Our History and Development

Our Investment Company Business after SDI’s Reorganization

Our Investment Plan

Our Operations

Regulation

The Market for our Loans and Related Services

Our Marketing Activities

Our Expected Investments

About our Principals

Our History and Development

Aztoré Holdings, Inc. (“Aztoré”, “We” or “Our”) was organized on May 16, 1995 as an Arizona corporation to own the assets of ShareData Inc. (“SDI”) under SDI’s Chapter 11 Reorganization Plan (the “SDI Plan”).  We could also be considered the successor to the business of Bulldog Investment Company, L.L.C. (“Bulldog”) and an even earlier informal partnership between two of our senior officers, Michael S. Williams and Lanny R. Lang.  Upon confirmation of SDI’s Plan in December, 1995 and the Court approved merger of SDI into Aztoré, we began to operate as a non-diversified, closed-end, management investment company.  Since then, we have developed a portfolio of debt and equity securities in over 30 companies.  As an investment company, we report our investments on a “mark to market” basis for accounting purposes.  Our principal office is located at 14647 S 50th ST, Suite 130, Phoenix, AZ  85044.  Our phone number is (480) 759-9400 and our facsimile number is (480) 759-9401.

Bulldog Investment Company, L.L.C.  Mr. Williams and Mr. Lang formed Bulldog in December 1993 to formalize an informal partnership formed in late 1990. Besides managing SDI’s bankruptcy, Bulldog’s business plan was to operate as a non-diversified, closed-end, management investment company and provide investment banking and consulting services to early stage and emerging growth public companies.  This business plan eventually became SDI’s post-reorganization business plan in January 1996 when Bulldog’s assets were acquired by Aztoré in conceptual merger.  Messrs. Williams and Lang became full-time employees of Aztoré in July 1996. 

Our Investment Company Business

We have evolved dramatically since our original concept, which was to file a bankruptcy reorganization plan to retain and exploit SDI’s significant net operating loss carryforward.  The “holding company” reorganization plan we formulated in early 1995 was modified to allow us to start to operate as an investment company effective January 1, 1996.  We took our experience and contacts gained in Bulldog and transferred them to Aztoré.  Because of our business plan focus on high growth, financially extended companies, we in effect now operate as a public venture capital fund.  Although this business plan inherently means our portfolio is risky, our performance proves that a portfolio of this nature can generate significant returns.

Our primary investment objective is to achieve capital appreciation rather than current income.  Our business is to invest or lend money to either high growth and/or financially extended companies.  These are higher risk situations and we select our “Portfolio Companies” if we believe they are poised for rapid changes in value.  We generally only act as a lender if we have or can obtain a significant “Equity Participations” in the companies to which we lend.  Our Equity Participations in the Portfolio Companies include equity, warrants, debt (with or without conversion rights) and preferred stock with conversion rights.  Often we take a combination of Equity Participations in any one transaction.  We also perform advisory assignments for a fee to determine if we should seek a long-term relationship with a particular company.  In many cases, we acquire investments at very low prices in conjunction with our consulting engagements.

The Portfolio Companies we invest in are generally public companies, or companies that are positioned to become public in the foreseeable future through an offering or merger into a public company.  To realize on our equity participations, a secondary market must exist or develop for a Portfolio Company’s common stock.  We may assist Portfolio Companies in this secondary market development. 

Our Investment Plan

Investment objective.  Our primary investment objective is to achieve dramatic capital appreciation of our Equity Participations, rather than current income.  We believe that our investment strategy can produce dramatic rates of return.  We also believe that there are a sufficient number of potential investment opportunities available to enable us to achieve our investment objective.

Investment strategies.  We believe we will achieve our investment objective by targeting either (i) our current Portfolio Companies, (ii) companies which we believe will grow rapidly and are committed to a merger with a public company or other public offering as soon as feasible or (iii) companies that are financially extended but which are in the process of turning around and require formal or informal restructuring.  By focusing on public or soon-to-be public companies or requiring mergers with public companies, we believe we can efficiently “harvest” our gains and be in a position to reinvest our gains in new transactions.  We expect to make the following investments: 

• Secured or unsecured loans and advances, bearing interest, or the use of our credit to guarantee performance, to Portfolio Companies where we already have a significant equity interest or if such loans or guarantees are accompanied by significant Equity Participations or equity inducements such as common stock, preferred stock, preferred stock convertible into common stock, warrants to acquire common stock and/or the capability to convert these loans or advances into equity;

• Secured loans to, or guarantees of performance to secured lenders of, financially troubled private companies that have agreed in advance to merge, at our option, with an existing Portfolio Company or other public company;

• Secured or unsecured loans to companies contemplating a specific financing activity which will provide us with a source of repayment (a “Bridge” loan);

• Secured or unsecured, post-petition loans and advances to companies under the protection of the bankruptcy court if we are the Debtor-in-Possession of such company or if such companies have otherwise agreed to participate in our public company strategy;

• Equity securities, including common equity and preferred equity, which may have additional equity features such as attached warrants or the preferred shares may be convertible into common equity.  Such investments may be in exchange for fees or services or may be additional investments or an inducement for others to invest; and

• Marketable securities of public companies with low market capitalization’s, characterized as “Micro-Cap Companies” or private placements in such companies.

Investment Policies.  We have developed a general policy framework from which we will operate.  Our investment objectives and non-diversification status may be changed at any time and from time to time without shareholder approval.  Our general policies are described below, but are not all-inclusive.

• We do not intend to sell securities short or on margin, write puts or calls on marketable securities or purchase or sell commodities or commodity contracts.

• We do not contemplate the purchase or sale of real estate, or real estate mortgage loans, nor do we intend to formally underwrite the issuance of securities of other companies.

• We do not exclude investments in certain types of businesses, industries or groups in which we may invest or as to the amount or type of securities of a company that we may acquire.  It is somewhat more likely that we will invest in potentially high growth technology companies because of the background of our management.

• We may make additional investments in Portfolio Companies to protect our original investment and we may continue to invest in the restricted securities of such Portfolio Companies.

• We expect to lend funds and provide services to our Portfolio Companies to advance their business plans and to create value.  We are more likely to subordinate repayment or convert to equity than to recapture such funds upon a follow-on financing transaction.

• We intend to focus on companies that have completed the R&D stage and are selling products or services or have a proven and marketable product.

• We may hold securities in non-target companies that we have received as fees.  Such securities will likely be liquidated when they become both marketable and unrestricted.

• We may hold investments in higher grade securities as a liquidity management tool while we seek appropriate portfolio investments.

Our Operations

In general terms, we operate as a “Merchant Banker.”  This is a European concept that can best be understood by what it is not.  A Merchant Banker is not an Investment Banker, who raises money for companies by doing underwritings into the public market.  A Merchant Banker is not a Commercial Banker, who just lends money for an interest rate return.  A Merchant Banker is a securities focused holding company that lends and invests its own funds.  A Merchant Banker takes different risks then either an Investment Banker or a Commercial Banker, but is still a type of financial intermediary, not an operating company.  Merchant Bankers may take an active role in their investees’ financial activities.  However, our intent is not to operate any of our Portfolio Companies, except on a crisis or developmental basis while new management is recruited.  In certain instances, we may also act as an advisor or investment banker regarding arranging mergers or sales of companies.

This type of merchant banking activity was generally suppressed in the United States by the securities acts passed between 1933 and 1940.  Merchant Banking has reappeared in the form of high-technology oriented, venture capital partnerships and leverage buyout partnerships.  We believe few companies focus on the segment of the market that we have chosen (i.e., smaller, financially troubled or early stage public companies).  Also, with the exception of a few companies like us, the flexibility of other publicly held investment companies is generally highly constrained by the 40 Act. 

Our management has significant and valuable experience in our chosen market of small public companies, particularly those that are financially troubled and those in the software business.  We believe the public market offers opportunities for higher returns and the ability to realize these returns because of the liquidity offered by public stock.  By specifically maintaining an organization that avoids the regulation of the 40 Act, we believe we offer investors an attractive mix of investment attributes.

We expect that a majority of our returns and revenues will arise from the appreciation in value of our Equity Participations.  However, we also regularly charge our Portfolio Companies cash consulting, advisory and management fees and generally strive to cover our out-of-pocket expenses, as they would relate to a particular Portfolio Company investment.  Charging an initial monthly consulting fee also serves as a preliminary screen to keep us from being overwhelmed with potential investments, provides leverage to obtain a larger equity position and minimizes our downside risk.

Our personnel may provide consulting services for our Portfolio Companies.  Since our growth portfolio is primarily public companies and/or high growth companies, such companies need a more sophisticated financial officer.  More than likely, however, these companies are unable to support the expense of such a qualified individual.  Therefore, we may perform these functions until such time as the companies’ volume or sophistication requires the expansion of the management team with a fully qualified CFO.  On either a fee for service or a fee plus additional equity basis, we may supply some or all of the following services:

• Accounting and SEC activities.  We will assist our Portfolio Companies in their accounting and SEC filing activities, including preparation of financial reports, coordinating audits and preparing SEC documents such as 10-K’s and 10-Q’s.

• Financial and Business Planning.  We work closely with our Portfolio Companies in developing their business plans and financial forecasts.

• Investment banking.  We assist our Portfolio Companies by acting as their investment banker.  This includes consulting and advising on matters of capital planning and/or potential mergers and acquisitions.  We may assist our Portfolio Companies in raising “bridge” financing to either a public financing or a more complicated private placement.  We may assist in developing and coordinating private placements for our Portfolio Companies.

• Public relations.  We assist our Portfolio Companies in developing market awareness and trading interest in their securities, including such activities as contacting brokers, soliciting market makers and coordinating the filing of press releases.

• Arranging bridge financing to an early IPO.  Most of our Portfolio Company investments are in companies that are already public.  There may be instances where we invest in and assist private companies by providing “bridge” lending to be paid back in an initial public offering.

Regulation

We are currently exempt from reporting and regulation under the Investment Company Act of 1940 due to an exemption in Section 6(a)(2) of such act.  We believe we qualify under this exemption and do not believe that maintaining this exemption will materially constrain our operations.  This exemption states that:

“Any company which since the effective date of this title or within five years prior to such date has been reorganized under the supervision of a court of competent jurisdiction, if (a) such company was not an investment company at the commencement of such reorganization proceedings, (b) at the conclusion of such proceedings all outstanding securities of such company were owned by creditors of such company or by persons to whom such securities were issued on account of creditors’ claims, and (c) more than 50 per centum of the net asset value of such company, and securities representing more than 50 per centum of the net asset value of such company, are currently owned beneficially by not more than twenty-five persons; but such exemption shall terminate if any security of which such company is the issuer is offered for sale or sold to the public after the conclusion of such proceedings by the issuer or by or through any underwriter.  For the purpose of this paragraph, any new company organized as part of the reorganization shall be deemed the same company as its predecessor, and beneficial ownership shall be determined in the manner provided in Section 3(c)(1).”

The Market for our Loans and Related Services

We believe the demand for our services is significant.  Although there have been positive changes in the restrictions related to smaller amounts of funding, the process is still time consuming.  There is often a significant overhead cost in the form of legal and accounting fees that must be paid in advance and there is no assurance that any money will be raised to cover such fees.  Smaller public companies have had to meet higher disclosure standards.  Also, due to the legal exposure, broker/dealers are usually hesitant in sponsoring small private placements and their clients have no exit strategy.  Venture funds usually have a threshold of at least $2,000,000 and require that their portfolio companies have a powerful exit strategy.  For example, venture capitalists may require prospective portfolio companies be able to support a major public offering (at least $20,000,000) within three to five years.

Banks do not want to make higher risk loans since they generally do not want, or don’t know how to use, Equity Participations.  Some LBO lenders started taking warrants but the loan size to support such a sophisticated lender is an estimated $10,000,000.  This leaves small companies few options.  One option, SBA loans, are collateral based and therefore are an ineffective alternative for technology companies with limited tangible collateral.

In our market, our only competition are “angel” investors, which are private investors who will invest $100,000 to $500,000 and “friends and family” investors.  The latter usually have limited resources and the former is usually very difficult to locate.  In neither case is there a realistic exit strategy for these investors.  Smaller, financially extended companies have even less funding options available than smaller growth companies.  They may have loans in place and do not know how to address the demands that are being made on them for their limited resources.  These demands, where their working capital has been used for long-term investment or to fund start-up losses, means that these companies have no cash to perform when opportunities for their products or services finally develop.  This is a prescription for failure.  Our techniques combined with a small loan can stabilize and address these problems and give the Portfolio Company the financial breathing room to grow.

We believe we are not impacted by the general state of the economy since an economic downturn creates more “turn-around” opportunities and a growing and changing economy provides increased demand and opportunities for early stage growth funding.

Our Marketing Activities

We solicit referrals to investments from the professional community, including but not limited to bankers, lawyers, accountants, broker/dealers, marketing and business development professionals, venture capitalists and money financiers.  We believe this marketing method will allow us to maintain our focus on transactions that fit our investment profile.  We do not intend to broadly solicit investment opportunities, like investment bankers may do, or to advertise for investment opportunities.  We believe we could be swamped with hundreds of business plans and other “opportunities” in this situation and we would spend ineffective time attempting to select opportunities.

We believe our merchant banking strategy and the use of a controlled amount of management assistance to protect and build our investments may be particularly attractive to banks and we expect to expand our marketing in that direction.  Banks are very concerned about not only the legal exposure of lender liability but the potentially adverse public relations that accompany bankruptcy strategies and aggressive restructuring, since these often have negative employment impact (i.e. layoffs, etc.).  We believe that we may be able to purchase bank loans at a significant discount and use our entrepreneurial management and financial techniques to create significant value over and above the purchase price.

With respect to broker/dealers, venture capitalists and money financiers, we believe our value creation strategies would be attractive to these parties because they often are not as attuned to smaller investments or to investments, which may require intensive management involvement to grow and manage the investment.  Lastly, wealthy individuals take investment positions in small companies and then find that they need aggressive and active management to protect and maintain their investment.  In some instances, we may acquire interests in Portfolio Companies by swapping our own equity for such interests.

Our Expected Investments

Loans related to a source of repayment (Bridge Loans).  Loans to Portfolio Companies, either secured or unsecured, are generally structured to carry the Portfolio Company to a planned financing or other event directly related to sources of repayment or to provide funds to restructure its liabilities.  In certain circumstances, we may provide credit lines (which may or may not be drawn upon) and receive Equity Participations as consideration for these loans.

Loans to and investments in Current Portfolio Companies.  Following an initial investment, we may make additional debt and equity investments in Portfolio Companies in order to increase our investment in a successful Portfolio Company.  We may exercise warrants or options that were acquired in the original financing to preserve our proportionate ownership when a subsequent financing is planned or to protect our initial investment when such Portfolio Company’s performance does not meet expectations.  The failure to make additional investments may, in certain circumstances, jeopardize the continued viability of a Portfolio Company and our entire initial investment.  The necessity of making additional investments may limit the number of companies in which we have the ability to invest.  We have no specific criteria in deciding whether to make an additional investment except that we will exercise our business judgment and apply similar criteria as we do with new investments.

Loans to financially extended companies.  We expect to lend money via private placements to public or private companies involved in turnaround or other restructuring situations that we believe, with the infusion of additional working capital and/or strengthening of the management team, will realize significant price appreciation and rapid growth in profits.  To the extent that these Portfolio Companies are unable to successfully turnaround or restructure, and if we cannot control a successful bankruptcy reorganization plan, our investment is not likely to appreciate in value and may be lost in its entirety.

Loans to Private companies.  We intend to selectively make loans to private companies in a financially extended condition.  Any loans to such companies will, in most instances, be convertible into common stock of the Portfolio Company.  We will only lend to private companies if they commit in advance, after turning around, to merge with a public shell or otherwise achieve a public trading status. Any Equity Participations would transfer to the merged company, enhancing our ownership interest in the combined entity.  Such a merger would always be at our option or upon certain criteria being reached.

Loans to high growth companies.  We may make loans to high growth companies as an intermediate step to a merger with a Portfolio Company or to an Initial Public Offering.  A loan allows us to react rapidly to gain an attractive Equity Participation, but protect ourselves with collateral and a merger exit strategy.  Although the documentation regarding loans, subscription agreements or preferred stock may provide for certain onerous default or performance provisions, up to and including control of the borrower’s Board of Directors in the event of default, there is no assurance that these default provisions will be sufficient to enable us to recoup our investment.

Investments in private placements.  The investment in private placement securities is generally very speculative.  The issuers of private placement securities may require several years of operations prior to achieving profitability and may never achieve profitability.  In these situations, our investment may experience substantial diminution in the value.  Also, such securities are generally highly illiquid and may not have any realizable value for several years after purchase, if ever.  Conversely however, these investments have the potential for very significant value appreciation if successful.  These types of investments require significant and experienced valuation decisions to weigh the risks of the loss of the investment to the potential for gain.  We believe we have the necessary experience to make these investments and the necessary people resources to invest a controlled amount of time to protect our investment and realize significant returns.  There are no assurances that this type of investment will be successful.

Our private placement investments will, in most instances, be negotiated directly with the Portfolio Company.  However, private placement opportunities may be presented to us by finders, brokers or other investment bankers who may receive fees or Equity Participations for their referral and/or services from the Portfolio Company or from us.

About our Principals

Michael S. Williams.  Mike has been Chief Executive Officer and Chief Portfolio Officer of Aztoré Holdings, Inc. since 1995.  Mike works full time on Aztoré activities.  From December 1993 to December 1995, Mike (along with Lanny) founded and was a Managing Director of Bulldog Investment Company CLC.  From November 1990 to December 1993, Mike was the sole principal of Bucher & Williams, a private investment and consulting company.  From October 1987 to November 1990, Mike was the President, Chief Financial Officer and a Director of ShareData Inc.

For the six years prior to October 1987, Mike was continuously employed in the securities business as an investment banker with various registered broker-dealers in Detroit, Michigan.  Mike has an MBA degree in Strategic Planning and Corporate Finance from the Wharton Graduate School of the University of Pennsylvania and a BA degree in both History and Political Science from Pennsylvania State University.

Lanny R. Lang.  Lanny has been the Secretary, Treasurer and Chief Financial Officer of Aztoré since 1995 and has worked full time on Aztoré activities since this date.  From December 1993 to December 1995, Lanny (along with Mike) founded and was a Managing Director of Bulldog.  From July 1992 to December 1993, Lanny was the principal of Lang Financial Services, Inc., a private management and accounting consulting firm.  From January 1986 to November 1990, Lanny was the Controller and Treasurer of SDI.

Prior to joining SDI, Lanny was employed by Price Waterhouse in Minneapolis, Minnesota for six years.  Lanny has a BA Degree in Accounting from the University of Northern Iowa.