
Services, LLC since its formation in 2003. Mr. Bernstein was employed by
Preferred Labor LLC from March 1999 through January, 2007. Mr. Bernstein served
Preferred as its Chief Financial officer and later as its President. On January
31, 2007, Mr. Bernstein became a full-time employee of our company. Before
joining Preferred Labor he was a partner of Miller, Ellin Consulting Group,
LLP.
Mr. Bernstein advised companies in many areas to improve their operations and
increase their profitability. Mr. Bernstein’s clients also included major
commercial and investment banks, asset based lenders and factoring companies.
These institutions relied on his ability to oversee due diligence engagements
and evaluate a Company’s financial performance, its internal control structure
and the quality of its assets before making investments or loans. Mr. Bernstein
has used his banking relationships to raise debt and negotiate and structure
financing for companies. Mr. Bernstein received a Bachelor of Arts degree from
Columbia University.
Frank
DeLape is Chairman and CEO of Benchmark Equity Group, a company he founded
in
1994. Prior to Benchmark, Mr. DeLape spent 11 years in executive
management roles of managing turnarounds for various companies. He has
worked on behalf of the Board of Directors or the sponsoring banks to
recapitalize companies, return them to profitability or maximize cash repayment
through an orderly liquidation. Benchmark provides private equity and debt
financings from various funds as well as a syndicate of investors. Mr.
DeLape was a founder and financier of Think New Ideas, a NASDAQ NMS listed
company, which later sold for over $300 million. At Benchmark, Mr. DeLape
has formed and been instrumental in the growth of eighteen companies. Of
these, seven have become NASDAQ listed, one listed on the American Stock
Exchange, and three were sold, creating in total over $3 billion in market
value. Mr. DeLape is also Founder and Managing General Partner of Trident
Growth Fund, a government licensed Small Business Investment Corporation,
(SBIC). From August 2001 through October 2005, Mr. DeLape was
Chairman of the Board of the biotechnology company Isolagen, Inc. Over his
four
years as Chairman and a major shareholder of Isolagen, Mr. DeLape oversaw the
listing of Isolagen on the American Stock Exchange, and raising over $194
million in debt and equity financings for the company. Mr. DeLape is a Director
of Polymedix, Inc. since November 2005 and President, CEO and a director of
Influmedix, Inc. since November 2004. Mr. DeLape is a member of the National
Association of Corporate Directors.
24
Kenneth
D. Smalley C.F.A. was the director of the High Yield Portfolio Group at The
Dreyfus Corporation from May of 2001 through February of 2005. As Dreyfus’s high
yield portfolio manager, he was responsible for the performance of over $1.5
billion in mutual fund assets. Prior to joining Dreyfus, Mr. Smalley was a
high-yield portfolio manager and analyst with the Alliance Capital Management
Corporation (January 1999 through May 2001). Prior to joining Alliance Capital,
he was a high-yield bond trader and analyst at, the PaineWebber Group Inc.
(July
1996 through December 1998), NatWest Securities from March 1994 through December
1995, and Nomura Securities from April of 1993 to March of 1994. Mr. Smalley
was
a credit analyst at Teacher Insurance and Annuity Association from July of
1989
through April of 1993 and began his career in 1985 as a financial analyst at
General Electric Co.’s Aircraft Engine Business Group. Mr. Smalley received his
M.B.A. from the Stern School in 1989, and is a Chartered Financial Analyst.
Mr.
Smalley has also been involved in the Legal Finance Industry, specially the
Pre-Settlement Legal Financing Sector, as one of the original founders of the
Cambridge Management Group and as a leading consultant (March 2005 through
September 2006) to the industry. Mr. Smalley recently joined the Bridgehead
Group (September 2006) as its Chief Financial Officer.
All
directors of the Company are elected at its annual meeting of stockholders
to
hold office until the next annual meeting of stockholders and until their
successor is elected and qualified, or until such director’s earlier death,
resignation or removal. All officers of the Company serve at the pleasure of
the
Board, subject to their contractual rights, if any.
Limitation
of Directors’ Liability and Indemnification
Our
directors are not personally liable to us or to any of our stockholders for
monetary damages for breach of fiduciary duty as a director except for liability
(i) for any breach of the director’s duty of loyalty to us or our stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the General
Corporation Law of the State of Delaware or (iv) for any transaction from which
the director derived any improper personal benefit. If the General Corporation
Law of the State of Delaware or any other statute of the State of Delaware
is
amended to authorize the further elimination or limitation of the liability
of
our directors, then the liability of our directors will be limited to the
fullest extent permitted by the statutes of the State of Delaware, as so
amended, and such elimination or limitation of liability shall be in addition
to, and not in lieu of, the provided limitation on the liability of a director.
To the maximum extent permitted by law, we fully indemnify any person who was
or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding (whether civil, criminal, administrative
or
investigative) by reason of the fact that such person is or was our director
or
officer, or is or was serving at our request as a director or officer of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorneys’ fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person
in
connection with such action, suit or proceeding. To the extent permitted by
law,
we may fully indemnify any person who was or is a party or is threatened to
be
made a party to any threatened, pending or completed action, suit or proceeding
(whether civil, criminal, administrative or investigative) by reason of the
fact
that such person is or was our employee or agent, or is or was serving at our
request as an employee or agent of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise, against expenses
(including attorneys’ fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding. We will, if so requested by a director or officer, advance
expenses (including attorneys’ fees) incurred by such director or officer in
advance of the final disposition of such action, suit or proceeding upon the
receipt of an undertaking by or on behalf of such director or officer to repay
such amount if it shall ultimately be determined that such director or officer
is not entitled to indemnification. We may advance expenses (including
attorneys’ fees) incurred by an employee or agent in advance of the final
disposition of such action, suit or proceeding upon such terms and conditions,
if any, as our Board deems appropriate.
Committees
Currently
the Company has no audit, compensation, corporate governance, nominating or
other committee of the Board of Directors.
25
The
Sarbanes-Oxley Act of 2002, as amended, required each corporation to have an
audit committee consisting solely of independent directors and to identify
the
independent directors who are considered to be a “financial expert.” Under the
National Association of Securities Dealers Automated Quotations definition,
an
“independent director means a person other than an officer or employee of the
Company or its subsidiaries or any other individuals having a relationship
that,
in the opinion of the Company’s board of directors, would interfere with the
exercise of independent judgment in carrying out the responsibilities of the
director. The board’s discretion in determining director independence is not
completely unfettered. Further, under the NASDAQ definition, an independent
director is a person who (1) is not currently (or whose immediate family members
are not currently), and has not been over the past three years (or whose
immediate family members have not been over the past three years), employed
by
the company; (2) has not (or whose immediate family members have not) been
paid
more than $60,000 during the current or past three fiscal years; (3) has
not (or whose immediately family has not) been a partner in or controlling
shareholder or executive officer of an organization which the company made,
or
from which the company received, payments in excess of the greater of $200,000
or 5% of that organizations consolidated gross revenues, in any of the most
recent three fiscal years; (4) has not (or whose immediate family members have
not), over the past three years been employed as an executive officer of a
company in which an executive officer of Anchor has served on that company’s
compensation committee; or (5) is not currently (or whose immediate family
members are not currently), and has not been over the past three years (or
whose
immediate family members have not been over the past three years) a partner
of
Anchor’s outside auditor.
The
term
“Financial Expert” is defined as a person who has the following attributes: an
understanding of generally accepted accounting principles and financial
statements; has the ability to assess the general application of such principles
in connection with the accounting for estimates, accruals and reserves;
experience preparing, auditing, analyzing or evaluating financial statements
that present a breadth and level of complexity of accounting issues that are
generally comparable to the breadth and complexity of issues that can reasonably
be expected to be raised by the company’s financial statements, or experience
actively supervising one or more persons engaged in such activities; an
understanding of internal controls and procedures for financial reporting;
and
an understanding of audit committee functions.
|
Executive
Compensation.
|
Compensation
of Directors and Executive Officers.
Summary
Compensation Table
The
following table sets forth the overall compensation earned over the fiscal
year
ended December 31, 2006 by (1) each person who served as the principal executive
officer of Anchor Funding Services, LLC during fiscal year 2006; (2) Anchor
Funding Services, LLC most highly compensated (up to a maximum of two) executive
officers as of December 31, 2006 with compensation during fiscal year 2006
of
$100,000 or more; and (3) those two individuals, if any, who would have
otherwise been in included in section (2) above but for the fact that they
were
not serving as an executive of Anchor Funding Services, LLC as of December
31,
2006.
|
Fiscal
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Options
Awards
($)(1)
|
Non-Equity
Incentive Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
Earnings ($)
|
All Other
Compensation
($) (2)(3)
|
Total ($)
|
||||||||||||||||||||
|
Morry
F. Rubin
|
2006
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
|||||||||||
|
Chief
Executive
|
||||||||||||||||||||||||||||
|
Officer
|
||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Brad
Bernstein
|
2006
|
$
|
-0-
|
$
|
-0_
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
|||||||||||
|
President
|
________________
| (1) |
Reflects
dollar amount expensed by Anchor Funding Services, LLC during applicable
fiscal year for financial statement reporting purposes pursuant to
FAS
123R. FAS 123R requires the company to determine the overall value
of the restricted stock awards and options as of the date of grant
based
upon the Black-Scholes method of valuation, and to then expense that
value
over the service period over which the restricted stock awards and
options
become vested. As a general rule, for time-in-service-based
restricted stock awards and options, the company will immediately
expense
any restricted stock awards and option or portion thereof which is
vested
upon grant, while expensing the balance on a pro rata basis over
the
remaining vesting term of the restricted stock awards and options.
For a description FAS 123R and the assumptions used in determining
the
value of the restricted stock awards and options under the Black-Scholes
model of valuation, see the notes to the consolidated financial statements
included with this Form 10-SB.
|
26
| (2) |
Includes
all other compensation not reported in the preceding columns, including
(i) perquisites and other personal benefits, or property, unless
the
aggregate amount of such compensation is less than $10,000; (ii)
any
“gross-ups” or other amounts reimbursed during the fiscal year for the
payment of taxes; (iii) discounts from market price with respect
to
securities purchased from the company except to the extent available
generally to all security holders or to all salaried employees; (iv)
any
amounts paid or accrued in connection with any termination (including
without limitation through retirement, resignation, severance or
constructive termination, including change of responsibilities) or
change
in control; (v) contributions to vested and unvested defined contribution
plans; (vi) any insurance premiums paid by, or on behalf of, the
company
relating to life insurance for the benefit of the named executive
officer;
and (vii) any dividends or other earnings paid on stock or option
awards
that are not factored into the grant date fair value required to
be
reported in a preceding column.
|
| (3) |
Includes
compensation for service as a director described under Director
Compensation, below.
|
For
a
description of the material terms of each named executive officer’s employment
agreement, including, without limitation, the terms of any contract, agreement,
plan or other arrangement that provides for any payment to a named executive
officer in connection with his or her resignation, retirement or other
termination, or a change in control of the company, see “Employment Agreements”
below.
No
outstanding common share purchase option or other equity-based award granted
to
or held by any named executive officer in 2006 were re-priced or otherwise
materially modified, including extension of exercise periods, the change of
vesting or forfeiture conditions, the change or elimination of applicable
performance criteria, or the change of the bases upon which returns are
determined, nor was there any waiver or modification of any specified
performance target, goal or condition to payout.
Executive
Officer Outstanding Equity Awards At Fiscal Year-End
The
following table provides certain information concerning any common share
purchase options, stock awards or equity incentive plan awards held by each
of
our named executive officers that were outstanding as of December 31,
2006.
|
Option Awards
|
Stock Awards
|
||||||||||||||||||||||||||||
| Name |
Number of
Securities
Underlying
Unexercised
Options(#)
Exercisable
|
Number of
Securities
Underlying
Unexercised
Options(#)
Unexercisable
|
|
Equity
Incentive Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
|
Option
Exercise
Price ($)
|
Option
Expiration
Date
|
Number of
Shares or
Units of
Stock That
Have Not
Vested (#)
|
Market
Value of
Shares or
Units of
Stock
That
Have Not
Vested
|
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That Have
Not
Vested
|
Equity
Incentive Plan
Awards:
Market or
Payout Value of
Unearned
Shares, Units or
Other Rights
That Have Not
Vested
|
|||||||||||||||||||
|
Morry
F. Rubin
|
-0-
|
-0-
|
-0-
|
N/A
|
N/A
|
-0-
|
-0-
|
-0-
|
-0-
|
||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||
|
Brad
Bernstein
|
-0-
|
-0-
|
-0-
|
N/A
|
N/A
|
-0-
|
-0-
|
-0-
|
-0-
|
||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||
______________
N/A
- not
applicable.
27
Employment
Agreements
Each
of
the following executive officers is a party to an employment agreement with
the
Company.
|
Name
|
Position
|
Annual Salary(1)
|
Bonus (2)
|
|
||||
|
Morry
F. Rubin
|
|
Chief
Executive Officer
|
|
$
|
1
(1)
|
|
Annual
bonuses at the discretion of the Board in an amount
determined
by the compensation committee.
|
|
|
Brad
Bernstein
|
|
President
|
|
$
|
205,000
(2)
|
|
Annual
bonuses at the discretion of the Board in an amount
determined
by the compensation committee.
|
|
____________
| (1) |
Effective
commencing on the first day of the first month following such time
as the
Company shall have, within any period beginning on January 1 and
ending
not more than 12 months thereafter, earned pre-tax net income exceeding
$1,000,000, Mr. Rubin’s Base Salary shall be adjusted to an amount, to be
mutually agreed upon between Employee and the Company, reflecting
the fair
value of the services provided, and to be provided, by Employee taking
into account (i) Employee’s position, responsibilities and performance,
(ii) the Company’s industry, size and performance, and (iii) other
relevant factors.
|
| (2) |
The
Company shall pay Mr. Bernstein a fixed base salary of $205,000 during
the
first year of the Employment Term, $220,000 during the second year
of the
Employment Term and $240,000 during the Third Year and any additional
year
of the Employment Term. The Board may periodically review Mr. Bernstein’s
Base Salary and may determine to increase (but not decrease) the
Base
Salary, in accordance with such policies as the Company may hereafter
adopt from time to time, if it deems
appropriate.
|
On
January 31, 2007, we entered into a three-year employment agreement with Morry
F. Rubin (“M. Rubin”) to retain his services as Co-chairman and Chief Executive
Officer. We entered into a three-year employment agreement to retain the
services of Brad Bernstein (“Bernstein”) as President. The following summarizes
the employment agreements of M. Rubin and Bernstein, who are individually
referred to as “Executive” and collectively as “Executives.”
| · |
Each
Executive shall receive a base salary and bonuses as described above.
M.
Rubin and Bernstein shall be entitled to a monthly automobile allowance
of
$1,500 and $1,000, respectively;
|
| · |
M.
Rubin and Bernstein were granted on January 31, 2007 10-year options
to
purchase 650,000 and 950,000 shares, respectively, exercisable at
$1.25
per share, pursuant to the Company’s 2007 Omnibus Equity Compensation
Plan. Vesting of the options is one-third immediately, one-third
on
February 29, 2008 and one-third on February 28, 2009, provided that
in the
event of a change in control or Executive is terminated without cause
or
Executive terminates for good reason, all unvested options shall
accelerate and immediately vest and become exercisable in full on
the
earliest of the date of change in control or date of Executive’s
termination for good reason by Executive or by the Company without
cause;
|
| · |
The
Agreement shall be automatically renewed for additional one year
terms
unless either party notifies the other, in writing, at least 60 days
prior
to the expiration of the term, of such party’s intention not to renew the
Agreement;
|
| · |
Each
Executive shall be required to devote his full business time and
efforts
to the business and affairs of the Company; provided that it is understood
and agreed that until such time as the sale of Preferred Labor, LLC,
a
company partially owned by the Executives, is completed, it is expected
that the Executive shall continue to provide minimal services to
Preferred
Labor, LLC;
|
| · |
Each
Executive shall be entitled to participate in such Executive benefit
and
other compensatory or non-compensatory plans that are available to
similarly situated executives of the Company, which may include
disability, health, dental and life insurance plans, option and bonus
plans and other fringe benefit plans or programs, including a 401(k)
retirement plan, of the Company established from time to time by
the
Board, subject to the rules and regulations applicable thereto, and
which
shall include an executive insurance program under which Executive
shall
be entitled to be reimbursed for up to $25,000 of medical costs not
covered by the Company’s health insurance per year.
|
| · |
Bernstein
shall be entitled to reimbursement for out-of-pocket moving costs
incurred
in connection with the relocation of the Company’s Executive offices to
Boca Raton, FL;
|
| · |
The
Company shall, to the extent such benefits can be obtained at a reasonable
cost, provide the Executive with disability insurance benefits of
at least
60% of his gross Base Salary per month; provided that for purposes
of the
foregoing, prior to the date on which M. Rubin’s Base Salary is adjusted
above $1.00 as described above, M. Rubin’s Base Salary shall be deemed to
be $300,000. In the event of the Executive’s Disability, the Executive and
his family shall continue to be covered by all of the Company’s Executive
welfare benefit plans at the Company’s expense, to the extent such
benefits may, by law, be provided, for the lesser of the term of
such
Disability and 24 months, in accordance with the terms of such
plans;
|
| · |
The
Company shall, to the extent such benefits can be obtained at a reasonable
cost, provide the Executive with life insurance benefits in the amount
of
at least $500,000. In the event of the Executive’s death, the Executive’s
family shall continue to be covered by all of the Company’s Executive
welfare benefit plans, at the Company’s expense, to the extent such
benefits may, by law, be provided, for 12 months following the Executive’s
death in accordance with the terms of such
plans;
|
| · |
The
Executive shall receive four weeks of vacation
annually;
|
| · |
During
the Employment Term and for two years following termination thereof
(other
than any such termination by the Company without Cause or by the
Executive
for Good Reason), the Executive shall not, directly or indirectly
own any
interest in, manage, control, participate in, consult with, render
services for, advise, or in any manner engage in the Company Business
within a 100 mile radius of any office operated by the Company or
any
subsidiary of the Company, whether as an officer, director, stockholder,
consultant, investor, agent or otherwise (unless the Board shall
have
authorized such activity and the Company shall have consented thereto
in
writing). “Company Business” means providing (i) accounts receivable
funding (factoring), outsourcing of accounts receivable management
including collections and the risk of customer default, purchase
order
financing, lawsuit financing, trade finance and government contract
funding and (ii) back office support including payroll, payroll tax
compliance and invoice processing services. Passive investments of
less
than 5% of the outstanding securities of any entity subject to the
reporting requirements of Section 13 or Section 15(d) of the Exchange
Act,
shall not be prohibited;
|
| · |
During
the Employment Term and for three years following termination of
the
Executive’s employment with the Company for any reason, the Executive will
not use, disclose to others, or publish or otherwise make available
to any
other party, any non-public or confidential business information
about the
business and affairs of the Company;
|
| · |
During
the Employment Term and for 18 months following termination of the
Executive’ employment with the Company for any reason, the Executive will
not (i) directly or indirectly, including through an entity or agent,
induce or otherwise attempt to influence any executive of the Company
to
leave the Company's employ, (ii) hire, cause to be hired or induce
a third
party to hire, any such executive (unless the Board shall have authorized
such employment and the Company shall have consented thereto in writing)
or in any way materially interfere with the relationship between
the
Company and any executive thereof, or (iii) induce or attempt to
induce
any customer, supplier, licensee, licensor or other business relation
of
the Company to cease or otherwise limit doing business with the Company
or
in any way materially interfere to the detriment of the Company with
the
relationship between any such customer, supplier, licensee or business
relation of the Company; and
|
| · |
The
Company will indemnify (and advance the costs of defense of) the
Executive
(and his legal representatives) to the fullest extent permitted by
the
laws of the state of Delaware, as in effect at the time of the subject
act
or omission, or by the Certificate of Incorporation and Bylaws of
the
Company, as in effect at such time or on the date of the Agreement,
whichever affords greater protection to the Executive, and both during
and
after termination (for any reason) of the Executive’s employment, the
Company shall cause the Executive to be covered under a directors
and
officers' liability insurance policy for his acts (or non-acts) as
an
officer or director of the Company or any of its affiliates. Such
policy
shall be maintained by the Company, at its expense in an amount of
at
least $5 million and on terms (including the time period of coverage
after
the Executive’s employment terminates) at least as favorable to the
Executive as policies covering the Company’s other members of its Board of
Directors; In the event of any litigation or other proceeding between
the
Company and the Executive with respect to the subject matter of the
Agreement and the enforcement of the rights hereunder and such litigation
or proceeding results in final judgment or order in favor of the
Executive, which judgment or order is substantially inconsistent
with the
positions asserted by the Company in such litigation or proceeding,
the
losing party shall reimburse the prevailing party for all of his/its
reasonable costs and expenses relating to such litigation or other
proceeding, including, without limitation, his/its reasonable attorneys’
fees and expenses.
|
28
Termination
of Employment.
Each
Executive’s employment with the Company may be terminated as set forth
below:
Termination
by Mutual Agreement.
The
Executive’s employment with the Company may be terminated at anytime by, and
upon the terms and conditions of, a mutual written agreement between the
parties.
Termination
for Cause.
The
Executive’s employment with the Company may be terminated by the Company for
Cause. For purposes of the Agreement, “Cause”
shall
mean any one of the following:
| · |
conviction
of the Executive for committing a felony or crime or other crime
involving
moral turpitude;
|
| · |
the
Executive having committed acts or omissions constituting willful
or
wanton misconduct with respect to the Company;
|
| · |
the
Executive having committed any act of fraud or embezzlement involving
the
Company;
|
| · |
the
Executive having committed any willful and material violation of
any
statutory or common law duty of loyalty to the Company;
|
| · |
the
Executive having committed acts or omissions constituting a material
breach of the Agreement that continues for more than 15 days after
notice
from the Company specifically identifying such breach.
|
In
the
event of any termination for cause, the Company shall pay all amounts of Base
Salary then due to the Executive under up to the payroll period worked but
for
which payment had not yet been made up to the date of termination. The Company
shall have no further obligations to the Executive under the Agreement
(including no obligation with respect to bonuses or other incentive
compensation), and any and all stock options granted to the Executive shall
terminate according to their terms of grant with any such vested options being
exercisable for the shorter of (i) 90 days from the date of termination and
(ii)
the exercise term of each relevant option grant.
Termination
for Disability.
The
Executive’s employment with the Company may be terminated by the Company in the
event of the Executive’s Disability. In the event of any termination, on the
date of termination all options that would have otherwise vested within the
12
months following the date of the date of termination shall accelerate and
immediately vest and become exercisable in full. Such options may be exercised
for the longer of (i) 12 months from the date of the date of termination and
(ii) the exercise term of each relevant option grant. For purposes of the
Agreement, “Disability”
shall
mean the inability of the Executive, in the reasonable judgment of a physician
appointed by the Board, to perform his duties of employment because of any
physical or mental disability or incapacity, where such disability shall exist
for an aggregate period of more than 150 days in any 365-day period or for
any
period of 90 consecutive days. In the event of any termination due to
disability, the Company shall (i) pay by the next payroll period all amounts
then due to the Executive for salary and automobile allowances up to the payroll
period worked but for which payment had not yet been made up to the date of
termination (including bonuses then-earned or owing), and (ii) comply with
its
obligations under employee welfare benefit plans.
Termination
upon Death.
The
Executive's employment with the Company automatically terminates on the
Executive's death. In the event of the Executive’s death (i) the Company will
continue to pay the Executive's heirs or beneficiaries his Base Salary for
6
months following the date of termination (on regular payroll dates) and (ii)
on
the date of termination all options that would have otherwise vested within
the
12 months following the date of the Executive's death shall accelerate and
immediately vest and become exercisable in full. Such options may be exercised
for the longer of (i) 12 months from the date of the Executive's death and
(ii)
the exercise term of each relevant option grant. In addition, in the event
of
the Executive's death, the Company shall (i) pay by the next payroll period
all
amounts then due to the Executive for salary and automobile allowances up to
the
payroll period worked but for which payment had not yet been made up to the
date
of termination (including bonuses then-earned or owing), and (ii) comply with
its obligations under employee welfare benefit plans.
Termination
without Cause.
The
Executive's employment with the Company may be terminated by the Company, in
the
absence of Cause, for any reason and in its sole and absolute discretion,
provided that in such event (which
would include the Company’s declining to extend the Employment Term)
the
Company shall continue to pay to the Executive the Base Salary (on regular
payroll dates) for twelve months from the date of termination (the “Termination
Payments”)
plus
any bonuses then-earned or owing on the date of termination and an amount equal
to the Target Bonus for the year in which the termination occurs pro rated
based
on the number of days of service in such year. On
the
date of termination, all
unvested options shall accelerate and immediately vest and become exercisable
in
full.
Such
options may be exercised for the longer of (i) 12 months from the date of
termination and (ii) the exercise term of each relevant option grant. Also,
during any period in which Termination Payments are required to be paid, the
Company shall continue all benefits for the Executive and his family described
herein at no cost to the Executive.
29
Termination
by
the
Executive for
Good Reason.
The
Executive’s employment with the Company may be terminated by the Executive for
Good Reason. “Good
Reason”
shall
be deemed to exist:
| · |
if
the Executive’s duties or responsibilities are materially diminished or
the Executive is assigned any duties materially inconsistent with
the
duties or responsibilities contemplated by this Agreement;
|
| · |
if
the Company shall have continued to fail to comply with any material
provision of the agreement after a 30-day period to cure (if such
failure
is curable) following written notice by the Executive to the Company
of
such non-compliance;
|
| · |
upon
a Change in Control; or
|
| · |
if
the Company requires that the Executive be based at any location
other
than Charlotte, NC or Boca Raton, FL (or the suburban area of either).
|
In
the
event of any termination by the Executive for Good Reason, the Company shall
pay
the Termination Payments plus any bonuses then-earned or owing on the date
of
termination and an amount equal to the Target Bonus for the year in which the
termination occurs pro rated based on the number of days of service in such
year
to the Executive in the same amount and manner as under “Termination Without
Cause.” On
the
date of termination, all
unvested options shall accelerate and immediately vest and become exercisable
in
full.
Such
options may be exercised for the longer of (i) 12 months from the date of
termination and (ii) the exercise term of each relevant option grant. Also,
during any period in which Termination Payments are required to be paid, the
Company shall continue the benefits for the Executive and his family described
herein at no cost to the Executive.
Voluntary
Resignation.
The
Executive’s employment with the Company may be terminated by the Executive
without Good Reason. In such event, the Company shall pay all amounts of Base
Salary then due to the Executive for salary and automobile allowance up to
the
payroll period worked but for which payment had not yet been made up to the
date
of termination. The Company shall have no further obligations to the Executive
under the Agreement (including no obligation with respect to bonuses or other
incentive compensation), and any and all stock options granted to the Executive
shall terminate according to their terms of grant; provided that if such
termination occurs during the first year of the Employment Term any such vested
options would be exercisable for the shorter of (i) 90 days from the date of
termination and (ii) the exercise term of each relevant option grant, and if
the
termination occurs thereafter any such vested options would continue to be
exercisable for the full exercise term of each relevant option
grant.
For
purposes of the agreement, a “Change
in Control”
shall
mean:
| · |
the
acquisition by any individual, entity or group (within the meaning
of
Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as
amended (the “Exchange
Act”))
(a “Person”)
of “beneficial ownership” (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of 50% or more of (I) the then-outstanding
shares
of Common Stock (the “Outstanding
Company Common Stock”),
or (II) the combined voting power of the then-outstanding voting
securities of the Company generally entitled to vote in the election
of
directors (the “Outstanding
Company Voting Securities”)
regardless of whether such acquisition is as a result of the issuance
of
securities by the Company to such Person, by such Person acquiring
such
shares publicly or in private sales (or in any combination of acquisitions
or public or private sales or both), or otherwise; provided,
however,
that the following shall not constitute a Change in Control: (a)
any
issuance or acquisition of securities of the Company whereby the
Executive
(including his affiliates) reaches or exceeds such 50% threshold;
(b) any
acquisition by any Executive benefit plan (or related trust) sponsored
or
maintained by the Company or any entity controlled by the Company;
or (c)
any issuance of shares of Series 1 Preferred Stock issued in the
Company’s
initial offering of such shares or any shares of common stock issued
upon
conversion of such shares of Series 1 Preferred
Stock;
|
| · |
approval
by the stockholders of the Company of a reorganization, merger,
consolidation or other business combination (collectively, a “Business
Combination”),
unless following such Business Combination more than 50% of, respectively,
the then-outstanding shares of common stock of the entity resulting
from
such Business Combination and the combined voting power of the
then-outstanding voting securities of such entity generally entitled
to
vote in the election of directors is then beneficially owned, directly
or
indirectly, by all or substantially all of the individuals and entities
who were the beneficial owners, respectively, of the Outstanding
Company
Common Stock and Outstanding Company Voting Securities immediately
prior
to such Business Combination in substantially the same proportions
as
their ownership, immediately prior to such Business Combination,
of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities, as the case may be;
and
|
30
| · |
approval
by the stockholders of the Company of a complete liquidation or
dissolution of the Company or the first to occur of (a) the sale or
other disposition (in one transaction or a series of related transactions)
of all or substantially all of the assets of the Company, or (b) the
approval by the stockholders of the Company of any such sale or
disposition.
|
CORPORATE
GOVERNANCE
BOARD
OF DIRECTORS
Board
Members Who Are Deemed Independent
Our
board
of directors has determined that Kenneth Smalley is our sole “independent
director” as that term is defined by the National Association of Securities
Dealers Automated Quotations (“NASDAQ”). Kenneth Smalley
is not
a
“financial expert.” See “Committees” for a description of the definition of
“Independent Director” and “Financial Expert.”
DIRECTOR
COMPENSATION
Cash
Fees and Options
The
chairman of each committee will be entitled to an annual fee of $6,500 and
each
non-executive director will receive an annual fee of $6,500 as a member of
the
Board, a fee of $1,000 per Board or Committee meeting (or consent in lieu of
a
meeting), and an activity fee of $1,000 per day for services rendered by the
Board member. George Rubin will receive the same health and dental insurance
benefits as those provided to our executive officers to the extent permitted
by
the rules and regulations applicable thereto and an additional medical
reimbursement of up to $25,000 per annum. Members of the Board of Directors
are
eligible to participate under one or more of our company’s stock option plan(s).
On January 31, 2007, we established a stock option plan covering 2,100,000
shares and granted non-statutory stock options to purchase 950,000, shares
and
650,000 shares to Brad Bernstein and Morry F. Rubin, respectively, exercisable
at $1.25 per share. We also granted non-statutory stock options to purchase
180,000 shares to each of Kenneth Smalley and Frank Delape, exercisable at
$1.25
per share. These options will have a term of ten years and will vest one third
on the date of grant, one-third on February 29, 2008 and one-third on February
28, 2009. Equity incentive awards and cash payments to directors will be
determined in the sole discretion of the Board and/or compensation committee
of
the Board at such times and in such amounts as the Board or a committee thereof
determines to make such awards.
Travel
Expenses
All
directors shall be reimbursed for their reasonable out of pocket expenses
associated with attending the meeting.
2006
Compensation
The
following table shows the overall compensation earned for the 2006 fiscal year
with respect to each non-employee and non-executive directors of the Company
as
of December 31, 2006.
|
DIRECTOR COMPENSATION
|
||||||||||||||||||||||
|
Name and
Principal
Position
|
Fees
Earned
or Paid
in Cash
($)
|
Stock
Awards
($)
(1)
|
Option
Awards ($)
(1)
|
Non-Equity
Incentive Plan
Compensation
($) (2)
|
Nonqualified
Deferred
Compensation
Earnings ($)
|
All Other
Compensation
($)
(3)
|
Total ($)
|
|||||||||||||||
|
Kenneth
Smalley, Director
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$ | -0- | ||||||||
| Frank DeLape, Director (4) |
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
||||||||
| George Rubin, Director (5) |
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
||||||||
______________________
31
| (1) |
Reflects
dollar amount expensed by the company during applicable fiscal year
for
financial statement reporting purposes pursuant to FAS 123R. FAS
123R requires the company to determine the overall value of the restricted
stock awards and the options as of the date of grant based upon the
Black-Scholes method of valuation, and to then expense that value
over the
service period over which the restricted stock awards and the options
become exercisable vested. As a general rule, for
time-in-service-based restricted stock awards and options, the company
will immediately expense any restricted stock award or option or
portion
thereof which is vested upon grant, while expensing the balance on
a pro
rata basis over the remaining vesting term of the restricted stock
award
and option. For a description FAS 123 R and the assumptions used in
determining the value of the restricted stock awards and options
under the
Black-Scholes model of valuation, see the notes to the financial
statements included with this Form
10-SB.
|
| (2) |
Excludes
awards or earnings reported in preceding
columns.
|
| (3) |
Includes
all other compensation not reported in the preceding columns, including
(i) perquisites and other personal benefits, or property, unless
the
aggregate amount of such compensation is less than $10,000; (ii)
any
“gross-ups” or other amounts reimbursed during the fiscal year for the
payment of taxes; (iii) discounts from market price with respect
to
securities purchased from the company except to the extent available
generally to all security holders or to all salaried employees; (iv)
any
amounts paid or accrued in connection with any termination (including
without limitation through retirement, resignation, severance or
constructive termination, including change of responsibilities) or
change
in control; (v) contributions to vested and unvested defined contribution
plans; (vi) any insurance premiums paid by, or on behalf of, the
company
relating to life insurance for the benefit of the director; (vii)
any
consulting fees earned, or paid or payable; (viii) any annual costs
of
payments and promises of payments pursuant to a director legacy program
and similar charitable awards program; and (ix) any dividends or
other
earnings paid on stock or option awards that are not factored into
the
grant date fair value required to be reported in a preceding
column.
|
| (4) |
Does
not include 1,500,000 shares of Common Stock purchased in December
2006 at
a purchase price of $.025 per share (the “Purchase Price”) at a time when
former BTHC XI had no material assets or liabilities. Management
believes
that the Purchase Price paid by Mr. DeLape was made in an arms length
transaction at no less than the fair market value of the former BTHC
XI’s
Common Stock.
|
| (5) |
See
“Item 7 Certain
Relationships and Related Transactions”
for a description of the issuance of 2,400,000 shares to George Rubin
on
January 31, 2007 in connection with the completion of the Anchor
Transaction in which George Rubin, as a member of Anchor Funding
Services,
LLC, exchanged his membership interest for restricted shares of our
company.
|
Indemnification;
Director and Officer Liability Insurance.
The
Company has agreed to indemnify (and advance the costs of defense of) each
director (and his legal representatives) to the fullest extent permitted by
the
laws of the state in which the Company is incorporated, as in effect at the
time
of the subject act or omission, or by the Certificate of Incorporation and
Bylaws of the Company, whichever affords greater protection to each director,
and both during and after termination (for any reason), the Company shall cause
each director to be covered under a directors and officers' liability insurance
policy for his acts (or non-acts) as an officer or director of the Company
or
any of its affiliates. Such policy shall be maintained by the Company at its
expense in an amount of at least $5 million during the term each director serves
the Company (including the time period of coverage after each director’s service
terminates for any reason whatsoever).
In
the
event of any litigation or other proceeding between the Company and a director
with respect to enforcement of a director’s rights to indemnification and
director and officer liability insurance and such litigation or proceeding
results in final judgment or order in favor of the Director, which judgment
or
order is substantially inconsistent with the positions asserted by the Company
in such litigation or proceeding, the losing party shall reimburse the
prevailing party for all of his/its reasonable costs and expenses relating
to
such litigation or other proceeding, including, without limitation, his/its
reasonable attorneys' fees and expenses.
32
2007
Omnibus Equity Incentive Plan
On
January 31, 2007, the Board adopted our 2005 Omnibus Equity Incentive Plan
(the
“Plan”), with 2,100,000 common shares authorized for issuance under the
Plan.
The
following table shows the amounts that have been granted under the
Plan:
|
2007
Omnibus Equity Compensation Plan
|
||
|
Name
and Position
|
Dollar
Value ($)
|
Number
of Options
|
|
Morry
R. Rubin, Chief Executive Officer (2)
|
(1)
|
650,000
|
|
Brad
Bernstein, President (2)
|
(1)
|
950,000
|
|
Executive
Group (2)
|
(1)
|
1,600,000
|
|
Non-Executive
Director Group (two persons) (2)
|
(1)
|
360,000
|
|
Non-Executive
Officer Employee Group (2)
|
$-0-
|
-0-
|
______________
|
(1)
|
No
value of the options is being shown in the table as there is no public
market for our Common Stock.
|
| (2) |
On
January 31, 2007, we established a stock option plan covering 2,100,000
shares and granted non-statutory stock options to purchase 950,000,
shares
and 650,000 shares to Brad Bernstein and Morry F. Rubin, respectively,
exercisable at $1.25 per share and granted non-statutory stock options
to
purchase 180,000 shares to each of Kenneth Smalley and Frank Delape,
exercisable at $1.25 per share. These options will have a term of
ten
years and will vest one third on the date of grant, one-third on
February
29, 2008 and one-third on February 28, 2009.
|
The
following is a summary of the material features of the Plan:
Shares
Subject to the Plan
The
maximum number of shares of common stock with respect to which awards may be
made under the Plan is 2,100,000. In the event of any stock split, reverse
stock
split, stock dividend, recapitalization, reclassification or other similar
event
or transaction, the Compensation Committee will make such equitable adjustments
to the number, kind and price of shares subject to outstanding grants and to
the
number of shares available for issuance under the Plan as it deems necessary
or
appropriate. Shares subject to forfeiture, cancelled or expired awards granted
under the Plan will again become available for issuance under the Plan. In
addition, shares surrendered in payment of any exercise price or in satisfaction
of any withholding obligation arising in connection with an award granted under
the Plan will again become available for issuance under the Plan.
Administration
A
committee of two or more directors appointed by the Board will administer the
Plan (the “Committee”); however, until the Committee is appointed, the Board
administers the Plan. The Committee interprets the Plan, selects award
recipients, determines the number of shares subject to each award and
establishes the price, vesting and other terms of each award. While there are
no
predetermined performance formulas or measures or other specific criteria used
to determine recipients of awards under the Plan, awards are based generally
upon consideration of the grantee's position and responsibilities, the nature
of
services provided, the value of the services to us, the present and potential
contribution of the grantee to our success, the anticipated number of years
of
service remaining and other factors which the Board or the Committee deems
relevant.
33
Eligibility
Employees,
directors, consultants and other service providers of our Company and its
affiliates are eligible to participate in the Plan, provided; however, that
only
employees of our Company are eligible to receive incentive stock options. Other
than consultants and other service providers, the number of currently eligible
employees in the Plan is five. The maximum number of shares that are the subject
of grants made under the Plan to any individual during any calendar year may
not
exceed 1,000,000 shares, subject to certain adjustments. A participant in the
Plan may not accrue dividend equivalents during any calendar year in excess
of
$500,000.
Amendment
and Termination of Plan
The
Board
may amend, alter or discontinue the Plan at any time; provided, however, that
the Board may not amend the Plan without stockholder approval if such approval
is required in order to comply with the Code or applicable laws or to comply
with applicable stock exchange requirements. The Plan will terminate on the
day
immediately preceding the tenth anniversary of the Plan’s effective date, unless
the Plan is terminated earlier by the Board or is extended by the Board with
the
approval of the stockholders.
Grants
Grants
made under the Plan may consist of incentive stock options, non-qualified stock
options, stock appreciation rights or “SARs”, stock awards, stock unit awards,
dividend equivalents and other stock-based awards. Each grant is subject to
the
terms and conditions set forth in the Plan and to those other terms and
conditions specified by the Committee and memorialized in a written grant
agreement between our Company and grant recipient (the “Grant
Instrument”).
Stock
Options
The
Plan
permits the grant of incentive stock options (“ISOs”) to our employees and the
employees of our subsidiaries. The Plan also provides for the grant of
non-qualified stock options (“NQSOs”) to our employees, directors, and
consultants and other individuals who perform services for us (as well as to
employees, directors, consultants and service providers of our subsidiaries).
The exercise price of any stock option granted under the Plan will be equal
to
or greater than the fair market value of such stock on the date the option
is
granted, provided, however, that the exercise price of any incentive stock
options granted under the Plan to an employee who, at the time of grant, owns
stock possessing more than 10% of the total combined voting power of all classes
of our stock or any parent or subsidiary of us, may not be less than 110% of
the
fair market value of our common stock on the date of grant. Generally, payment
of the option price may be made (i) in cash, (ii) with the Committee’s consent,
by approval of the Committee, by delivering shares of Company Stock owned by
the
Optionee (including Company Stock acquired in connection with the exercise
of an
Option, subject to such restrictions as the Committee deems appropriate) and
having a Fair Market Value on the date of exercise equal to the Exercise Price
or by attestation (on a form prescribed by the Committee) to ownership of shares
of Company Stock having a Fair Market Value on the date of exercise equal to
the
Exercise Price, (iii) through a broker in accordance with applicable laws,
or
(iv) with a combination of cash and shares. The participant must pay the option
price and the amount of withholding tax due, if any, at the time of exercise.
Shares of common stock will not be issued or transferred upon exercise of the
option until the option price and the withholding obligation are fully paid.
Under
the Plan, each option is exercisable at such time and to such extent as
specified in the pertinent Grant Instrument between our Company and the option
recipient. However, no option shall be exercisable with respect to any shares
of
common stock more than ten years after the date of grant of such award (except
as otherwise determined by the Committee with respect to non-incentive options)
and no incentive stock option that is granted to an employee, who at the time
of
grant, owns stock possessing more than 10% of the total combined voting power
of
all classes of stock of our Company, or any parent or subsidiary of ours, may
be
exercised more than five years from the date of grant. Notwithstanding the
foregoing, the Committee may provide, in a Grant Instrument, that a Grantee
may
transfer Nonqualified Stock Options to family members, or one or more trusts
or
other entities for the benefit of or owned by family members, consistent with
the applicable securities laws, according to such terms as the Committee may
determine; provided that the Grantee receives no consideration for the transfer
of an Option and the transferred Option shall continue to be subject to the
same
terms and conditions as were applicable to the Option immediately before the
transfer.
34
Effects
of Termination of Service with our Company
Generally,
unless provided otherwise in the Grant Instrument, the right to exercise any
option or SAR (described below) terminates ninety (90) days following
termination of the participant’s relationship with the Company for reasons other
than death, disability or termination for “cause” as defined in the Plan. If the
participant’s relationship with us terminates due to death or disability, unless
provided otherwise in the Grant Instrument, the right to exercise an option
or
SAR will terminate the earlier of one year following such termination or the
original expiration date. If the participant’s relationship with us is
terminated for “cause”, any option or SAR not already exercised will
automatically be forfeited as of the date such termination.
Stock
Awards
We
may issue awards of our common stock pursuant to the terms of the Plan. A stock
award may be issued for consideration or for no consideration and may be subject
to certain restrictions and risk of forfeiture (such as the completion of a
period of service or attainment of a performance goal) as determined by the
Committee and set forth in the Grant Instrument governing the stock award.
If a
participant’s employment terminates before the vesting condition is fulfilled,
the shares will be forfeited. While the shares remain unvested, a participant
may not sell, assign, transfer, pledge or otherwise dispose of the shares.
Unless otherwise determined by the Committee, a stock award entitles the
participant to all of the rights of a stockholder of our Company, including
the
right to vote the shares and the right to receive any dividends thereon.
Stock
Units
The
Plan provides for the grant of stock units to employees, non-employee directors,
or consultants or other individuals who perform services for us, subject to
any
terms and conditions, including the fulfillment of specified performance goals
or other conditions, as may be established by the Committee. Each stock unit
represents one hypothetical share of common stock and the right of the grantee
to receive an amount based on the value of a share of our common stock. Payments
with respect to stock units may be made in cash or in shares of common stock,
or
in combination of the two as determined by the appointed committee.
Stock
Appreciation Rights
The
Plan also provides for the grant of SARs, either alone or in tandem with stock
options. An SAR entitles its holder to a cash payment of the excess of the
fair
market value of our common stock on the date of exercise, over the fair market
value of our common stock on the date of grant. An SAR issued in tandem with
a
stock option will have the same terms as the stock option. The terms of an
SAR
granted alone, without an option, will be established by the Committee, in
the
Grant Instrument governing the SAR.
Other
Stock-Based Award
The
Committee may grant other stock-based awards, other than those described herein,
that are based on, measured by or payable in shares of common stock on such
terms and conditions as the Committee may determine. Such awards may be subject
to the achievement of performance goals or other conditions and may be payable
in cash, shares of common stock or any combination of cash and shares of common
stock as the Committee shall determine.
Dividend
Equivalents
The
Committee may grant dividend equivalents in connection with grants under the
Plan. Dividend equivalents may be paid currently or accrued as contingent cash
obligations and may be payable in cash or shares of common stock, and upon
such
terms as the appointed committee may establish, including the achievement of
specific performance goals.
Change
of
Control of the Company
In
the event of a Change of Control, as that term is defined in the Plan, of our
Company, the Committee has discretion to, among other things, accelerate the
vesting of outstanding grants, cashout outstanding grants or exchange
outstanding grants for similar grants of a successor company. A Change of
Control of our Company will be deemed to have taken place upon the:
35
|
|
•
|
the
acquisition by any person of direct or indirect ownership of securities
representing more than 50% of the voting power of our then outstanding
stock;
|
|
|
|
|
|
|
•
|
a
consolidation or merger of our Company resulting in the stockholders
of
the Company immediately prior to such event not owning at least a
majority
of the voting power of the resulting entity’s securities outstanding
immediately following such event;
|
|
|
|
|
|
|
•
|
the
sale of substantially all of our assets; or
|
|
|
|
|
|
|
•
|
The
liquidation or dissolution of our Company.
|
|
|
|
|
Certain
Relationships and Related Transactions.
|
Anchor
Funding Services, LLC was founded in 2003 by George Rubin, Morry F. Rubin and
Brad Bernstein. Since its formation, Anchor’s operations were funded through
loans from George Rubin and Morry F. Rubin. Effective November 30, 2006, George
Rubin and Morry F. Rubin converted the principal amount of $253,000 and
$203,000, respectively, into membership interests of Anchor. George Rubin,
Morry
F. Rubin and Illissa Bernstein, Brad Bernstein’s wife beneficially owned 30%,
45% and 25%, respectively of the membership interests of Anchor up until the
closing of the Anchor Transaction on January 31, 2007
George
Rubin and Morry F. Rubin Beneficially own approximately 96% and Brad Bernstein
beneficially owns approximately 2% of Preferred Labor,which completed the sale
of its business on April 23, 2007. Preferred Labor temporarily maintains a
limited staff. We utilize a credit manager from Preferred Labor to assist in
managing credit and making collection calls. At times in the past , we used
other accounting personnel from Preferred Labor for certain back office
functions. In the past through April 23, 2007, this affiliated company charged
a
fee of .25% of the value of accounts receivable purchased for credit and
collection services only and .5% for credit, collection, invoicing, payroll
and
other bookkeeping services. The fees charged by this affiliated company were
$28,668 and $20,352 for the years ended December 31, 2006 and 2005.
respectively. Since April 23, 2007, Anchor pays a portion of Preferred Labor‘s
shared employees salaries based upon actual time incurred. This is a temporary
arrangement that is likely to cease within a month or two as we expand our
support staff and fill key positions including a marketing director, credit
manager, account executives and collections personnel and to eventually perform
all of our own back office operations, including, without limitation, credit
and
collection services, invoicing, payroll and other bookkeeping services. Anchor
also reimburses Preferred for its share of the shared office space.
From
time
to time Anchor has borrowed money from Preferred on a short-term basis at a
10%
interest rate for the services mentioned above which are charged to an
intercompany account. As of December 31, 2006, any loans between the companies
were paid and except for services provided by Preferred to Anchor and reimbursed
on an estimated cost basis, it is not anticipated that there will be any further
transactions between the companies.
The
Anchor Transaction
On
January 31, 2007, the former BTHC XI and certain principal stockholders entered
into a Securities Exchange Agreement (“Securities agreement”) with Anchor
funding Services, LLC and its members, namely, George Rubin, Morry F. Rubin
and
Ilissa Bernstein, to become a wholly-owned subsidiary of the former BTHC XI,
Inc. (the “Anchor Transaction”), in exchange for an aggregate of 8,000,000
shares issued to George Rubin (2,400,000 shares), Morry F. Rubin (3,600,000
shares) and Ilissa Bernstein (2,000,000 shares). At closing of the Anchor
Transaction, Morry F. Rubin and Brad Bernstein, the husband of Ilissa Bernstein
and President of the Company, entered into employment contracts with the Company
and George Rubin entered into a Director’s Compensation Agreement with the
Company. See “Item 6” of Part I herein.
36
|
Description
of Securities.
|
Overview
We
have
authorized 40 million shares of Common Stock, $.001 par value and 10 million
shares of Preferred Stock, $.001 par value. As of the filing date of this Form
10-SB, we have 11,820,555 shares of Common Stock and 1,342,500 shares of Series
1 Preferred Stock issued and outstanding. The foregoing does not include
Placement Agent Warrants issued to Fordham Financial Management, Inc. to
purchase 1,342,500 shares of Common Stock. The Placement Agent Warrants are
exercisable for five years through January 31, 2012 at $1.10 per share and
contain weighted average anti-dilution protection, cashless exercise provisions
and demand and “piggy-back” registration rights. In addition to the foregoing,
we have established a stock option plan covering an aggregate of 2,100,000
shares of Common Stock. We have issued ten-year options to purchase an aggregate
of 1,600,000 shares of Common Stock at an exercise price of $1.25 per share
to
the executive officers of our company and we have granted to two other directors
ten-year options to purchase 180,000 shares each of our Common Stock at an
exercise price of $1.25 per share.
Common Stock
We
are
authorized to issue 40,000,000 Shares of Common Stock, $.001 par value. Holders
of our Common Stock are entitled to one vote for each Share held at all meetings
of stockholders (and written actions in lieu of meetings). Dividends may be
declared and paid on our Common Stock from funds lawfully available therefore
as, if and when determined by our Board and subject to any preferential rights
of any then outstanding preferred stock. We do not intend to pay cash dividends
on our Common Stock. Upon the voluntary or involuntary liquidation, sale,
merger, consolidation, dissolution or winding up of the Company, holders of
Shares of Common Stock will be entitled to receive all of our assets available
for distribution to stockholders, subject to any preferential rights of any
then
outstanding preferred stock. Our Common Stock is not redeemable.
Preferred
Stock
Our
Board
is authorized to issue from time to time, subject to any limitation prescribed
by law, without further stockholder approval, up to 10,000,000 Shares of
Preferred Stock, $.001 par value, in one or more series. Preferred Stock will
have such number of Shares, designations, preferences, voting powers,
qualifications and special or relative rights or privileges as determined by
our
Board, which may include, among others, dividend rights, voting rights,
redemption and sinking fund provisions, liquidation preferences, conversion
rights and preemptive rights.
On
January 31, 2007, we filed a Certificate of Designation with the Secretary
of
State of the State of Delaware and we have designated 2,000,000 shares of our
Preferred Stock as Series 1 Convertible Preferred Stock. The Series 1
Preferred Stock shall rank senior as to the payment of dividends and in
liquidation as to the Common Stock. The following sets forth the rights, terms
and preferences of the Series 1 Preferred Stock.
| Conversion Ratio |
Each
share of Series 1 Preferred Stock will be convertible into five (5)
shares
of the Company’s Common Stock (the “Conversion Ratio”) at any time at the
option of the holder (with each date of conversion being referred
to as
the “Conversion Date”). Upon conversion, all accrued and unpaid
(undeclared) dividends on the Series 1 Preferred Stock through the
Conversion Date shall be paid in additional shares of Common Stock
as if
such dividends had been paid in additional shares of Series 1 Preferred
Stock rounded up to the nearest whole number, and then automatically
converted into additional shares of Common Stock at the then applicable
Conversion Ratio. The Conversion Ratio is subject to adjustment in
the
event of stock splits, stock dividends, combinations, reclassifications
and alike and to weighted average anti-dilution protection for sales
of
Common Stock at a purchase price below $1.00 per
share.
|
| Dividends |
Cumulative
annual dividends shall be paid in shares of Series 1 Preferred Stock
or,
in certain instances in cash, at an annual rate of 8% ($.40 per share
of
Series 1 Preferred Stock), payable on December 31 of each year commencing
December 31, 2007. Dividends payable on outstanding Shares of Series
1
Preferred Stock shall begin to accrue on the date of each closing
and
shall cease to accrue and accumulate on the earlier of December 31,
2009
or the applicable Conversion Date (the “Final Dividend Payment Date”).
Thereafter, the holders of Series 1 Preferred Stock shall have the
same
dividend rights as holders of Common Stock of the Company, as if
the
Series 1 Preferred Stock has been fully converted into Common Stock.
The
dividends payable on December 31, 2007 will be prorated or adjusted
for
the period from the date of issuance through December 31, 2007. Unpaid
dividends will accumulate and be payable prior to the payment of
any
dividends on shares of Common Stock or any other class of Preferred
Stock.
Cash dividends will only be payable from funds legally available
therefor,
when and as declared by the Board of Directors of the Company, and
unpaid
dividends will accumulate until the Company has the legal ability
to pay
the dividends. The Company shall pay a cash dividend in lieu of a
stock
dividend where on the date of declaration of the dividend, it is
the
Board’s determination that the Company’s Common Stock is trading
consistently at a market price below $1.00 per share. Cash dividends
shall
not apply to the payment of accrued and unpaid (undeclared) dividends
which are paid on a Conversion Date. Dividends paid in shares of
Series 1
Preferred Stock shall be based upon an assumed value of $5.00 per
share of
Series 1 Preferred Stock. Notwithstanding anything contained herein
to the
contrary, the Company’s Board of Directors shall timely declare dividends
on its Series 1 Preferred Stock each year unless the payment of such
dividends would be in violation of applicable state law.
|
37
| Registration Rights |
The
holders of the Series 1 Preferred Stock and the Underlying Common
Stock
will have unlimited piggy-back registration rights for a period of
48
months, exercisable commencing 12 months from March 30, 2007, the
final
closing date of our recently completed a private placement offering
of
Series 1 Preferred Stock (the “Offering”). The piggy-back registration
rights are not applicable to a registration statement filed by the
Company
on Form S-4, Form S-8 or any other inappropriate form. Pursuant to
a
Placement Agent Agreement, the Company is prohibited from filing
a
registration statement on Form SB-2, Form S-1 or other similar form
for a
period of 18 months following the final closing date of the Offering
without the prior written consent of the Placement Agent. Further,
before
we file a Form S-8 Registration Statement or grant options under
one or
more stock option plan(s), as the case may be, we must deliver to
the
Placement Agent 18-month lock-up agreements from January 31, 2007.
The
lock-up agreement shall cover any shares of common stock that may
be
issued pursuant to the plan(s).
|
| Voting Rights |
The
holders of shares of Series 1 Preferred Stock shall vote with holders
of
the Common Stock, together as single class, upon all matters submitted
to
a vote of stockholders, including, without limitation, for the election
of
directors. For such purpose, each holder of Series 1 Preferred Stock
shall
be entitled to a number of votes determined as follows. Through
March 30, 2007, the final closing date of the Company’s Series 1
Preferred Stock financing, each share of Series 1 Preferred Stock
shall be
entitled to a number of votes equal to a fraction, the numerator
of which
is 7,770,000, and the denominator of which is the number of shares
of
Series 1 Preferred Stock issued January 31, 2007, from the date of
the
filing of the Certificate of Designation for the Series 1 Preferred
Stock
with the Secretary of state of the state of Delaware through the
record
date fixed for the determination of stockholders entitled to vote
or on
the effective date of any written consent of stockholders, as applicable.
Following March 30, 2007, the final closing date of the Company’s Series 1
Preferred Stock offering, each share of Series 1 Preferred Stock
shall be
entitled to a fixed number of votes equal to a fraction, the numerator
of
which is 7,770,000, and the denominator of which is the number of
shares
of Series 1 Preferred Stock issued in the Company’s Series 1 Preferred
Stock financing, irrespective of any subsequent conversions or stock
dividend issuances which may occur from time to time. Fractional
votes
shall not however, be permitted and any fractional voting rights
resulting
from the above formulas with respect to any holder of Series 1 Preferred
Stock shall be rounded upward to the nearest whole
number.
|
|
Liquidation
Preference
|
Through
the Final Dividend Payment Date, the shares
of Series 1 Preferred Stock will have a liquidation preference over
the
Common Stock of $5.00 per share, plus all accumulated and unpaid
dividends
in arrears. Commencing on the Final Dividend Payment Date, the holders
of
Series 1 Preferred Stock shall have the same liquidation rights as
holders
of Common Stock on a fully converted
basis.
|
|
Information
Rights
|
The
Company will provide holders of shares of Series 1 Preferred Stock
with
all notices, reports and other information provided to the holders
of
Common Stock.
|
38
|
Market
Price and Dividends on the Registrant’s Common Equity and Related
Shareholder Matters.
|
Market
Information
There
is
currently no public market for our Common Stock or any other securities of
our
company. We anticipate a member of the National Association of Securities
Dealers, Inc. filing a Form 15c2-11 application for trading to commence on
the
OTC Electronic Bulletin Board. We can provide no assurances that an established
public market for our Common Stock will develop in the near future.
As
of
April 1, 2007, there were 11,820,555 shares of Common Stock issued and
outstanding. As of April 1, 2007, there were (i) outstanding options to purchase
1,960,000 shares of our Common Stock, (ii) outstanding Placement Agent Warrants
to purchase 1,342,500 shares of our Common Stock, and (iii) outstanding
1,342,500 shares of our Series 1 Preferred Stock which are convertible into
6,712,500 shares of our Common Stock.
Currently,
we have a float of 525,555 shares which were issued as free trading shares
by
the Bankruptcy Court under Section 1145(a)(1) of the Bankruptcy Code. Of the
525,555 shares, 367,500 shares are owned by Halter Financial Group, LLC and
are
subject to a one-year lock-up pursuant to which 50% may be sold on or after
July
31, 2007 and the balance may be sold on January 31, 2008. The remaining
11,295,000 outstanding shares of Common Stock are restricted securities and
are
eligible for sale pursuant to Rule 144 of the Securities Act commencing on
December 7, 2006 with respect to 3,295,000 shares and the remaining balance
of
8,000,000 shares are eligible for sale under Rule 144 beginning on January
31,
2008. However, the holders of the 11,295,000 restricted common shares have
signed 18 month lock-up agreements not to sell or otherwise transfer these
restricted common shares (except in certain limited cases where the transferee
agrees to be bound by the transfer restrictions) until July 31, 2008, with
the
prior written consent of Fordham Financial Management, Inc. Pursuant to Rule
144
of the Securities Act of 1933, as amended, shares of our common stock
beneficially owned by a person for at least one year (as defined in Rule 144)
are eligible for resale under Rule 144 subject to certain volume limitations,
manner of sale provisions, notice requirements and the availability of current
public information about us. Pursuant to Rule 144(k) of the Securities Act,
our
non-affiliates (who have been non-affiliates for at least three months) may
sell
their common stock that they have held for two years (as defined in Rule 144)
without compliance with volume restrictions, manner of sale provisions, notice
provisions or the availability of current information.
We
have
outstanding 1,342,500 shares of Series 1 Preferred Stock which are convertible
into an aggregate of up to 6,712,500 shares of our restricted Common Stock.
These securities are eligible for sale under Rule 144 commencing on
January 31, 2008 through March 30, 2008.
39
Holders
of Record
As
of
April 23, 2007, there were approximately 520 holders of record of shares of
Common Stock and 80 holders of record of our Series A Preferred Stock.
Dividends
The
holders of our Series 1 Preferred Stock are entitled to receive dividends as
more fully described under Item 8 of Part I. We have not paid or declared any
cash dividends on our Common Stock. We currently intend to retain any earnings
for future growth and, therefore, do not expect to pay cash dividends on our
Common Stock in the foreseeable future.
Securities
Authorized for Issuance under Equity Compensation Plans
The
following table provides information about the securities authorized for
issuance under our equity compensation plans as of April 1, 2007.
Equity
Compensation Plan Information
|
(a)
Number
of Common
Shares
to
be
issued upon exercise
of
outstanding options
|
(b)
Weighted
average
exercise
price of
outstanding
options (1)
|
(c)
Number
of Common Shares
remaining
available for future issuance under our equity compensation plan
(excluding securities) reflected in column
(a))
|
|
|
Equity
compensation plans approved by security holders
|
1,960,000
|
$1.25
|
140,000
|
_______________
| (1) |
As
of April 1,, 2007, we have outstanding options to purchase 1,960,000
common shares, exercisable at $1.25 per
share
|
.
|
Item
2.
|
Legal
Proceedings.
|
We
are
not a party to any pending legal proceedings. Our property is not the subject
of
any pending legal proceedings. To our knowledge, no governmental authority
is
contemplating commencing a legal proceeding in which we would be named as a
party.
|
Item
3.
|
Changes
in and Disagreements With Accountants.
|
40
Item
4. Recent Sales of Unregistered Securities.
The
following table provides information about the sales of restricted securities
during the past three years.
|
Date
of Sale
|
|
Title
of Security
|
|
Number
Sold
|
|
Consideration
Received,
Commissions
|
|
Purchasers
|
|
Exemption
from
Registration
Claimed
|
|
|
December
2006
|
|
Common
Stock
|
|
3,295,000
shares
|
|
$0.25
per share; no
commissions
paid
|
|
Sophisticated
Investors
|
|
Section
4(2)
|
|
|
January
31, 2007
|
|
Common
Stock
|
|
8,000,000
shares
|
|
Exchange
of securities; no cash received; no commissions
paid
|
|
Three
sophisticated and accredited
investors
|
|
Section
4(2) and/
Rule
506
|
|
|
January
31, 2007
through
March
31, 2007
|
Series
1
Preferred
Stock
|
1,342,500
shares
|
$1.00
per share; 14% compensation paid to broker/dealer plus
warrants
to purchase
1,342,500
shares of
common
stock
|
Accredited
Investors
|
Rule
506
|
||||||
|
January
31, 2007
|
Common
Stock
|
Options
to
purchase
1,960,000
common shares
|
Securities
granted under Equity Compensation Plan;
no cash received; no commissions paid
|
Accredited
Investors
|
Rule
701, Rule 506,
And/or
Section 4(2)
|
Section
102 of the General Corporation Law of the State of Delaware permits a
corporation to eliminate the personal liability of directors of a corporation
to
the corporation or its stockholders for monetary damages for a breach of
fiduciary duty as a director, except where the director breached his duty of
loyalty, failed to act in good faith, engaged in intentional misconduct or
knowingly violated a law, authorized the payment of a dividend or approved
a
stock repurchase in violation of Delaware corporate law or obtained an improper
personal benefit. The Company’s Amended and Restated Certificate of
Incorporation, as amended, provides that a director of the Company shall not
be
personally liable to it or its stockholders for monetary damages for any breach
of fiduciary duty as a director, except to the extent that such exemption from
liability or limitation thereof is not permitted under the General Corporation
Law of the State of Delaware as currently in effect or as the same may hereafter
be amended.
Section
145 of the General Corporation Law of the State of Delaware provides that a
corporation has the power to indemnify a director, officer, employee, or agent
of the corporation and other persons serving at the request of the corporation
in related capacities against expenses (including attorneys’ fees), judgments,
fines and amounts paid in settlements actually and reasonably incurred by the
person in connection with an action, suit or proceeding to which he is or is
threatened to be made a party by reason of such position, if such person acted
in good faith and in a manner he reasonably believed to be in or not opposed
to
the best interests of the corporation, and, in any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful, except
that, in the case of actions brought by or in the right of the corporation,
no
indemnification shall be made with respect to any claim, issue or matter as
to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or other adjudicating
court determines that, despite the adjudication of liability but in view of
all
of the circumstances of the case, such person is fairly and reasonably entitled
to indemnify for such expenses which the Court of Chancery or such other court
shall deem proper.
41
Article
Ninth of the Company’s Certificate of Incorporation states the
following:
“The
Corporation may, to the fullest extent permitted by the Delaware General
Corporation Law, as the same exists or may hereafter be amended, indemnify
any
and all persons it has power to indemnify under such law from and against any
and all of the expenses, liabilities or other matters referred to in or covered
by such law. In addition, the Corporation shall indemnify each of the
Corporation’s directors and officers in each and every situation where, under
Delaware General Corporation Law (specifically section 145) the Corporation
is
not obligated, but is permitted or empowered, to make such indemnification,
except as otherwise set forth in the Bylaws of the Corporation. Such
indemnification may be provided pursuant to any Bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in
his
director or officer capacity and as to action in another capacity while holding
such office, will continue as to a person who has ceased to be a director,
an
officer, or a person for whom the Corporation has approved indemnification
pursuant to the first sentence hereof, and will inure to the benefit of the
heirs, executors and administrators of such a person.
If
a
claim under the preceding paragraph is not paid in full by the Corporation
within thirty (30) days after a written claim has been received by the
Corporation, the claimant may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant will be entitled to be paid also the expense
of
prosecuting such claim. It will be a defense to any such action (other than
an
action brought to enforce a claim for expenses incurred in defending any
proceeding in advance of its final disposition where the required undertaking,
if any is required, has been tendered to the Compotation) that the claimant
has
not met the standards of conduct that make it permissible under the laws of
the
State of Delaware for the Corporation to indemnify the claimant for the amount
claimed, but the burden of proving such defense will bon on the Corporation.
Neither the failure of the Corporation (including its board of directors,
independent legal counsel, or its stockholders) to have made a determination
prior to the commencement of such action that indemnification of the claimant
is
proper in the circumstances because he has met the applicable standard of
conduct set forth in the laws of the State of Delaware nor an actual
determination by the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) that the claimant has not met such
applicable standard of conduct, will be a defense to the action or create a
presumption that the claimant has not met the applicable standard of
conduct.”
Each
director and officer by contractual right is also entitled as serving as a
director and/or officer and for a period of ____ years thereafter, to
participate in directors and officers liability insurance and to indemnification
of all costs and expenses, including cost of legal counsel, selected and
retained by the director, in connection with any action, suit or proceeding
to
which the director and/or officer may be a party by reason of such person,
acting in such capacity. Effective January 31,2007, the Company has purchased
certain liability insurance for its directors and executive officers covering
$5,000,000, with a $75,000 deductible ($100,000 for securities
claims).
Article
Tenth of the Company’s certificate of incorporation provides that a director of
the Company shall not be personally liable to the Company or its stockholders
for monetary damages for breach of fiduciary duty as a director, except: (A)
for
any breach of the director’s duty of loyalty to the Company or its stockholders,
(B) for acts or omissions that are not in good faith or that involve intentional
misconduct or a knowing violation of law, (C) under Section 174 of the General
Corporation Law of the State of Delaware, or (D) for any transaction from which
the director derived any improper personal benefit. If the General Corporation
law of the State of Delaware is amended after the date of filing of this
Certificate to further eliminate or limit the personal liability of directors,
then the liability of a director of the Company shall be eliminated or limited
to the fullest extent permitted by the General Corporation Law of the State
of
Delaware, as so amended. Any repeal or modification of the foregoing paragraph
by the stockholders of the Company shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.
42
ANCHOR
FUNDING SERVICES, LLC
FINANCIAL
STATEMENTS
DECEMBER
31, 2006 and 2005
TABLE
OF CONTENTS
|
Page
No.
|
||
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
F-1
|
|
|
FINANCIAL
STATEMENTS:
|
||
|
Balance
Sheets
|
F-2
|
|
|
Statements
of Operations
|
F-3
|
|
|
Statements
of changes in Members' Equity
|
F-4
|
|
|
Statements
of Cash Flows
|
F-5
|
|
|
Notes
to Financial Statements
|
F-6
- F-13
|
|
|
Unaudited
Condensed Consolidated Pro-Forma Financial Information
|
P-1
-P-3
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
The
Stockholders and Board of
Directors
of Anchor Funding Services, LLC
We
have
audited the accompanying balance sheet of Anchor Funding Services, LLC
(the
Company) as of December 31, 2006 and 2005, and the related statements of
operations, changes in members’ equity and cash flows for the years then ended.
These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements
based
on our audits.
We
conducted our audit of these statements in accordance with the standards
of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance
about
whether the financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform,
an audit of its internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express
no
such opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and
evaluating the overall financial statement presentation. We believe that
our
audits provide a reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in
all
material respects, the financial position of Anchor Funding Services, LLC
at
December 31, 2006 and 2005, and the results of its operations and its cash
flows
for the years then end, in conformity with accounting principles generally
accepted in the United States of America.
CHERRY,
BEKAERT & HOLLAND, L.L.P.
Charlotte,
North Carolina
April 24,
2007
F-1
ANCHOR
FUNDING SERVICES, LLC
BALANCE
SHEETS
December
31, 2006 and 2005
|
ASSETS
|
|||||||
|
2006
|
2005
|
||||||
|
CURRENT
ASSETS:
|
|||||||
|
Cash
|
$
|
49,501
|
$
|
30,240
|
|||
|
Retained
interest in purchased accounts receivable
|
473,092
|
1,037,680
|
|||||
|
Prepaid
expenses
|
41,134
|
5,569
|
|||||
|
Total
current assets
|
563,727
|
1,073,489
|
|||||
|
PROPERTY
AND EQUIPMENT, net
|
4,010
|
8,157
|
|||||
|
DUE
FROM RELATED COMPANY
|
-
|
95,455
|
|||||
|
$
|
567,737
|
$
|
1,177,101
|
||||
|
LIABILITIES
AND MEMBERS' EQUITY
|
|||||||
|
CURRENT
LIABILITIES:
|
|||||||
|
Due
to financial institution
|
$
|
44,683
|
$
|
823,578
|
|||
|
Accounts
payable
|
39,218
|
-
|
|||||
|
Due
to related company
|
21,472
|
-
|
|||||
|
Accrued
payroll and related taxes
|
37,796
|
42,828
|
|||||
|
Subordinated
related party demand notes payable and accrued interest
|
-
|
494,481
|
|||||
|
Total
current liabilities
|
143,169
|
1,360,887
|
|||||
|
COMMITMENTS
AND CONTINGENCIES
|
|||||||
|
MEMBERS'
EQUITY
|
424,568
|
(183,786
|
)
|
||||
|
$
|
567,737
|
$
|
1,177,101
|
||||
The
accompanying notes to financial statements are an integral part of these
statements.
F-2
ANCHOR
FUNDING SERVICES, LLC
STATEMENTS
OF OPERATIONS
For
the years ended December 31, 2006 and 2005
|
2006
|
2005
|
||||||
|
FINANCE
REVENUES
|
$
|
569,285
|
$
|
253,999
|
|||
|
INTEREST
EXPENSE, net - financial institution
|
(134,231
|
)
|
(23,403
|
)
|
|||
|
INTEREST
EXPENSE, net - related parties
|
(59,364
|
)
|
(72,790
|
)
|
|||
|
NET
FINANCE REVENUES
|
375,690
|
157,806
|
|||||
|
PROVISION
FOR CREDIT LOSSES
|
-
|
-
|
|||||
|
FINANCE
REVENUES, NET OF INTEREST EXPENSE
|
|||||||
|
AND
CREDIT LOSSES
|
375,690
|
157,806
|
|||||
|
OPERATING
EXPENSES
|
223,336
|
175,303
|
|||||
|
NET
INCOME (LOSS)
|
$
|
152,354
|
($17,497
|
)
|
|||
|
EARNINGS
(LOSS) PER SHARE - BASIC AND DILUTED
|
$
|
1.52
|
($0.17
|
)
|
|||
|
WEIGHTED
AVERAGE NUMBER OF UNITS -
|
|||||||
|
BASIC
AND DILUTED
|
100,000
|
100,000
|
|||||
The
accompanying notes to financial statements are an integral part of these
statements.
F-3
ANCHOR
FUNDING SERVICES, LLC
STATEMENTS
OF CHANGES IN MEMBERS' EQUITY
For
the years ended December 31, 2006 and 2005
|
MEMBERS'
DEFICIT, January 1, 2005
|
($166,289
|
)
|
||
|
NET
LOSS, year ended December 31, 2005
|
(17,497
|
)
|
||
|
MEMBERS'
DEFICIT, December 31, 2005
|
(183,786
|
)
|
||
|
NET
INCOME, year ended December 31, 2006
|
152,354
|
|||
|
CONTRIBUTION
OF RELATED PARTY DEMAND NOTES
|
||||
|
PAYBLE
TO MEMBERS' EQUITY
|
456,000
|
|||
|
MEMBERS'
EQUITY, December 31, 2006
|
$
|
424,568
|
||
The
accompanying notes to financial statements are an integral part of these
statements.
F-4
ANCHOR
FUNDING SERVICES, LLC
STATEMENTS
OF CASH FLOWS
For
the years ended December 31, 2006 and 2005
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
2006
|
2005
|
|||||
|
Net
income (loss):
|
$
|
152,354
|
($17,497
|
)
|
|||
|
Adjustments
to reconcile net income (loss) to net cash provided
|
|||||||
|
by
(used in) operating activities:
|
|||||||
|
Depreciation
and amortization
|
5,476
|
4,502
|
|||||
|
Decrease
(increase) in retained interest in purchased accounts
receivable
|
564,588
|
(907,257
|
)
|
||||
|
Increase
in prepaid expenses
|
(35,565
|
)
|
(12,928
|
)
|
|||
|
Increase
accounts payable
|
39,218
|
-
|
|||||
|
(Decrease)
increase accrued payroll and related taxes
|
(5,032
|
)
|
13,470
|
||||
|
(Decrease)
increase in accrued interest - related party
|
(38,481
|
)
|
26,485
|
||||
|
Net
cash provided by (used in) operating activities
|
682,558
|
(893,225
|
)
|
||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|||||||
|
Purchases
of property and equipment
|
(1,329
|
)
|
(9,148
|
)
|
|||
|
Collections
from related company
|
95,455
|
-
|
|||||
|
Loans
to related company
|
-
|
(95,455
|
)
|
||||
|
Net
cash provided by (used in) investing activities
|
94,126
|
(104,603
|
)
|
||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|||||||
|
(Payments
to) borrowings from financial institution, net
|
(778,895
|
)
|
823,577
|
||||
|
Borrowings
from subordinated related party demand notes payable
|
-
|
345,000
|
|||||
|
Borrowings
from related company
|
21,472
|
-
|
|||||
|
Principal
payments on loan from related company
|
-
|
(213,124
|
)
|
||||
|
Net
cash (used in) provided by financing activities
|
(757,423
|
)
|
955,453
|
||||
|
INCREASE
(DECREASE) IN CASH
|
19,261
|
(42,375
|
)
|
||||
|
CASH,
beginning of period
|
30,240
|
72,615
|
|||||
|
CASH,
end of period
|
$
|
49,501
|
$
|
30,240
|
|||
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOWS:
|
|||||||
|
Cash
paid during the year for interest
|
$
|
240,000
|
$
|
69,700
|
|||
|
Subordinated
debt converted to equity
|
$
|
456,000
|
$
|
0
|
|||
The
accompanying notes to financial statements are an integral part of these
statements.
F-5
ANCHOR
FUNDING SERVICES, LLC
NOTES
TO FINANCIAL STATEMENTS
December
31, 2006 and 2005
| 1. |
ORGANIZATION:
|
Effective
August 2005, ANCHOR FUNDING SERVICES, LLC (“the Company”) became a North
Carolina limited liability company. From January 2003 to July 2005 the
Company
was a South Carolina limited liability company. The Company will continue
in
existence until terminated in accordance with its operating agreement.
The
Company was formed for the purpose of providing factoring and back office
services to businesses located throughout the United States of
America.
| 2. |
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES:
|
Estimates
-
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates that affect
the
reported amounts of assets and liabilities and 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.
Revenue
Recognition - Revenue
is recognized when the fee is earned and consists primarily of
non-refundable transaction and time-based fees. Non- refundable
transaction
fees are charged when the Company purchases an accounts receivable. Time-based
fees are charged until the Company collects the purchased accounts receivable.
The amount charged as transaction and time-based fees is specified in each
customer’s factoring and security agreement and these amounts can vary between
customers.
Retained
Interest in Purchased Accounts Receivable - Retained
interest in purchased accounts receivable represents the gross amount of
invoices purchased from factoring customers less amounts maintained in
a reserve
account. The Company purchases a customer’s accounts receivable and advances
them a percentage of the invoice total. The difference between the purchase
price and amount advanced is maintained in a reserve account. The reserve
account is used to offset any potential losses the Company may have related
to
the purchased accounts receivable.
The
Company’s factoring and security agreements with their customers include various
recourse provisions requiring the customers to repurchase accounts receivable
if
certain conditions, as defined in the factoring and security agreement,
are met.
F-6
ANCHOR
FUNDING SERVICES, LLC
NOTES
TO FINANCIAL STATEMENTS
December
31, 2006 and 2005
Senior
management reviews the status of uncollected purchased accounts receivable
monthly to determine if any are uncollectible. The Company has a security
interest in the accounts receivable purchased and on a case-by-case basis,
may
have additional collateral. The Company files security interests in the
property
securing their advances. Access to this collateral is dependent upon the
laws
and regulations in each state where the security interest is filed.
Additionally, the Company has varying types of personal guarantees from
their
factoring customers relating to the purchased accounts receivable.
Management
did not consider any of the December 31, 2006 and 2005 retained interest
in
purchased accounts receivable uncollectible based on their analysis of
the
portfolio.
Management
believes the fair value of the retained interest in purchased accounts
receivable approximates its recorded value because the majority of these
invoices have been subsequently collected.
Property
and Equipment -
Property
and equipment, consisting primarily of computers and software, are stated
at
cost. Depreciation is provided over the estimated useful lives of the
depreciable assets using the straight-line method. Estimated useful lives
range
from 2 to 5 years.
Advertising
Costs -
The
Company charges advertising costs to expense as incurred. Total advertising
costs were approximately $68,200 and $68,400 for 2006 and 2005,
respectively.
Earnings
per Share -
The
Company computes net income per share in accordance with SFAS No. 128 “Earnings
Per Share.” Basic net income per share is computed by dividing the net income
for the period by the weighted average number of common shares outstanding
during the period. Basic and diluted per share results are the same since
the
Company did not have any common stock equivalents outstanding at December
31,
2006 or 2005.
Stock
Based Compensation - In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard (“SFAS”) No. 123(R), “Accounting for
Stock-Based Compensation.” SFAS No. 123(R) establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments
for goods or services. This statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based
payment
transactions. SFAS No. 123(R) requires that the fair value of such equity
instruments be recognized as an expense in the historical financial statements
as services are performed. Prior to SFAS No. 123(R), only certain pro forma
disclosures of fair value were required. The provisions of this statement
were
effective for the first interim reporting period that began after December
15,
2005. We adopted the provisions of SFAS No.123(R) in the first quarter
of Fiscal
2006.
F-7
ANCHOR
FUNDING SERVICES, LLC
NOTES
TO FINANCIAL STATEMENTS
December
31, 2006 and 2005
Recent
Accounting Pronouncements -
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair
Value Measurements.”
SFAS
157 provides enhanced guidance for using fair value to measure assets and
liabilities. It clarifies the principle that fair value should be based
on the
assumptions market participants would use when pricing the asset or liability
and establishes a fair value hierarchy that prioritizes the information
used to
develop those assumptions. SFAS 157 is effective for fiscal years beginning
after November 15, 2007. The Company is currently evaluating the impact
of SFAS
157 on its results of operations and financial condition.
In
September 2006, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 108 (“SAB 108”), Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements
in
Current Year Financial Statements.
SAB 108
provides additional guidance for the quantitative assessment of the materiality
of uncorrected misstatements in current and prior years. The assessment
for
materiality should be based on the amount of the error relative to both
the
current year income statement and balance sheet. For misstatements originating
in prior years that are deemed material to the current year financial
statements, SAB 108 permits recording the effect of adopting this guidance
as a
cumulative effect adjustment to retained earnings. During the fourth quarter
of
2006, the Company adopted SAB 108 and it did not have a significant impact
on
the Company’s financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The
Fair Value Option for Financial Assets and Financial Liabilities - Including
an
amendment of FASB Statement No. 115.
SFAS 159
provides companies with an option to report selected financial assets and
liabilities at estimated fair value. Most of the provisions of SFAS No.
159 are
elective; however, the amendment to SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities,
applies
to all entities that own trading and available-for-sale securities. The
fair
value option created by SFAS No. 159 permits an entity to measure eligible
items
at fair value as of specified election dates. The fair value option (a)
may
generally be applied instrument by instrument, (b) is irrevocable unless
a new
election date occurs, and must be applied to the entire instrument and
not to
only a portion of the instrument.
SFAS
No.
159 is effective as of the beginning of an entity’s first fiscal year beginning
after November 15, 2007. Early adoption is permitted as of the beginning
of the
previous fiscal year provided that the entity makes that choice in the
first 120
days of the fiscal year, has not yet issued financial statements for any
interim
period of such year, and also elects to apply the provisions of SFAS No.
157.
The Company is currently evaluating the impact of SFAS 157 on its results
of
operations and financial condition.
F-8
ANCHOR
FUNDING SERVICES, LLC
NOTES
TO FINANCIAL STATEMENTS
December
31, 2006 and 2005
Fair
Value of Financial Instruments -
The
carrying value of cash equivalents, retained interest in purchased accounts
receivable, due to financial institution, accounts payable, accrued liabilities
and subordinated related party demand notes approximates their fair
value.
Cash
and cash equivalents -
Cash and
cash equivalents consist primarily of highly liquid cash investment funds
with
original maturities of three months or less when acquired.
| 3. |
INCOME
TAXES:
|
The
Company is treated as a partnership for Federal and state income tax purposes.
Its earnings and losses are included in the personal tax returns of its
members;
therefore, no provision or benefit from income taxes has been included
in these
financial statements.
| 4. |
RETAINED
INTEREST IN PURCHASED ACCOUNTS
RECEIVABLE:
|
Retained
interest in purchased accounts receivable consists of the
following:
|
2006
|
2005
|
||||||
|
Purchased
accounts receivable outstanding
|
$
|
614,034
|
$
|
1,300,648
|
|||
|
Reserve
account
|
(172,779
|
)
|
(278,470
|
)
|
|||
|
441,255
|
1,022,178
|
||||||
|
Earned
but uncollected fee income
|
31,837
|
15,502
|
|||||
|
$
|
473,092
|
$
|
1,037,680
|
||||
Total
accounts receivable purchased were approximately $11,469,000 and $6,103,000
for
2006 and 2005, respectively.
Retained
interest in purchased accounts receivable consists of United States companies
in
the following industries:
|
Industry
|
2006
|
2005
|
|||||
|
Staffing
|
$
|
397,061
|
$
|
315,413
|
|||
|
Transportation
|
(52,854
|
)
|
328,106
|
||||
|
Logistics
|
-
|
279,000
|
|||||
|
Publishing
|
45,971
|
55,791
|
|||||
|
Construction
|
26,591
|
-
|
|||||
|
Service
|
14,951
|
37,433
|
|||||
|
Other
|
9,535
|
6,435
|
|||||
|
$
|
441,255
|
$
|
1,022,178
|
||||
F-9
ANCHOR
FUNDING SERVICES, LLC
NOTES
TO FINANCIAL STATEMENTS
December
31, 2006 and 2005
| 5. |
PROPERTY
AND EQUIPMENT:
|
Property
and equipment consist of the following:
|
2006
|
2005
|
||||||
|
Furniture
and fixtures
|
$
|
1,235
|
$
|
1,235
|
|||
|
Computers
and software
|
15,531
|
14,201
|
|||||
|
16,766
|
15,436
|
||||||
|
Less
accumulated depreciation
|
(12,756
|
)
|
(7,279
|
)
|
|||
|
$
|
4,010
|
$
|
8,157
|
||||
| 6. |
DUE
TO FINANCIAL INSTITUTION:
|
The
Company has an agreement with a financial institution under which the
institution finances their purchased accounts receivable. The institution
receives a fee of .3 percent of the receivables financed plus interest
as
described below. This agreement expires September 2007 and will automatically
renew for one year unless either party provides a written termination notice
sixty days in advance of the termination date.
Borrowings
are made at the request of the Company. The amount eligible to be borrowed
is
the lower of $1,000,000 or a borrowing base formula as defined in the agreement.
The interest on borrowings is paid monthly at a rate ranging from the
institution’s prime rate plus 1% to 12.75%.
The
agreement is collateralized by all current and future Company assets and
is
guaranteed by its members. The related party demand notes payable were
subordinated to this agreement (Note 8).
The
agreement requires the Company to maintain a specified level of tangible
net
worth, tangible net worth as defined in the agreement included subordinated
related party demand notes payable. The agreement also has a change of
control covenant. As of December 31, 2006 and 2005, the Company was in
compliance with all terms of this agreement.
| 7. |
CAPITAL
STRUCTURE:
|
The
Company’s operating agreement specifies only one class of units. All units
issued and outstanding have voting rights. Distributions are made as authorized
by the members.
The
operating agreement restricts the transfer of any member’s interest. The
agreement requires any member to obtain approval from the Company’s manager
before any transfer is permitted.
| 8. |
RELATED
PARTY TRANSACTIONS:
|
Due
from/to Related Company -
The
Company has borrowing and loan transactions with a limited liability company
(LLC) related through common ownership. These amounts are unsecured, interest
bearing (at 10 percent), and payable on demand. During 2006 the Company
recorded
approximately $12,000 in net interest income related to this activity.
During
2005 the Company recorded approximately $23,500 in net interest expense
related
to this activity.
F-10
ANCHOR
FUNDING SERVICES, LLC
NOTES
TO FINANCIAL STATEMENTS
December
31, 2006 and 2005
Administrative
Charges -