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  1. 1. DRC Capital Fund, Ltd. Business Plan 2009 Contact Information:
  2. 2. James P. Massengale or David R. Clifton 4000 Surfside Boulevard, Suite 507 Corpus Christi, Texas 78402 361.887.9091
  3. 3. Confidentiality Agreement The content of this report is confidential and is the sole property of DRC Capital. Its use is strictly limited to those readers authorized by the Company’s owner. Any reproduction or divulgence of the content of this report without written consent of the Company is strictly prohibited. The undersigned reader acknowledges that the information provided by DRC Capital in this business plan is confidential; therefore, the reader agrees not to disclose it without the express written permission of DRC Capital. It is acknowledged by the reader that information to be furnished in this business plan is in all respects confidential in nature, other than information which is in the public domain through other means and that any disclosure or use of same by the reader may cause serious harm or damage to DRC Capital. Upon request, this document is to be immediately returned to DRC Capital. ___________________ ___________________ Signature Date ___________________ Name (typed or printed) This business plan is not an offer, which can only be made by an approved Private Placement Memorandum. Participatory interest will only be to Accredited Investors. This Document includes “forward-looking statements.” All statements other than statements of historical fact within this Document, including statements regarding DRC Capital, Inc. or its subsidiaries’ strategies, plans, objectives and expectations, are all forward-looking statements. Although DRC Capital believes that the expectations reflected in such forward-looking statements are reasonable at this time, it can give no assurance that such expectations will prove to have been correct. Certain important factors that could cause actual results to differ materially from expectations are set forth herein. All subsequent written and oral forward-looking statements attributable to DRC Capital or persons acting on its behalf are expressly qualified in this regard.
  4. 4. Table of Contents 1.0 EXECUTIVE SUMMARY 1.1 Objectives 1.2 Mission 1.3 Vision 1.4 Strategy Highlights 2.0 FINANCING 2.1 Company Ownership & Personnel 2.2 Keys to Success 2.3 Facilities 3.0 ASSET ALLOCATION 3.1 Philosophy 3.2 Investment Process Flow Charts 3.3 Risk Management Outline 4.0 MARKET ANALYSIS SUMMARY 4.1 Market Trends 4.2 Market Segmentation 4.3 Target Markets 5.0 STRATEGY AND IMPLEMENTATION SUMMARY 5.1 Competitive Edge 5.2 Competition 5.3 Due Diligence Process 5.3.1 Business Plan Section Check List 5.3.2 Business Plan Rating 5.4 Fourteen Criteria of Better Business Models 6.0 FINANCIAL PROJECTIONS 6.1 Cash Flow Forecast 6.2 Return Scenarios for Illiquid Securities 6.3 Assumptions 7.0 MANAGEMENT SUMMARY 8.0 HEADQUARTERS AND CORPORATE DIRECTORY This material is for your information only and is not intended to be used by anyone other disapproved by the Securities and Exchange Commission. The Interests are offered pursuant to an exemption from registration requirements of the Securities Act and applicable state securities laws for non-public offerings. This presentation is informational only and is neither a solicitation to buy nor an offer to sell interests in the partnership. Such solicitation or offer may be made only by private placement memorandum. Offering and sales of interests is being made solely to “Accredited Investors” as that term is defined in the Securities Act of 1933, as amended. Confidential 2
  5. 5. 1.0 EXECUTIVE SUMMARY DRC is a fund that uses Fund Characteristics management’s talent to • $10 million closed-end fund with attract outstanding traders payout in year three and negotiate positions in the • Balanced portfolio through statistical leaders of tomorrow. The fund and fundamental analysis, as well as is structured to provide broad the best of private and public equity discretion of the fund’s asset • Trader experienced with hedging $800 allocation, although the million funds Company intends to invest • General Partner matches 1% of about 75% in liquid securities, limited partner investments with the remainder in • 2% management and 20% aggressive growth private performance incentive fee equity transactions, which gain liquidity in the future. DRC’s chief trader, Mitch Bulajic, CMT1 gained experienced implemented hedging strategies in New York on portfolios of value of up to $800 million. A Manhattan brokerage invested in capturing his trading strategy in software, as he is excellent at managing volatility. DRC’s CEO David Clifton has over 25 years experience managing stock brokerages and raising capital. He has raised funds for over 400 private and public companies. His experience with IPOs will help ensure liquidity of private equity investments. To best leverage management’s insight and maximize returns, the Company will focus on liquid securities under $250 million market capitalization, and illiquid securities under $100 million estimated valuation. The small markets DRC is targeting provide stronger returns, as large funds must look for highly liquid investment opportunities. With substantial capital in multi-billion dollar funds investing in companies that are already developed, investors lack access to the high returns of private equity with the balance of security trading. As a niche boutique fund, DRC invests in smaller start-up and early stage companies. When an investment exceeds 10% of the company’s valuation, DRC is generally hands-on through counseling and consulting. Providing guidance to entrepreneurs benefits of the entire portfolio in terms of return and liquidity. To assist in creating a liquidity event, management will provide its deep experience in taking companies public, and retain other IPO experts. In the 1970s, management started an oil & gas company, NRG, which they listed on the stock market and increased the price per share from $0.065 to over five dollars. DRC Capital Fund invests in diverse industries including emerging growth companies in oil & gas, alternative energy, motor sports, real estate, Internet, waste management, nanotechnology, and other cutting edge technologies. 1 Chartered Market Technician Confidential 3
  6. 6. 1.1 Objectives Raise $10 million into closed-end fund Diversify among liquid securities and private equity Develop track record of outstanding returns, infamous brands, exit in 3-5 years and proper accounting Offer 1st right of refusal to DRC investors of subsequent investment opportunities Provide investors portfolio allocation services including bonds, real estate and publicly traded securities 1.2 Mission DRC’s mission is to build emerging brands with distinct capabilities and realistic potential for improving the quality of life. The Company will satisfy the necessary parameters of compound annual growth rate, liquidity and beta to be ranked the leading fund in its class. Management’s reputation for honesty, integrity and old fashioned service, will help distinguish the fund among entrepreneurs and investors. A long-view approach will help DRC create a diversified portfolio of superior companies to be the next Apple Computer, Intel or Berkshire Hathaway. 1.3 Vision DRC’s vision is to become a major diversified financial services company, with multiple funds known worldwide for providing excellent returns to investors. 1.4 Strategy Highlights  Strategy with unique themes, specific style, and proven proprietary models  Strategy with a unique overlay and feed-back between quantitative/technical, and fundamental models  Performs in all market conditions, and exceptionally well in markets with high cross sectional volatility  Strategy adaptive to any market regime by allocating capital between models, and utilizing multi sub-model environment - given market conditions.  Targets 13%-21% annual return with low volatility Confidential 4
  7. 7. 2.0 FINANCING DRC Capital, Inc. is a Texas “C” Key Partners corporation and the General Partner of Prime Broker (Merrill Lynch) DRC Capital Fund, Ltd., a Limited Partnership. The Company will raise Auditor (Rothstein Kass) $10,000,000 into a closed-end limited partnership by selling 40 units at Third party administrator (Carew $250,000 each. Carswell & Co.) The admission date is the date on Corporate Legal (Godwin Pappas which a purchaser of Interests is Langley Ronquillo, LLP) admitted to the Partnership as a Limited Partner. On the admission Fund Legal (Sadis Goldberg) dates, the General Partner shall make a Capital Contribution in an amount Subject to change equal to 1% of the initial aggregate Capital Contributions that are made by the new Limited Partners on their Admission Dates. The partnership is organized to invest in speculative securities, some of which are not traded on securities exchanges or in the Over-the-Counter market. Illiquid securities are generally considered more speculative, and will be limited to 25% of the portfolio’s investable assets. 2.1 Company Ownership & Personnel The ownership of the general partner is subject to change, however as of this writing, it is owned by David R. Clifton, James P. Massengale and Mitch Bulajic. Mr. Clifton has been involved with 400 IPOs and private placements raising tens of millions of dollars. In his 25 year stock brokerage career, he managed up to 100 employees and never had an unproductive office. David R. Clifton - President and CEO James P. Massengale – COO Mitch Bulajic – Chief Trader This management team has over 37 years experience in the industry and will utilize their previously gained business savvy, knowledge, experience and acumen in the management and operation of the fund. The management team has previously been successful in the investment, operation, marketing and promotion of numerous businesses in a variety of industries. They are prepared to dedicate themselves fulltime to successfully select and manage projects. The members of the management team have previously been successful in the investment, operation, marketing and promotion of numerous businesses in a variety Confidential 5
  8. 8. of industries and will utilize their previously gained business savvy, knowledge, experience and acumen in the management and operation of the fund. The management team functions as a unit, utilizing the strengths of each member to accomplish its goals. At the present time, all operations of the company will be performed by David R. Clifton, James P. Massengale, Mitch Bulajic and Carolyn J. Massengale. As we find suitable key personnel, we will add to the management team. Characteristics sought are honesty, integrity and a track record of experience and success. Personnel will not require training other than in DRC’s administrative protocols; however, weekly meetings with management will build cohesiveness as the fund takes positions in the businesses most adept at thriving in the current market environment. Short or put positions may be purchased when appropriate. 2.2 Keys to Success Maintain proven trading strategies, which minimize risk and provide stable returns Acquire high quality sources of deal flow, conduct efficient due diligence and communicate honestly with entreprenuers. Standardized screening protocols Adherence to strategies to limit poor investement choices. Measures of Performance Raise capital to close out the fund and allocate among securities Maintain trader’s historical annual performance of 14%+ Receive media attention for portfolio private companies, increasing value Exit all private companies profitably Begin offering liquidity and returns to investors in 3-5 years Provide an average annual appreciation of 40% 2.3 Facilities DRC was founded in August 2000, reorganized September 2001, and changed its name from No-Lack, Inc. to DRC in May 2006 to provide investors access to the compelling opportunities management has reviewed, and is reviewing. The corporate office is maintained in Corpus Christi, and a branch office exists in Colorado. The branch is already in a formal office space leased by Mr. Clifton, and DRC will establish its formal headquarters in Texas after financing. Oftentimes, trading firms will allow startup funds to operate from their offices, or sublet space. If the trading firm is also established as a broker/dealer, it will also receive the benefit of DRC trading a portion of its liquid securities through the landlord, as long as commissions are reasonable and competitive in the market. Contact hours accommodate both the East Coast and West Coast, 7:00 a.m. – 7:00 p.m. CST Monday through Friday. Confidential 6
  9. 9. 3.0 ASSET ALLOCATION Asset allocation will begin as funds are received, focusing on liquid securities. The Company will aim to invest funds within 30 days of receipt in liquid securities, and a maximum of 90 days to take positions in illiquid securities. Hence, the Company will become more diversified as capital absorbed becomes allocated, and as the fund grows toward its $10 million cap. Given operational costs, it is unprofitable for a management firm to hold a fund lower than $10 million. Once over $1 billion, a fund can become too large to maintain returns. While it is the intent of management to open new funds as DRC performs, the performance on DRC is critical Asset Allocation by Security Type to management’s ability to expand client portfolios. Therefore, proper asset allocation is imperative to management. 25% Long/Short Stocks Structured as a fund, the General Call/Put Options Partner will create a diversified 55% portfolio across industries and 20% Private Equity securities. Positions held in liquid securities will include stocks and options. The Company’s private equity will focus on start-up, early stage businesses that meet the 14 criteria for best business models. 2 When making venture capital investment; DRC will also provide its management expertise. Consulting and mentoring companies is a service many venture capitalists promise, but fail to provide. DRC management imparts its experience to help illiquid assets perform. When a DRC affiliate has a relationship for a strategic partnership with a portfolio company, there is more value added to the company beyond capital. DRC is distinguished from consultants charging startup companies upfront due diligence fees before seeking investors. Having its own capital, DRC does not expose companies to these types of brokers. 2 Confidential 7
  10. 10. 3.1 Philosophy In the dynamic and ever more global What We Are What We are Not economy, new standards have been A Long/Short fund utilizing A “black box” algorithm, set for competing in the market place, quantitative/technical and generated and optimized by fundamental techniques mining data where talented mangers and a A fund with themes and style with A fund that adjusts net exposures sophisticated consumer dictate profit potential in any market in hopes of timing market regime direction capital. Companies need to innovate A dynamic portfolio management - A fund that buys-and-holds not imitate to survive. Changes are oriented fund with clear trading “cheap” stocks while ignoring entry and exit signals market sentiment evident in the way corporations are A dynamic trading vehicle that A fund that trades illiquid reorganizing and in the emergence of can exit or hedge positions securities that cannot be sold in quickly to control risk time of stress new sectors. A fund with a risk management A fund without a defined risk approach that employs strict stop- management discipline or a that loss discipline on a position and "doubles-up" on losing trades. Small-cap and micro-capitalization portfolio level corporations are best fit to position "Institutional friendly" strategy "Hot strategy" that chases with consistent attractive returns performance themselves for the new marketplace. A non-directional or directional- A fund vehicle that bets on market Identifying the right companies before hedgedmarket fund that utilizes direction they grow to six times the original market direction, spread relationships, sector rotation, and value provides upside, which is hedging tactics complemented with an active trading strategy. Active trading of liquid securities is about 75% of the fund’s asset allocation, tempering the volatility associated with the high potential of private equity. Liquid and illiquid companies sought are the ones that exhibit the following characteristics:  Focus  Narrow Focus – to one or several related core activities  Hollow Focus – to activities they do best, outsource the rest  Target Focus – to specifically defined and nurtured clients  Influential  Internal – stimulating, constantly learning environment  International – direct and indirect involvement in the international markets  Industrial – in home sector, and capability to diversify into other sectors  Innovation  Strategy – implementation of innovative products or services  Speed – implementation of innovative products or services  Intellectual – implementation of innovative products or services  Heterarchy – Having several micro hierarchies make it more adaptive and flexible, where typical hierarchy is predictive and static The investment strategy in liquid securities is a hybrid of Equity Long/Short and Equity Long/Hedged strategies, and consists of three well defined sub-strategies: Stock Option Spreads, Long/Short Stocks, and Long/Short Sectors/Industries. The focus of the strategy is sector/industry theme and small-cap/micro-cap universe. Confidential 8
  11. 11. The rationale behind this strategy is embedded in a unique overlay and feedback loop between the complementary quantitative/technical and fundamental models. The quantitative/technical models consist of four (4) unique and complementary sub- models:  Sector/Industry Rotation Model,  Options/Market Sentiment Model,  Money Flow Momentum Model, and  Technical Patterns Model. The fundamental models consist of four (4) unique and complementary sub-models  Value Model  Growth Model  Quality Model  Sentiment Model The investment strategy also implements a dynamic derivatives hedging overlay on a portfolio level (options, ETFs, and futures), where added value besides protecting capital is in lowering volatility and/or adding returns. The investment process consists of well-defined and integrated qualitative/technical and fundamental procedures. These procedures are defined on position level as Position Entry Process and on Portfolio level as Portfolio Management Process:  Position Entry Process consists of Universe Identification, Strategy Model Signals, Position Entry & Portfolio Construction, and Trading & Execution  Portfolio Management Process consists Position Entry in to the Portfolio, Portfolio Analysis, and Position Exit out of the Portfolio Confidential 9
  12. 12. 3.2 Investment Process Flow Charts Position Entry Process Confidential 11
  13. 13. Portfolio Management Process Confidential 12
  14. 14. 3.3 Risk Management Outline Stop-loss Discipline  Strict stop-loss discipline precludes large draw-downs on any trades or portfolio  Each theme employs capital preservation by fully liquidating at fixed % loss of the position value from the original entry point  Stock Option Spreads: 3%  Long/Short Stocks: 5%  Long/Short Sector/Industry: 2%  Each theme employs profit protection by implementing hard stops 2 X capital preservation from current market value of the position  Portfolio is liquidated at 5% loss (month-to-date) in order for strategies and market conditions to be re-evaluated prior to re-entry Strict Stock, Position, Sector/Industry, and Country Exposure Limits  Strict exposure limits will be used at the stock, position, sector/industry, and country level to control risk  All exposure limits are computed at current market value based upon a percentage of portfolio value  Gross Stock Exposure Limits: 10%  Gross Position Exposure Limits  Stock Option Spreads: 3%  Long/Short Stocks: 5%  Long/Short Sector/Industry: 2%  Net Sector Exposure Limit: +/-15%  Net Country Exposure Limit (ex. US): +/-25% Portfolio Leverage, Exposure, Volatility, Turnover and Correlation  Net exposure from 0% to 100%  Maximum gross leverage = 200%  Portfolio can be in cash, at any time and at any percentage  Volatility very low due to low correlation of positions (by style and direction), and lower deltas  Annual turnover between 200% and 400%  Correlation to the market varies from high positive (+0.90) to mid negative (-0.50) due to hedging strategies (options, ETFs, & futures) Confidential 13
  15. 15. 4.0 MARKET ANALYSIS SUMMARY Through July 2006, funds managed $1.2 trillion in assets, up from $324 billion at the start of 2000, says Hennessee Group, a fund advisory firm.3 In that span, the number of funds doubled to roughly 8,800. The amount in US equity investments is $56 billion or 4.3% of the total market. Approximately 4,100 funds are operating, however the top 5% control approximately 40% of the $1.3 trillion in assets. Dividing the remaining capital across the small funds implies the average amount of assets under management is $200 million. About 60% of these funds have less than $25 million AUM (Assets Under Management). Based on about 10% growth, funds are expected to control $2.0 trillion within the next five years. Industries Management and advisors are highly knowledgeable on several industries such as oil & gas, alternative energy, media and technology. Increased crude prices have boosted profits and stock prices of oil companies. In October 2006, the AP reported recent repeated calls by some OPEC members to cut output…may suggest growing desperation by oil producers to stem a near 25 percent decline in prices in less than two months.”4 DRC’s chief trading strategist thrives in volatile market conditions. Meanwhile, after decades of mediocre returns, the alternative energy industry is starting to perform. In May 2006, Chevron announced that it was creating a business unit to research and invest in ethanol and biodiesel fuels.5 Solar is generally less economical than fuel cells, wind power and nuclear, although BP announced in November 2005, it would invest $8 billion over the next decade in wind and solar power. In June 2006, BP said it would invest $500 million to create a research center for biofuels. Ethanol is growing faster than biodiesel. Media and entertainment is being transformed by technology. Consumer devices such as iPods, DVRs and video camera phones, and web sites such as MySpace, YouTube and Skype, are relatively new phenomenon. The Internet still has more consumer hours than ad spending represents. Media budgets are shifting toward online, particularly rich media advertising enabled by broadband. Social networks are becoming increasing popular, but quickly reaching maturity. Semiconductors, a leading component of the technology sector, have increasing quantities demanded at a lower price. Furthermore, manufacturers of integrated circuits have increasing pressure to produce smaller, more efficient chips for a lower price. In order to make significant breakthroughs, R&D companies are pushing the boundaries of physics with nanotechnology and biochemical computing. RFID chips are having a major impact on inventory control. 3 4 5 Confidential 14
  16. 16. Forbes reported aerospace and defense stocks continue to climb higher.6 Assuming that war will eventually decrease, defense stocks may fall 20% when the global environment becomes more peaceful again. Venture Capital Industry In general, the pattern in first-time 2006 financings Venture capitalists remained on a steady pace in the first quarter of followed the same trends seen in overall investing. 2006, investing $5.6 billion in 761 Software companies continued to attract the most deals, according to the MoneyTree first time deals, followed by medical device Report by PricewaterhouseCoopers and the National Venture Capital companies. The industrial/energy sector also Association based on data provided by recorded an increase, rising 21% in volume to 17 Thomson Financial. The quarter's dollar value matches the investment deals, and 30% in dollars to $55 million. Growth level from Q4 2005 and represents a areas of venture capital were reported by The 12% increase over the same time last Thompson Corporation to be semiconductors, year. business products and services, media and Source: The Thompson Corporation entertainment, IT services, and healthcare services.7 The Thompson Corporation reported software investments rose 12% in the first quarter of 2006, to $1.2 billion in 197 deals and remained the largest single industry category with 22% of total dollars and 26% of all deals. Media and entertainment was reported to hit its highest investment level since Q3 2001. Several large deals accounted for a significant portion of this increase. Additionally, companies focused on delivering content via the Internet accounted for approximately half of the total dollars invested and number of deals. 4.1 Market Trends On October 3, 2006, the Dow Jones Industrial averaged reached a new high, not seen in seven years. At 2,243, the Nasdaq composite is still less than half of its record high. Similar to the Nasdaq, the Russell 3000 index has many small, volatile technology companies. The one-year chart below illustrates grey Bollinger Bands above and below the blue index line, and a red MACD signal below:8 6 7 2006_04_25_1Q06_VentCap_Investing&section=financial&secondary=pr_market_group&tertiary=Private %20Equity&title=%0A%0AVenture_Capital_Investing_Off_To_A_Solid_Start_In_Q1_2006_With_%245.6_Billion%0A%0A 8 Confidential 15
  17. 17. Technical & Fundamental Analysis DRC will use a combination of technical and fundamental analysis. The former is only applicable to liquid securities. Fundamental analysis is applied to all investments, private and public, long and short. Revenues, profits and the market trends are examined in fundamental analysis. Stock price, volume and volatility are components of technical analysis. Investment opportunities in liquid securities are typically discovered by first applying a screen, which can capture any publicly traded security exhibiting the “if/and/or” parameters. This screen can apply to technical and fundamental data. Fundamental analysis is applied by reading about the company’s products and services. Other research also occurs, such as monitoring Nasdaq Level II on certain issues, to help management determine trading forces. HFRX Global and Strategy Indices9 HFRX Equity Hedge Index - HFRXEH Equity Hedge, also The HFRX Global Fund Index is known as long/short equity, combines core long holdings designed to be representative of the of equities with short sales of stock or stock index options. Equity hedge portfolios may be anywhere from net long to overall composition of the fund net short depending on market conditions. Equity hedge universe. managers generally increase net long exposure in bull markets and decrease net long exposure or even are net short in a bear market. Generally, the short exposure is Below is return data on various intended to generate an ongoing positive return in HFRX fund indices. addition to acting as a hedge against a general stock market decline. Stock index put options are also often used as a hedge against market risk. Profits are made The left hand columns represent day, when long positions appreciate and stocks sold short month and year to date (DTD, MTD, depreciate. Conversely, losses are incurred when long positions depreciate and/or the value of stocks sold short YTD), followed by year to date rate of appreciates. Equity hedge managers' source of return is return (ROR) for 2006, followed by similar to that of traditional stock pickers on the upside, but they use short selling and hedging to attempt to three years of historical data on the outperform the market on the downside. right. Daily - 10/02/2006 Sep 2005 2004 2003 HFRX Index DTD MTD YTD Value * ROR TOTAL TOTAL TOTAL HFRX Global Fund Index 0.0332 0.0332 3.8631 1212.80 0.50 2.72 2.69 13.39 HFRX Equal Weighted Strategies Index 0.0824 0.0824 4.6470 1182.00 0.59 1.28 2.73 11.32 HFRX Absolute Return Index 0.1002 0.1002 4.7297 1073.36 0.49 -0.02 3.20 11.95 HFRX Market Directional Index -0.0634 -0.0634 3.9834 1132.90 0.39 4.20 4.84 25.22 HFRX Convertible Arbitrage Index -0.0476 -0.0476 7.1861 1034.77 1.04 -5.69 -0.14 8.85 HFRX Distressed Securities Index 0.0943 0.0943 4.2027 1324.06 0.35 1.21 8.95 20.90 HFRX Equity Hedge Index -0.0451 -0.0451 2.6538 1225.39 0.50 4.19 2.19 14.47 HFRX Equity Market Neutral Index 0.5151 0.5151 3.9003 1014.94 1.32 0.21 0.33 -2.38 HFRX Event Driven Index -0.0807 -0.0807 5.2843 1350.76 0.99 2.81 6.93 18.74 HFRX Macro Index 0.2084 0.2084 0.4308 1193.24 -0.57 6.67 -0.32 14.61 HFRX Merger Arbitrage Index -0.1171 -0.1171 7.7652 1194.95 0.58 3.72 2.80 4.26 HFRX Relative Value Arbitrage Index 0.1318 0.1318 5.7624 1141.69 0.53 -0.97 1.98 9.15 Private Equity The average annual return for early seed venture capital funds has a peak that is superior to all other private equity funds. However, one must look back 10 years to see this track record. If one looked back five years, the bursting of the Internet 9 Confidential 16
  18. 18. bubble caused negative average returns on most fund types as seen the chart from Thompson below:10 In its private equity investments, DRC seeks to emulate average 10 year returns of early/seed venture funds, barring macroeconomic volatility. Startups with a new product filling a niche are less affected by the economy. Recent returns from buyout funds have been above long-term average, whereas seed funds have performed below 10 year averages. Venture Capital Industry Statistics11 The second and fourth quarters of the year tend to be the most active, which is a result of many people on holiday during 1Q and 3Q, in addition to year-end urgency to close deals in the fourth quarter. DRC may be able to secure shares in companies during Jan-Mar and July-Sept., when competing funds are less active. Private equity fundraising had a very strong showing in the first quarter of 2006, with ninety-three funds raising a combined $31.4 billion, according to Thomson Venture Economics and the National Venture Capital Association (NVCA).12 4.2 Market Segmentation While a greater portion of Net Asset Value assets will be allocated toward liquid securities, $40,000,000 bought and sold every $30,000,000 Value of Liquid couple months, the return Securities from more speculative $20,000,000 Value of Illiquid illiquid securities is expected $10,000,000 Securities to drive investor return, as $- seen in projections right: 2007 2008 2009 The following segmentation is from Van Hedge on the number of funds with each strategy. DRC will alter its strategy if economic conditions significantly alter, however 10 11 12 Confidential 17
  19. 19. its current aggressive growth, market neutral and event driven strategies will be used to generate returns projected. Despite the higher fees of funds, superior net returns are attracting capital from mutual funds. As seen below in 2004, fund assets were nearly 25% of mutual fund assets.13 Private Equity Unlike those funds making an average investment of $7 million per deal, DRC will diversify private equity investment among smaller firms, which are often neglected by large venture capitalists. While Sequoia and Garage Ventures seek to invest $2 to $10 million per deal, DRC targets $250,000 - $500,000 opportunities overlooked by such firms. Any investment under $10 million could be classified as early stage, which retains about one-third of venture capital activity. Thompson reported that overall for 1Q2006, startup/early stage companies accounted for 29% of deals; 13 Confidential 18
  20. 20. expansion stage, for 38%; and later stage for 33%. These percentages were relatively steady when compared to Q4 2005.14 International “The United States remains the primary investment target for VCs around the globe,” said Mark Jensen, national managing partner of Deloitte’s Venture Capital Services. “From a venture capital viewpoint, the perceptions of a brain drain from the United States to China and India are simply not true,” Jensen says. “The majority of VCs surveyed worldwide, including those based in the United States, still believe the United States is the best bet for entrepreneurial success.”15 The chart to the left16 illustrates how venture capital firms were allocating investments in the second quarter of 2006. Technology consists of internet, software, media and semiconductors. Life sciences, which had more deals with only a third of capital invested in technology, is still a major sector. Medical, healthcare and biotechnology should continue long term performance, but analyzing such opportunities generally requires the VC firm have doctors who are experienced in the related field. Semiconductors in the technology sector can also be highly complicated. As seen to the right,17 exit polls show that only seven of 42 disclosed deals, or one-sixth, returned less than the amount invested. About half had moderately positive returns, while 19% of deals returned 4x to 10x, and 14% had returns 10x the venture investment. The Company believes it can achieve 4x to 10x the return on 14 2006_04_25_1Q06_VentCap_Investing&section=financial&secondary=pr_market_group&tertiary=Private %20Equity&title=%0A%0AVenture_Capital_Investing_Off_To_A_Solid_Start_In_Q1_2006_With_%245.6_Billion%0A%0A 15,1014,sid%253D2283%2526cid%253D123691,00.html 16 Confidential 19
  21. 21. illiquid investments, due to its access to deal flow through tradition and non- traditional means. 4.3 Target Markets DRC is offering an investment opportunity to accredited investors (as that term is defined by the SEC), and will allocate funds for trading in liquid securities, and private equity financing for small companies or individuals with potential ideas and/or patents. Stock market investments will be on the New York, American, Nasdaq and OTC markets. The Company will not trade in pink sheets, however when a private investment target goes public, DRC may sell on the pink sheets if this is where a private client begins trading. Private Equity Deal Flow Funding Post claims to work with thousands of angel and venture capital investors representing over $89.46 Billion. has over 1,400 Venture Capital firms listed and over 23,000 angel investors. With contacts to several business plan writers, the Company will have unusual access to opportunities before they reach other investors. Other channels to connect with business plan writers are and Such individuals can inform DRC of investment opportunities to become available, prior to the business plan being completed and distributed. DRC is already receiving business plans through its website from companies worldwide. The Company will promote the web site through search engines, opt-in email and targeted online display advertising. Entrepreneurs will also find out about DRC from trade shows, word-of-mouth, business cards and seminars. 17 Confidential 20
  22. 22. 5.0 STRATEGY AND IMPLEMENTATION SUMMARY While a majority of capital will be in lower risk, liquid investments, most of the return is expected to be from private equity investments. Management has identified several investment opportunities, which have not been made available to most venture capital firms. The nature of portfolio management emphasizes out-performance relative to one’s peer group, and non-correlation to investors’ other portfolios. Generating superior returns over the first several years is critical. The General Partner employs a multi-system (strategy) approach within the portfolio. Most stock selection, stock-picking judgment, and experience is encapsulated and reflected in numerous software-codified algorithms, which are distinct, highly systematic, and disciplined, but simultaneously demonstrate an ability to adapt quickly to changing market conditions. More specifically, the use of multiple systematic algorithms is flexible to respond to market conditions that exhibit a range of characteristics; reversion to mean, trending markets, channel-bound, price momentum-influenced, etc. Operations & Execution Good trading strategies go awry without good execution, and to that end the DRC team has accomplished the following in order to ensure smooth operations and to mitigate execution risks: 1. Deployed experienced CEO and Chief Trader 2. Established office infrastructure a. Colorado and Texas offices b. Reduced burn rate for short term c. Office layout for ease of communication and monitoring of media 3. Established third party service providers 4. Implementing redundant network infrastructure 5. Developed and published security policies and procedures 6. Developed and published strategy validation and deployment protocol 7. Identified Third Party Administrator, Legal, Auditing and Prime Broker Legal, Regulatory, & Compliance Important to the development of a fund, is the thorough treatment of legal and regulatory drivers. To that end, DRC has accomplished the following: 1. Established legal relationships: a. Currently a long term relationship with general counsel provides day- to-day operational guidance b. Fund legal relationship established for industry specific needs. 2. Procured services of Auditing firm a. Brokerage statements sent as received to auditor b. Positioned to receive year-end tax statements promptly for investors Confidential 21
  23. 23. It is prohibited for funds to advertise or market themselves. In addition, only "accredited" investors are eligible to receive information on funds.18 The Company will raise capital through personal contacts, and regularly communicate performance data. Risk Mitigation Factors Systemic/market risk mitigation is sought through a careful portfolio balancing of long vs. short positional exposure, a balancing of overall time-in-market exposure (time series analysis), and by maintaining the ability to remain extremely nimble in macro conditions of market-stress, event-stress or liquidity-stress. Sector risk is mitigated through rigorous analysis of equity instrument pairing. The General Partner employs numerous systematic strategies simultaneously on equity vehicles, which in turn, are also capable of demonstrating orthogonal characteristics within the portfolio. There can be no assurance that the Partnership will achieve its investment objective or avoid substantial losses. An investor should not make an investment in the Partnership with the expectation of sheltering income or receiving cash distributions. Investors are urged to consult with their personal advisers before investing in the Partnership. Because risks are inherent in all the investments in which the Partnership engages, no assurances can be given that the Partnership’s investment objectives will be realized. DRC repeatedly validates assumptions. The statistical validation or “Testing” phase confirms there is information to suggest a security deserves further scrutiny. Subsequently, the identification of optimal performance expectations is conducted through co-variant analysis, or “dial” settings that illustrate a security’s performance under certain assumptions. Historical analysis of performance and profitability capacities is also performed. Risk Mitigation • Diversifying strategies • Eliminating emotionally-based decision making • Controlling risk at the individual trade decision level • Balancing portfolios • Blending optimization efforts • Smoothing effects upon cumulative equity curve • Generating a ratio of long to short typically ~ 50/50 • Minimizing maximum expected drawdown exposure • Non correlation of individual strategies - advantageous effects on drawdown 18 Confidential 22
  24. 24. 5.1 Competitive Edge DRC is differentiated from funds that either only invest in private equity or only invest in liquid securities. While there are challenges of reconciling different reporting standards, the result will be superior risk adjusted returns. DRC operates with honesty, integrity, hard work and experience. To affirm the Company’s integrity, it will use a top rated auditor specialized in the fund industry. The general partner will research thousands of prospective targets to find those with truly outstanding potential. Management has vast experience taking companies public, which is the ideal exit strategy in many private equity situations. Public companies often carry a higher valuation than private companies due to the liquidity premium. However, a buyout from a larger company within the industry can also provide a favorable exit. The track record of the Chief Trader provides a key advantage, as it is difficult to obtain the services of a trader with over 10 years of consistent performance. The trader’s ability to achieve profits on over 70% of transactions is a talent that is difficult to procure. Additional data on the trader’s background is available upon request. 5.2 Competition There are thousands of funds competing for capital, and some are large enough to move the prices of small stocks. Venture capital firms will compete with DRC for capital and quality deal flow. Much of the private equity competition has been developing low return criteria, such as only investing in companies already established. This is leaving a vacuum in the seed and startup capital markets. DRC will not only invest in startup opportunities, but liquid securities worth up to $250 million. Startup companies often seek loans instead of equity financing because venture capital can be more challenging to acquire, and the venture industry is notorious for backpedaling on deals or taking excessive equity positions. While DRC will try to buy at the lowest share price possible, having clear communication with target companies and strong integrity will give the Company a competitive advantage. Confidential 23
  25. 25. The intent of any investment is to identify companies that are unique in the market and also of high value to the consumer, but relatively undervalued to DRC. Unique in Market Place Value to Consumer 5.3 Due Diligence Process Liquid Securities Bloomberg screen of fundamental and technical characteristics Discovery of anomalies recently affecting price Research of product & services Research of recent market developments Illiquid Securities Read executive summary (<2 pages) Read and score entire plan Interview management Confirm status of contracts and letters of intent Confirm the validity of research DRC advisor meeting Interview management 5.4 Fourteen Criteria of Better Business Models19 1. It makes sense. Upon seeing the product for the first time, most people will understand the value, usefulness and humanitarian aspects. 2. It's new. Ideally the product will have limited or no exposure at trade shows or in stores. 19 Confidential 24
  26. 26. 3. It solves a problem. The product solves a common everyday problem that's never been addressed before, or it solves a problem in a much less expensive way. 4. It's unique. There's absolutely nothing like it on the market. 5. It looks good. The product blends into the car and photographs well. It comes in any color. An attractive eye-catching photo works wonders for sales. 6. It's simple. It doesn’t change the operation of the machine. The product has just one main function and solves just one problem. 7. There's a widespread market. Naturally the larger the catalog market for the product, the larger the opportunity. Unfortunately, certain consumer markets, although big, are not necessarily big catalog markets. Distributors will rely on electronic or paper catalogs and brochures for sales. 8. There's a year-round market. The bigger the window of opportunity for this product, the better. It's usually more profitable to get steady sales throughout the year than to be limited to a short seasonal market. 9. It's safe. The product is not dangerous in any way. Its function is to make streets safer. 10. It's durable. The product is designed to last the life of the car, and will easily ship without breaking. 11. It's easy to supply. There's an adequate inventory with a short lead time (less than five weeks) on production. Plus, there are backup suppliers lined up, in case needed. 12. It's priced between $470 and $675. Ideally the perceived value is over $900, as the Company’s study showed, unless the product is bought in quantity. 13. It's easy to mail. The product is UPS-shippable. Preferably the product is lightweight. 14. It's patented. With a patent the Company can ward off "knockoffs." Confidential 25
  27. 27. 6.0 FINANCIAL PROJECTIONS The financial forecast presents, to the best of management’s knowledge and belief, the Company’s expected financial position, results of operations, and cash flows for the forecast period. Accordingly, the forecasts reflect management’s judgment as of December 12, 2009, and conditions may change. The assumptions disclosed herein are those that management believes are significant to the forecast. There will usually be differences between the forecasted and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material. Project Returns FY Dec Asset Allocation 2009 2010 2011 Liquid Securities 75% 75% 75% Illiquid Investments 25% 25% 25% Annual Returns (liquid securities) 14.69% 14.69% 14.69% Beta to S&P 0.67 0.67 0.67 Illiquid Asset Performance Scenarios Average CAGR 125% 154% 102% Value of Illiquid Securities $ 4,612,500 $ 11,695,982 $ 23,600,821 Value of Liquid Securities $ 7,970,955$ 9,141,888 $ 10,484,832 Total $ 12,583,455 $ 20,837,870 $ 34,085,653 Asset Allocation Max Proposed Amount of 3-Year Return Fund Amount of Investment Industry 1st Investment on Investment ROI Investment Liquid Securities Miscellaneous $ 6,950,000 $ 16,739,529$ 9,789,529 $ 6,950,000 Illiquid Securities: Total $ 2,050,000$ 4,937,559$ 2,887,559 $ 2,050,000 Confidential 26
  28. 28. 6.1 Cash Flow Forecast Cash Flows FY Dec 2009 2010 2011 Cash flows from Operating Activities Management fee 200,000 200,000 200,000 Interest - - - Net Cash from Operations (200,000) (200,000) (200,000) Cash Flows from Investing Activities Cash received from sale of investments 34,085,653 Less acquisitions & development 9,000,000 Net Cash from Investing Activities (9,000,000) - 34,085,653 Cash Flows from Financing Activities Equity Investments 10,000,000 General partner incentive fee - - 4,817,131 Limited partner dividends 29,268,522 Net cash from Financing Activities 10,000,000 - (34,085,653) Increase in Cash 800,000 (200,000) (200,000) Cash Balance 800,000 600,000 400,000 * Note that remaining $400,000 cash from $1 million reserve would be distributed per 80/20 schedule. Owner's return as % of investors' return 18.51% IRR 71.08% Investor cash flow (10,000,000) - 29,268,522 6.2 Return Scenarios for Illiquid Securities Return Scenarios for Illiquid Securities Initial Fund Illiquid % Return Rank Securities Year 1 Year 2 Year 3 25% $ 2,050,000 $ 2,562,500 $ 3,203,125 $ 4,003,906 60% $ 2,050,000 $ 3,280,000 $ 5,248,000 $ 8,396,800 125% 14% $ 2,050,000 $ 4,612,500 $ 10,378,125 $ 23,350,781 Confidential 27
  29. 29. 6.3 Assumptions General Assumptions Corporate Income Tax 30% Management Company Dividend (as % Net Profit) 20% Limited Partners Dividend (as % Net Profit) 80% Finder's Fee 4% Capital Raised Assumed Subject to Finder's Fee 10% Effective Finder Fees as % Capital Raised 0.40% Annual Turnover of Liquid Securities 3 Assumptions Size of Closed End Fund $ 10,000,000 Asset Acquisition Cost $ 9,000,000 Exit Valuation $ 34,085,653 Projected Gross Profit $ 24,085,653 ROI 267.6% Gross Return on Investment 240.9% Fund CAGR 43.0% IRR on Fund Net Fees 71.1% Management Fee 2% Management Fees $ 600,000 Total Value in 36 mos. $ 4,937,559 General partner incentive fee 20% General partner incentive fee $ 4,817,131 Limited partner dividends $ 29,268,522 Total to General Partner $ 5,417,131 Capitalization LP Units 40 Price per Unit $ 250,000 Minimum Investment $ 250,000 Net Investment after Fees $ 205,456 Minimum LP Units 1 Maximum Investors 40 Financing Capital Raised $ 10,000,000 Reserve $ 1,000,000 Allocated Capital $ 9,000,000 Confidential 28
  30. 30. 7.0 MANAGEMENT SUMMARY David R. Clifton is a resident of Woodland Park, Colorado. He managed his first IPO in 1972. In 1983 at FW Davaney, Mr. Clifton was involved in the purchase of FCC towers for cellular telephones. He participated through the IPO process, and this experience will benefit many portfolio companies. From 1984 to 1999, Mr. Clifton was a registered principal/representative of numerous broker-dealers, holding Series 7, 24 and 63 securities licenses. In 1986, Mr. Clifton assumed control of a Stewart James brokerage office, and managed the IPO of a $10 million market capitalization company. Clients now own 90% of CMVT, a $4.7 billion market cap company. He managed about 100 deals, including Kershner Locke, over a five year period. From 1991 to 1992, he worked at a stock brokerage called Chelsea Street in Texas. From early 1992 until 1996, he was vice president of two Lewis Lieberbaum offices generating $250,000 per month in gross commission. Mr. Clifton has been self- employed since 1996, and his securities licenses and NASD associate membership have lapsed as inactive. From 1995 to 1996, he was president of Lord & Kendal, a Texas-based brokerage with 15-20 employees. Mr. Clifton testified before the SEC due to other unscrupulous managers. Since 1995, Mr. Clifton has worked as a partner in CMC Financial Group, Dallas, Texas, providing consulting services to "small cap" and "shell" companies with shares traded or to-be-traded in the over-the- counter securities market. He is a principal shareholding officer and director in Clifton Investment Group, Inc., providing management consulting services to privately held companies. During this same period, Mr. Clifton also participated in the following businesses: Officer, director and principal shareholder of Sunrise Software Systems, Inc., a software development and marketing company; director of Entertainment Trends Corporation, Beverly International a Health and Nutrition business, and shareholder and director of J.T. Bowling, Inc., a manufacturer of a patented bowling ball insert. James P. Massengale is a resident of Corpus Christi, Texas. Mr. Massengale has a total of 34 years as an entrepreneur. Mr. Massengale has 17 years experience as an independent oil and gas producer/operator in South Texas, performing the duties of President & CEO, Underwriter, and Investor/Public Relations taking his oil and gas production company, NRG (aka XRG, Doran), public on the OTC market. Mr. Massengale has a total of 34 years as an entrepreneur with hands on experience as President and CEO of the following businesses: Entertainment Trends Corporation, an entertainment and promotional business where Mr. Massengale organized, promoted, and secured sponsors for sports events and trade shows. He won an Addy Award for producing and directing television commercials advertising these events; Beverly International, an international health and nutrition business providing fitness and nutritional guidance and supplement distribution; Click FX, Inc. (Click FX Web Service) an IT - web hosting, design, marketing and public relations business where he created and marketed websites, magazine ads, brochures and provided investor/public relations duties for various companies. His business background brings a wealth and variety of experience to the DRC Venture Capital team. M. Mitch Bulajic is a resident of Belgrade and grew up in Montenegro. He currently consults to and regularly visits a New York fund, after spending over a decade working from within large funds on the East Coast of the United States, and in Hong Kong. For Halsey Advisory and Management, he communicates with high net worth Confidential 29
  31. 31. clients on personal portfolio strategies, as well as implements risk management strategies on the fund level. He implements quantitative (statistical and technical) strategy overlays to all portfolios. From April 2003 to September 2004, he was the Quantitative Portfolio Manager/Trader of Everest Capital. From September 2001 to April 2003, he was at Elliott Associates and was Head of the Statistical Arbitrage Portfolio. There, Mr. Bulajic implemented and traded proprietary long/short market neutral strategies based on sector/industry/country baskets, utilizing optimization techniques and derivative overlays – with positions in value up to $50 million, and portfolios in value up to $250 million. For over seven years he was an Equity Strategist / Equity Derivatives Trader and Head of Structured Trading Strategies Group for ITG, Inc. in New York. During this time at ITG, June 1994 to September 2001, he implemented hedging strategies for the portfolio trading desk with an average of 20 million shares traded daily, and portfolios in value of up to $800 million. Carolyn J. Massengale is a resident of Corpus Christi, Texas. Mrs. Massengale has over 30 years Office Administration/Management experience in a variety of office situations where she has developed her marketing/promotion skills along with her administrative/management skills. She worked 12 years as a Legal Assistant in a one-person office providing legal, administrative, accounts payable/accounts receivable assistance and research skills for a solo practitioner. She spent several years as Office Manager/Administrative Assistant for an oil and gas producer/operator where she maintained all production records and regulatory filings with the Texas Railroad Commission and the Securities and Exchange Commission and prepared and distributed press releases to media and financial publications. She added hands-on securities knowledge to her resume while working in the Trial Department of the District Office at the Securities and Exchange Commission in Fort Worth, Texas. She has served as Secretary/Treasurer of Entertainment Trends Corporation, an entertainment business, Owner/Office Manager of Beverly International, a Health and Nutrition business, and Secretary/Treasurer and Office Manager of Click FX, Inc., an IT - Web Hosting, Design, Marketing and Public Relations business. Confidential 30
  32. 32. 8.0 HEADQUARTERS AND CORPORATE DIRECTORY DRC Capital Fund 4000 Surfside Boulevard, Suite 507 Corpus Christi, Texas 78402 (361) 887-9091 The Company has an outside group of advisors, which include a CPA and a corporate attorney. The Company monitors the following trade resources: Van Hedge Lipper HedgeWorld MARHedge Hedgemedia Energy Fund Center National Venture Capital Association (NVCA) International Angel Investors Institute Confidential 31