As filed with the Securities and Exchange Commission
on May 19, 2006.
Registration Statement No. 333-131946
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2/A
Pre-Effective Amendment No. 3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
CHILCO RIVER HOLDINGS, INC.
(Name of small business issuer in its charter)
Nevada 7990 98-0419129
------ ---- ----------
State or jurisdiction Primary Standard Industrial I.R.S. Employer
of incorporation Classification Code Number Identification No.
or organization
355 Lemon Ave., Suite C, Walnut, CA 91789
(646) 330-5859
- --------------------------------------------------------------------------------
(Address and telephone number of principal executive offices
and principal place of business)
Tom Liu
355 Lemon Ave., Suite C,
Walnut, CA 91789
(646) 330-5859
- --------------------------------------------------------------------------------
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Kenneth G. Sam, Esq.
Dorsey & Whitney LLP
Republic Plaza Building, Suite 4700
370 Seventeenth Street
Denver, CO 80202-5647
(303) 629-3445
Approximate date of proposed sale to the public: From time to time
after the effective date of this registration statement.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. |X|
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If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
-----------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
-----------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
-----------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
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The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until this Registration Statement shall
become effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
EXPLANATORY NOTE
This pre-effective amendment number 3 amends the registration statement on Form
SB-2 (333-131946), registers an aggregate of 6,481,334 shares of common stock of
the registrant for resale by the selling shareholders.
The information contained in this prospectus is not complete and may be
changed. The selling shareholders may not sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these shares, and the selling
shareholders are not soliciting an offer to buy these shares in any state where
the offer or sale is not permitted.
PRELIMINARY PROSPECTUS
Subject To Completion: Dated May 19, 2006
Chilco River Holdings, Inc.
6,481,334 Shares of Common Stock
This is a public offering of up to 6,481,334 shares of the common stock,
par value $0.001 per share, of Chilco River Holdings, Inc., by selling
shareholders listed beginning on page 13 of this prospectus. All of the shares
being offered, when sold, will be sold by selling shareholders. The shares of
common stock registered for resale under this registration statement includes:
o 5,090,667 shares of common stock held by selling shareholders; and
o 1,390,667 shares of common stock acquirable upon exercise of Class A
Warrants at the exercise price of $2.00 per share for a period of one
year from the date of issuance.
The price at which the selling shareholders may sell the shares will be
determined by the prevailing market price for the shares or in negotiated
transactions.
We will not receive any proceeds from the sale or distribution of the
common stock by the selling shareholders. We may receive proceeds from the
exercise of the Class A Warrants upon exercise, if they are exercised, and will
use the proceeds from any exercise for general working capital purposes.
Our common stock is quoted on the National Association of Securities
Dealers Over-the-Counter Bulletin Board under the symbol "CRVH". On May 17,
2006, the closing sale price for our common stock was $2.30 on the NASD OTCBB.
Investing in our common stock involves risks. See "Risk Factors and
Uncertainties" beginning on page 4.
These securities have not been approved or disapproved by the SEC or any
state securities commission nor has the SEC or any state securities commission
passed upon the accuracy or adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
The date of this prospectus is ___________________, 2006.
1
TABLE OF CONTENTS
Page
----
SUMMARY INFORMATION 3
RISK FACTORS AND UNCERTAINTIES 6
FORWARD-LOOKING STATEMENTS 13
DIVIDEND POLICY 13
SELLING SHAREHOLDERS 14
PLAN OF DISTRIBUTION 21
LEGAL PROCEEDINGS 22
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS 22
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 25
EXECUTIVE COMPENSATION 26
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 28
DESCRIPTION OF SECURITIES 30
THE SEC'S POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES 32
DESCRIPTION OF THE BUSINESS 33
REPUBLIC OF PERU 42
DESCRIPTION OF PROPERTY 43
MANAGEMENT'S DISCUSSION AND ANALYSIS 44
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS 50
TRANSFER AGENT AND REGISTRAR 51
USE OF PROCEEDS 51
LEGAL MATTERS 51
EXPERTS AND CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 51
WHERE YOU CAN FIND MORE INFORMATION 52
INDEX TO FINANCIAL STATEMENTS F-1
2
SUMMARY INFORMATION
The Offering
This is an offering of up to 6,481,334 shares of the common stock of Chilco
River Holdings, Inc. by certain selling shareholders.
Shares Offered By the Selling 6,481,334 shares of common stock, $0.001 par
Shareholders value per share, including:
-- 5,090,667 shares of common stock held by
selling shareholders; and
-- 1,390,667 shares of common stock
acquirable upon exercise of Class A
Warrants at the exercise price of $2.00
per share
Offering Price Determined at the time of sale by the
selling shareholders
Common Stock Outstanding as of 21,815,667 shares
May 19, 2006
Use of Proceeds We will not receive any of the proceeds of
the sale of shares offered by the selling
shareholders. We intend to use the proceeds
from the exercise of Class A Warrants, if
any, for general working capital purposes.
Dividend Policy We currently intend to retain any
future earnings to fund the development and
growth of our business. Therefore, we do not
currently anticipate paying cash dividends.
OTC Bulletin Board Symbol CRVH
3
SUMMARY OF OUR BUSINESS
We, Chilco River Holdings, Inc., through our wholly-owned subsidiaries, own
all of the assets of and operate the Bruce Hotel and Casino. The Bruce Hotel and
Casino is located Jiron Francisco Bolognesi # 171-191 in the Miraflores
District, Province and Department of Lima, Peru, approximately 30 minutes from
Jorge Charvez International Airport in the heart of Miraflores. The Bruce Hotel
and Casino is a "destination" hotel and casino location for visitors traveling
to the Republic of Peru, and we cater to local and foreign visitors, including
visitors from the People's Republic of China. The Bruce Hotel and Casino
business consists of a hotel, restaurants, a gaming casino and real property. We
acquired the Bruce Hotel and Casino in connection with a Share Exchange
transaction with the shareholders of Kubuk International, Inc., which we refer
to in this report as Kubuk, on July 15, 2005.
The Bruce Hotel and Casino is a full-service hospitality facility with
standard and premium lodging accommodations (rooms and suites). In addition, the
hotel encompasses several dining facilities and a full-featured Gambling Casino
with traditional gaming tables and slot machines.
Hotel: The Bruce Hotel and Casino is a 60-room full-service hospitality
facility with standard and premium lodging accommodations (rooms and suites) and
dining facilities. The amenities include guest suites and rooms, sauna, air
conditioning, mini-bar, telephone, hair dryer, wake-up service/alarm-clock,
radio, satellite TV and safe deposit boxes. The hotel can accommodate 200
guests. In addition, the hotel offers a gaming room, meeting/banquet facilities
and a barber/beauty shop. The room fare ranges from $70 for a standard room to
$95 for an executive suite.
The Miraflores District is one of the most important financial and
commercial centers of Lima and is located approximately 20 minutes from the
historical center of Lima. The Bruce Hotel and Casino is supported by urban
infrastructure, such as asphalt roads, concrete sidewalks, city water and
sewage, and public electricity and garbage collection as well as phone lines.
The Bruce Hotel and Casino is located on commercial property and is located on a
major thoroughfare.
Restaurants: The Bruce Hotel and Casino features two full-service
restaurants serving Chinese and international cuisine. The restaurants seat 200
guests, respectively. The Bruce Hotel and Casino holds a retail liquor license.
The restaurants were closed for renovation in November 2005 and are expected to
reopen in the last half of 2006.
Gaming Casino: The gaming casino is a full-featured casino with 20
traditional gaming tables (blackjack, roulette, craps and poker) and
approximately 220 slot machines. The casino is located on the second floor of
the Hotel and is approximately 622 square meters. The casino will feature two
full bars, and VIP area and can accommodate 300 guests.
The gaming casino operates under a gaming license issued to Kubuk Gaming
SAC by the Republic of Peru. The gaming casino is currently closed for
remodeling and is scheduled to reopen to the public in the last half of 2006.
Real Property: As a result of the Share Exchange with Kubuk, we now own all
of the real property and assets used in the operation of the Bruce Hotel and
Casino. The property consists of one seven-story building and one fourteen-story
building that are physically connected and have been configured for use as a
hotel, casino and office space. The property also includes a parking garage. We
also own all of the fixtures, improvements, systems, furniture, gaming machines
and gaming tables and the other contents currently used in the business of the
Bruce Hotel and Casino.
Prior to signing the Share Exchange Agreement with Kubuk, we developed a
plan to expand, renovate and modernize the current facilities of the Bruce Hotel
and Casino and temporarily suspended the operation of the gaming room in
February 2005 and operation of the restaurants and slot room in November 2005.
We began renovations to the restaurant and slot area, and in January 2006, we
raised $2 million to begin renovation of the casino floor and for marketing of
the Bruce Hotel and Casino. We intend to raise an additional $5 million in
capital
4
to fund the expansion, renovation and modernization of the Bruce Hotel and
Casino. We expect to reopen the casino, slot room and restaurants in the last
half of 2006, subject to raising sufficient capital to complete our renovations.
We were incorporated on May 8, 2003 under the laws of the State of Nevada.
We maintain our registered agent's office at 6100 Neil Road, Suite 500, Reno,
Nevada 89511, and an office at the Bruce Hotel and Casino at Jiron Francisco
Bolognesi # 171-191 in the Miraflores District, Province and Department of Lima.
Our executive offices are located at 355 Lemon Ave., Suite C, Walnut, CA 91789,
and our phone number is (646) 330-5859.
SELECTED FINANCIAL DATA
Following the share exchange transaction on July 15, 2005, Kubuk
International, Inc. became a wholly-owned subsidiary of Chilco River Holdings,
Inc. Prior to the share exchange, we had no substantial assets and only nominal
operations. Accordingly, the transaction is treated as a reverse acquisition of
Chilco River Holdings, Inc. and has been accounted for as a recapitalization
rather than a business combination. The historical financial statements of Kubuk
International, Inc. are deemed to be the historical statements of Chilco River
Holdings, Inc.
The selected financial information presented below as of and for the
periods indicated is derived from our financial statements contained elsewhere
in this report and should be read in conjunction with those financial
statements.
Chilco River Holdings, Inc.
Year Ended Three Months Ended
INCOME STATEMENT DATA December 31 March 31,
2005 2004 2006 2005
-------------- ---------------- -------------- --------------
Revenue $ 4,507,552 $ 10,694,694 $ 351,959 $ 1,408,116
Operating Expenses $ 3,499,396 $ 4,221,246 $ 693,189 $ 739,212
Net Income (Loss) $ 581,383 $ 4,595,393 $ (348,034) $ 398,424
Income (Loss) per Common
share* $ 0.03 $ 0.24 $ (0.02) $ 0.01
Weighted Average Number
of Common Shares Outstanding 20,252,611 19,250,000 22,843,140 19,250,000
BALANCE SHEET DATA: At December 31, 2005 At March 31, 2006
Working Capital (Deficiency) $ 1,515,351 $ 1,893,671
Total Assets $ 18,069,490 $ 18,340,450
Retained Earnings $ (279,446) $ (627,481)
Shareholders' Equity $ 17,742,641 $ 18,319,537
* Basic and diluted.
Due to the Share Exchange Agreement and the significance of the Company's
operations, the "development stage" status of Chilco is no longer in effect. The
development stage disclosures are no longer required in the Company's current
status. Historical results of operations for Chilco River Holdings, Inc. may
differ materially from future results.
5
RISK FACTORS AND UNCERTAINTIES
Readers should carefully consider the risks and uncertainties described
below before deciding whether to invest in shares of our common stock.
Our failure to successfully address the risks and uncertainties described
below would have a material adverse effect on our business, financial condition
and/or results of operations, and the trading price of our common stock may
decline and investors may lose all or part of their investment. We cannot assure
you that we will successfully address these risks or other unknown risks that
may affect our business.
ALL OF OUR REVENUES AND INCOME ARE EXPECTED TO BE DERIVED FROM THE BRUCE HOTEL
AND CASINO.
We anticipate that all of our revenue and income, if any, will be derived
from the operations of the Bruce Hotel and Casino. We have no other source of
operating revenue. We had revenue of $4,507,552 and $10,694,694, respectively,
for the years ended December 31, 2005 and 2004, and net income of $581,383 and
$4,595,393, respectively, for the years ended December 31, 2005 and 2004. We
anticipate that results of operations at the Bruce Hotel and Casino will be
lower than historical periods because the gaming casino has been closed for
remodeling since February 2005 and the slot room and restaurants were closed for
renovation in November 2005. During the year ended December 31, 2004, gaming
revenues accounted for approximately 82% of our operating revenue, restaurant
revenue accounted for approximately 5% of our operating revenue and
hotel/hospitality accounted for approximately 9% of our operating revenue.
Our casino, slot room and restaurants are not expected to reopen until the
last half of 2006, assuming adequate financing is available. Consequently, our
revenue is expected to be approximately 10% of historical levels until the
renovations are completed and our casino, slot room and restaurants are
reopened. We may incur losses in 2006 as a result of these closures.
WE ANTICIPATE THAT WE WILL NEED TO RAISE APPROXIMATELY $5 MILLION TO COMPLETE
THE RENOVATION OF THE BRUCE HOTEL AND CASINO AND THE OPENING OF OUR CASINO, SLOT
ROOM AND RESTAURANT MAY BE DELAYED IF WE ARE UNABLE TO RAISE THE FINANCING IN A
TIMELY MANNER.
We intend to finance our current and future expansion and renovation
projects primarily with cash flow from operations and equity or debt financings.
We anticipate that we will need to raise $5 million to complete the renovation
of the Bruce Hotel and Casino. Our failure to raise capital as needed may delay
our efforts to complete the renovation and opening of our casino, gaming room
and restaurant during the second half of 2006. We currently intend to raise the
required capital through debt or equity financing. If we are unable to finance
our current or future expansion projects, we will have to adopt one or more
alternatives, such as reducing or delaying planned expansion, development and
renovation projects or capital expenditures; selling assets; mortgaging our real
property; selling and leasing back the property or entering into joint venture
partnership arrangements. These sources of funds may not be sufficient to
finance our expansion, and other financing may not be available on acceptable
terms, in a timely manner or at all. If we are unable to secure additional
financing, we could be forced to limit or suspend expansion, development and
renovation projects, which may adversely affect our business, financial
condition and results of operations.
WE INTEND TO MAKE SUBSTANTIAL INVESTMENTS IN RENOVATING, EXPANDING AND IMPROVING
THE BRUCE HOTEL AND CASINO, AND OUR ABILITY TO BENEFIT FROM OUR INVESTMENTS ARE
SUBJECT TO RISKS.
The gaming casino in the Bruce Hotel and Casino has been closed since
February 2005 for remodeling and renovation, and our slot room and restaurants
were closed in November 2005 for renovation, as part of the first stage of our
renovation project. Our ability to generate sufficient revenue to earn a profit
is dependent on our ability to raise the necessary funds to complete the
renovation and to open our casino. We are in the process of seeking capital to
complete the renovation, but have no firm commitments at this time.
Our ability to benefit from our investments will depend on many factors,
including:
6
o our ability to successfully complete the renovations;
o our ability to successfully integrate the expanded operations;
o our ability to attract and retain competent management and employees;
o our ability to secure licenses, permits and approvals; and
o the availability of adequate financing on acceptable terms.
Many of these factors are beyond our control. Therefore, we cannot be sure
that we will be able to recover our investments in the expansion, renovation and
modernization of the Bruce Hotel and Casino.
WE MAY EXPERIENCE CONSTRUCTION DELAYS DURING OUR EXPANSION PROJECT WHICH MAY
LEAD TO ADDITIONAL COSTS AND DELAY THE REOPENING OF OUR CASINO AND SLOT ROOM.
We are currently engaged in a substantial renovation project to improve our
gaming casino, slot room and restaurants. We also are evaluating other expansion
opportunities at the Bruce Hotel and Casino. The anticipated costs and
construction periods are based upon budgets, conceptual design documents and
construction schedule estimates prepared by us in consultation with our
architects and contractors.
Construction projects entail significant risks, which can substantially
increase costs or delay completion of a project. Such risks include shortages of
materials or skilled labor, unforeseen engineering, environmental or geological
problems, work stoppages, weather interference and unanticipated cost increases.
Most of these factors are beyond our control. In addition, difficulties or
delays in obtaining any of the requisite licenses, permits or authorizations
from regulatory authorities can increase the cost or delay the completion of an
expansion or development. Significant budget overruns or delays with respect to
expansion and development projects could adversely affect our results of
operations.
WE ARE SUBJECT TO EXTENSIVE REGULATION FROM GAMING AUTHORITIES THAT COULD
ADVERSELY AFFECT US.
As owners and operators of gaming facilities, we are subject to extensive
regulation. The National Bureau of Tourism of the Department of Foreign Trade
and Tourism, the gaming authority, requires us and our subsidiaries to
demonstrate suitability to obtain and retain various licenses and require that
we have registrations, permits and approvals to conduct gaming operations. The
Tourism Board may limit, condition, suspend or revoke a license to conduct
gaming operations or prevent us from owning the securities of any of our gaming
subsidiaries. We may also be deemed responsible for the acts and conduct of our
employees. Substantial fines or forfeiture of assets for violations of gaming
laws or regulations may be levied against us, our subsidiaries and the persons
involved. The suspension or revocation of any of our licenses or the levy on us
or our subsidiaries of a substantial fine would have a material adverse effect
on our business.
To date, the Bruce Hotel and Casino has demonstrated suitability to obtain
and has obtained all governmental licenses, registrations, permits and approvals
necessary for us to operate our existing gaming facilities. However, like all
gaming operators, we must periodically apply to renew our gaming license. We
cannot assure you that we will be able to obtain such renewals. In addition, if
we expand our gaming operations as planned to increase the number of tables and
slot machines, we will have to meet suitability requirements and obtain
additional licenses, registrations, permits and approvals from gaming and
non-gaming authorities. Accordingly, the regulation and timing of installation
and operation of gaming tables and machines may be delayed or restricted.
POTENTIAL CHANGES IN GAMING REGULATORY ENVIRONMENT COULD AFFECT OUR ABILITY TO
OPERATE THE BRUCE HOTEL AND CASINO AND AFFECT OUR PROFITABILITY.
The gaming industry can be controversial and from time to time, legislators
and special interest groups have proposed legislation that would expand,
restrict or prevent gaming operations. In addition, from time to time, certain
anti-gaming groups may propose referenda that, if adopted, would limit our
ability to continue to operate in
7
those jurisdictions in which such referenda are adopted. Any expansion of gaming
or restriction on or prohibition of our gaming operations could have a material
adverse effect on our operating results.
WE ARE SUBJECT TO THE POSSIBILITY OF AN INCREASE IN GAMING TAXES, WHICH WOULD
INCREASE OUR COSTS.
The Bruce Hotel and Casino is subject to regulatory, legal, tax or
ancillary government oversight of the Federal Republic of Peru. Changes in tax
regulations or increases in gaming taxes could affect our profitability. We
believe that the prospect of significant revenue is one of the primary reasons
that jurisdictions permit legalized gaming. As a result, gaming companies are
typically subject to significant taxes and fees in addition to normal federal
and local income taxes, and such taxes and fees are subject to increase at any
time. We pay substantial taxes and fees with respect to our operations. From
time to time, federal and local legislators and officials have proposed changes
in tax laws, or in the administration of such laws, affecting the gaming
industry. In addition, poor economic conditions could intensify the efforts of
state and local governments to raise revenues through increases in gaming taxes.
It is not possible to determine with certainty the likelihood of changes in tax
laws or in the administration of such laws. Such changes, if adopted, could have
a material adverse effect on our business, financial condition and results of
operations.
WE ARE SUBJECT TO NON-GAMING REGULATION THAT COULD ADVERSELY AFFECT OUR
HOSPITALITY BUSINESS.
We are subject to a variety of other local rules and regulations, including
zoning, environmental, construction and land-use laws and regulations governing
the serving of alcoholic beverages. We must maintain a hotel license to operate
our hotel and a liquor license to serve alcoholic beverages. The loss of these
licenses would have a material adverse impact on our revenues and may hinder our
ability to compete with gaming establishments with liquor licenses. Penalties
can be imposed against us if we fail to comply with these regulations. The
imposition of a substantial penalty or the loss of service of a gaming facility
for a significant period of time would have a material adverse affect on our
business.
IF OUR KEY PERSONNEL LEAVE US, OUR BUSINESS WILL BE SIGNIFICANTLY ADVERSELY
AFFECTED.
Our continued success will depend, among other things, on the efforts and
skills of a few key executive officers, including Tom Liu, our President, who
has been involved with managing the Bruce Hotel and Casino since 1998, and the
experience of our property managers. We also depend on qualified employees in
operating the Bruce Hotel and Casino. We must be able to attract and retain
highly qualified personnel with gaming industry experience and qualifications to
retain our licenses and maintain the quality of our services. We do not maintain
"key man" life insurance for Mr. Lui or any of our employees. We believe a
shortage of skilled labor in the gaming industry may make it increasingly
difficult and expensive to attract and retain qualified employees. We expect
that increased competition in the gaming industry will intensify this problem.
ENERGY AND FUEL PRICE INCREASES MAY ADVERSELY AFFECT OUR COSTS OF OPERATIONS AND
OUR REVENUES
Our casino properties use significant amounts of electricity, natural gas
and other forms of energy. While no shortages of energy have been experienced,
substantial increases in the cost of electricity in Peru will negatively affect
our results of operations. In addition, energy and fuel price increases in
cities that constitute a significant source of customers for our properties
could result in a decline in disposable income of potential customers and a
corresponding decrease in visitation to our properties, which would negatively
impact our revenues. The extent of the impact is subject to the magnitude and
duration of the energy and fuel price increases, but this impact could be
material.
FUTURE CHANGES IN VISA AND TOURISM POLICIES OF THE REPUBLIC OF PERU MAY
ADVERSELY AFFECT OUR RESULTS OF HOTEL OPERATIONS.
The Republic of Peru does not require entry visa for visitors from most
countries in the world as a policy to promote tourism in Peru. If the visa and
tourism policies are tightened in the future, we may lose hotels guests
traveling to Lima from other countries.
8
OUR RESULTS OF OPERATIONS ARE SUBJECT TO FOREIGN CURRENCY EXCHANGE FLUCTUATIONS
BETWEEN THE U.S. DOLLAR AND NUEVO SOL, THE CURRENCY OF PERU.
Our functional currency is the U.S. dollar. All of our expected revenue and
expenses from the operation of the Bruce Hotel and Casino are expected to be in
nuevo sol, the currency of Peru. Recently, the value of the U.S. dollar has
declined compared to nuevo sol, and we expect that the exchange rate will
fluctuate in the future. As a result, we may experience losses or declines in
our gross profit margins as a result of fluctuations in the foreign currency
exchange rates. At the present time, we do not hedge our foreign currency
exchange risks.
RISKS RELATED TO PERU
Our ownership of Peruvian companies and operation involves certain
considerations not typically associated with ownership of U.S. companies,
including those discussed below, and therefore should be considered more
speculative than investments in the U.S. Political and economic situation has
historically been unstable.
During the past several decades, Peru has had a history of political
instability that included military coups and different governmental regimes with
changing policies. Past governments have frequently played an interventionist
role in the nation's economy and social structure. Among other things, past
governments have imposed controls on prices, exchange rates, local and foreign
investment and international trade, have restricted the ability of companies to
dismiss employees and have expropriated private sector assets.
Following the resignation of the former president, Alberto Fujimori
(1990-2000), after revelations of corruption, the president of Congress,
Valentin Paniagua, became interim president in November 2000. In 2001 Mr.
Paniagua oversaw free and fair presidential and congressional elections, and
transferred power to the newly elected president, Alejandro Toledo of "Peru
Posible," on July 28, 2005. Since 2001, under President Toledo, Peru has pursued
an ambitious program to re-establish democracy, following a decade of
increasingly authoritarian rule and rampant corruption under the former Fujimori
government, and is promoting a market-based economy that will benefit all
citizens. Toledo is also devolving more power to the provinces. A weak
congressional position and extremely low levels of popularity since 2002 have
ensured that Mr. Toledo's position as president has been fragile throughout, and
his leadership of government ineffectual at times.
Inflation as measured by the Lima consumer price index has decreased from
7,650% in 1990 to 39.5% in 1993 to 1.79% in the period from January to May 2005,
which is lower than the inflation rate for the same period in the previous year
(3.18%). Peru's gross domestic product, or GDP, grew by 4.8% during 2004,
compared to 4.0% in 2003. In April 2005, GDP increased by 6.4%, as compared to
the GDP in April 2004, which grew 3.4% as compared to the GDP in April 2003.
This rise in GDP growth was largely a result of growth in the non-primary
sector, mainly the non-primary manufacturing and construction sectors, which
increased 9.3% and 10.6%, respectively, between May 2004 and April 2005.
Notwithstanding the progress achieved in restructuring Peru's political
institutions and revitalizing the economy, there can be no assurance that
President Toledo's government, or any successor government, can sustain the
progress achieved. In addition, it is possible that Toledo's support could be
eroded as a result of certain effects of current programs. For example,
privatizations may result in layoffs due to the reduction in the work force of
privatized companies. As in the case of all foreign investments, our investments
in Peru could in the future be adversely affected by increases in taxes or by
political, economic or diplomatic developments.
OUR BUSINESS AND THE TOURISM INDUSTRY MAY BE SUBJECT TO TERRORISM AND OTHER
THREATS.
Peru experienced significant terrorist activity in the 1980s and early
1990s, during which period anti-government groups escalated their acts of
violence against the government, the private sector and Peruvian residents. The
Company's operations have not been directly affected by the terrorist activity.
9
There has been substantial progress in suppressing terrorist activity since
1990, in part as a result of the arrest of the leaders and approximately 2,000
members of the two principal terrorist groups. Notwithstanding the success
achieved during Fujimori's regime, Peru during President Toledo's rule has been
swamped with a wave of social protests coupled with an increase in domestic
guerilla terrorism activities. In June 2003, President Toledo was forced to
declare a state of emergency to handle these issues. We cannot be certain that
the progress achieved in combating terrorist activity can be sustained.
CURRENCY FLUCTUATIONS MAY HAVE A NEGATIVE IMPACT ON OUR RESULTS OF OPERATIONS.
Changes in the value of the Nuevo Sol against the U.S. dollar will result
in corresponding changes in the U.S. dollar value of our assets denominated in
Nuevos Soles and will change the U.S. dollar value of income and gains derived
in Nuevos Soles. Our income in Peru is denominated in both Nuevo Soles and US
dollars. The expenses and other charges incurred in the company's daily business
are denominated in Nuevo Soles, and the computation of income will be made on
the date of our receipt at the currency exchange rate in effect on that date. It
is possible that the value of the Nuevo Sol could fall relative to the U.S.
dollar between receipt of income and our distributions or date of accounting. In
addition, assuming new proceeds are raised from future offerings, if the value
of the Nuevo Sol falls relative to the U.S. dollar between the time we incur
expenses in U.S. dollars (i.e., contracting for capital improvements or purchase
of equipment) and the time expenses are paid, the amount of Nuevos Soles
required to be converted into U.S. dollars in order to pay expenses will be
greater than the equivalent amount in Nuevos Soles of such expenses at the time
they were incurred.
PERU HAS BEEN SUBJECT TO HIGH LEVELS OF INFLATION IN THE PAST
Since we operate our primary business in Peru, we may be adversely affected
by high inflation levels. Peru historically has experienced very substantial,
and in some periods extremely high and variable, rates of inflation. See,
"Inflation." Inflation and rapid changes in inflation rates have had and may
continue to have significant effects both on the Peruvian economy and on the
Peruvian securities and foreign exchange markets. We cannot assure investors
that the government's economic and monetary reform measures will be any more
successful than previous programs in reducing inflation in the long term.
EXCHANGE CONTROLS IMPLEMENTED BY PERU MAY AFFECT OUR ABILITY TO EXCHANGE NUEVOS
SOLES FOR U.S. DOLLARS
Prior to 1991, Peru exercised control over the foreign exchange markets by
imposing multiple exchange rates and placing restrictions on the possession and
use of foreign currencies. In 1991, the Fujimori administration eliminated all
foreign exchange controls and the exchange rates were unified. Currently,
foreign exchange rates are determined by market conditions, with regular
operations by the Central Bank in the foreign exchange market in order to reduce
volatility in the value of Peru's currency against the U.S. dollar. There can be
no guarantee, however, that limits on our ability to remit profits will not be
imposed in the future. Furthermore, if Peru were to reinstitute exchange control
and if we were to issue promissory notes to raise or borrow funds, our ability
to service debt could be adversely affected. We cannot be certain that the
Peruvian government will continue its current policy of permitting currency
transfers and conversions without restriction.
AVAILABILITY OF INFORMATION ON OUR COMPETITORS IN PERU
Although Peruvian generally accepted accounting, auditing and financial
reporting standards and practices are similar in some respects to those employed
in the United States, they are not equivalent and differ significantly in
certain fundamental areas, most notably the treatment of inflation accounting.
Moreover, equity research and public information on businesses and individuals
is not as common in Peru as it is in the United States. As a consequence, fewer
research reports are available on Peruvian hospitality and gaming operations
than on similar U.S. operations.
ENFORCEABILITY OF JUDGMENTS UNDER PERUVIAN LAW MAY BE DIFFICULT
Substantially all of our assets are located in Peru and are held by the
subsidiaries in Peru. In the event that investors were to obtain a judgment in
the United States against us, Kubuk International Inc., Kubuk Investment
10
SAC or Kubuk Gaming SAC and seek to enforce such judgment in Peru, the
investor's ability to enforce the judgment in Peru would be subject to Peruvian
laws regarding enforcement of foreign judgments. In general, Peruvian law
provides that a judgment of a competent court outside of Peru would be
recognized and could be enforced against the assets of the debtor in Peru,
subject to the following statutory limitations set forth in the Peruvian civil
code: (i) the judgment must not resolve matters for which exclusive jurisdiction
of Peruvian courts applies (e.g., disputes relating to real estate located in
Peru); (ii) the competence of the foreign court which issued the judgment must
be recognized by Peruvian conflict of laws rules; (iii) the party against whom
the judgment was obtained must have been properly served in connection with the
foreign proceedings; (iv) the judgment of the foreign court must be a final
judgment, not subject to any further appeal; (v) no pending proceedings may
exist in Peru among the same parties and on the same subject; (vi) the judgment
by the foreign court cannot be in violation of public policy; and (vii) the
foreign court must grant reciprocal treatment to judgments issued by Peruvian
courts. Moreover, there can be no assurance that a judgment rendered against us
in the United States in a bankruptcy-related action would be enforceable against
the assets of our subsidiaries in Peru or that a Peruvian court would not assert
jurisdiction in a bankruptcy proceeding.
RISKS RELATED TO SECURITIES
NEW LEGISLATION, INCLUDING THE SARBANES-OXLEY ACT OF 2002, MAY MAKE IT DIFFICULT
FOR US TO RETAIN OR ATTRACT OFFICERS AND DIRECTORS.
We may be unable to attract and retain qualified officers, directors and
members of board committees required to provide for our effective management as
a result of the recent and currently proposed changes in the rules and
regulations which govern publicly-held companies. Sarbanes-Oxley Act of 2002 has
resulted in a series of rules and regulations by the Securities and Exchange
Commission that increase responsibilities and liabilities of directors and
executive officers. The perceived increased personal risk associated with these
recent changes may deter qualified individuals from accepting these roles.
WHILE WE BELIEVE WE HAVE ADEQUATE INTERNAL CONTROL OVER FINANCIAL REPORTING, WE
ARE REQUIRED TO EVALUATE OUR INTERNAL CONTROLS UNDER SECTION 404 OF THE
SARBANES-OXLEY ACT OF 2002. ANY ADVERSE RESULTS FROM SUCH EVALUATION COULD
RESULT IN A LOSS OF INVESTOR CONFIDENCE IN OUR FINANCIAL REPORTS AND HAVE AN
ADVERSE EFFECT ON THE PRICE OF OUR SHARES OF COMMON STOCK.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we expect that
beginning with our annual report on Form 10-KSB for the fiscal year ended
December 31, 2007, we will be required to furnish a report by management on our
internal control over financial reporting. Such report will contain among other
matters, an assessment of the effectiveness of our internal control over
financial reporting, including a statement as to whether or not our internal
control over financial reporting is effective. This assessment must include
disclosure of any material weaknesses in our internal control over financial
reporting identified by our management. Such report must also contain a
statement that our auditors have issued an attestation report on our
management's assessment of such internal controls. Public Company Accounting
Oversight Board Auditing Standard No. 2 provides the professional standards and
related performance guidance for auditors to attest to, and report on, our
management's assessment of the effectiveness of internal control over financial
reporting under Section 404.
While we believe our internal control over financial reporting is
effective, we are still compiling the system and processing documentation and
performing the evaluation needed to comply with Section 404, which is both
costly and challenging. We cannot be certain that we will be able to complete
our evaluation, testing and any required remediation in a timely fashion. During
the evaluation and testing process, if we identify one or more material
weaknesses in our internal control over financial reporting, we will be unable
to assert that such internal control is effective. If we are unable to assert
that our internal control over financial reporting is effective as of December
31, 2007 (or if our auditors are unable to attest that our management's report
is fairly stated or they are unable to express an opinion on the effectiveness
of our internal controls), we could lose investor confidence in the accuracy and
completeness of our financial reports, which would have a material adverse
effect on our stock price.
Failure to comply with the new rules may make it more difficult for us to
obtain certain types of insurance, including director and officer liability
insurance, and we may be forced to accept reduced policy limits and coverage
and/or incur substantially higher costs to obtain the same or similar coverage.
The impact of these events could also
11
make it more difficult for us to attract and retain qualified persons to serve
on our board of directors, on committees of our board of directors, or as
executive officers.
THERE IS ONLY A LIMITED TRADING MARKET FOR OUR SECURITIES.
Our common stock is quoted for trading on the National Association of
Securities Dealers over-the-counter bulletin board, and there is currently only
a limited trading market for our common stock. There can be no assurance that an
active market will develop or be sustained. The lack of an active public market
for our common stock could have a material adverse effect on the price and
liquidity of the common shares.
OUR OFFICERS AND DIRECTORS BENEFICIALLY OWN APPROXIMATELY 43.00% OF OUR ISSUED
AND OUTSTANDING COMMON STOCK, WHICH MAY LIMIT YOUR ABILITY TO INFLUENCE
CORPORATE MATTERS.
As of March 31, 2006, Tom Liu, our Chief Executive Officer, beneficially
owned 6,463,991 shares of our common stock (approximately 29.6%); David Liu, Tom
Liu's father, beneficially owned 4,322,018 shares of our common stock
(approximately 19.8%); Guo Xiu Yan, Tom Liu's mother, owned 1,620,077 shares of
our common stock (approximately 7.4%); and our other officers and directors,
collectively, as a group, beneficially owned 2,914,949 shares of our common
stock (approximately 13.4%). These shareholders could control the outcome of any
corporate transaction or other matter submitted to our shareholders for
approval, including mergers, consolidations, or the sale of all or substantially
all of our assets, and also could prevent or cause a change in control. The
interests of these shareholders may conflict with the interests of our other
shareholders.
Third parties may be discouraged from making a tender offer or bid to
acquire us because of this concentration of ownership.
BROKER-DEALERS MAY BE DISCOURAGED FROM EFFECTING TRANSACTIONS IN OUR COMMON
SHARES BECAUSE THEY ARE CONSIDERED A PENNY STOCK AND ARE SUBJECT TO THE PENNY
STOCK RULES.
Rules 15g-1 through 15g-9 promulgated under the Securities Exchange Act of
1934, as amended impose sales practice and disclosure requirements on certain
broker-dealers who engage in certain transactions involving a "penny stock."
Subject to certain exceptions, a penny stock generally includes any non-NASDAQ
equity security that has a market price of less than $5.00 per share. Our shares
are considered penny stock. The additional sales practice and disclosure
requirements imposed upon broker-dealers may discourage broker-dealers from
effecting transactions in our shares, which could severely limit the market
liquidity of the shares and impede the sale of our shares in the secondary
market.
A broker-dealer selling penny stock to anyone other than an established
customer or "accredited investor" (generally, an individual with net worth in
excess of $1,000,000 or an annual income exceeding $200,000, or $300,000
together with his or her spouse), must make a special suitability determination
for the purchaser and must receive the purchaser's written consent to the
transaction prior to sale, unless the broker-dealer or the transaction is
otherwise exempt. In addition, the penny stock regulations require the
broker-dealer to deliver, prior to any transaction involving a penny stock, a
disclosure schedule prepared by the United States Securities and Exchange
Commission relating to the penny stock market, unless the broker-dealer or the
transaction is otherwise exempt. A broker-dealer is also required to disclose
commissions payable to the broker-dealer and the registered representative and
current quotations for the securities. Finally, a broker-dealer is required to
send monthly statements disclosing recent price information with respect to the
penny stock held in a customer's account and information with respect to the
limited market in penny stocks.
Our common stock is quoted on the OTC Bulletin Board. Trading in stock
quoted on the OTC Bulletin Board is often thin and characterized by wide
fluctuations in trading prices, due to many factors that may have little to do
with the company's operations or business prospects. Moreover, the OTC Bulletin
Board is not a stock exchange, and trading of securities on the OTC Bulletin
Board is often more sporadic than the trading of securities listed on a
quotation system like Nasdaq or a stock exchange like AMEX. Accordingly, you may
have difficulty reselling any of the stock you purchase.
12
IN THE EVENT THAT YOUR INVESTMENT IN OUR SHARES IS FOR THE PURPOSE OF DERIVING
DIVIDEND INCOME OR IN EXPECTATION OF AN INCREASE IN MARKET PRICE OF OUR SHARES
FROM THE DECLARATION AND PAYMENT OF DIVIDENDS, YOUR INVESTMENT WILL BE
COMPROMISED BECAUSE WE DO NOT INTEND TO PAY DIVIDENDS.
We currently intend to retain our cash for the continued development of our
business. We do not intend to pay cash dividends on our common stock in the
foreseeable future. As a result, your return on investment will be solely
determined by your ability to sell your shares in a secondary market.
FORWARD-LOOKING STATEMENTS
We use words like "expects," "believes," "intends," "anticipates," "plans,"
"targets," "projects" or "estimates" in this prospectus. When used, these words
and other, similar words and phrases or statements that an event, action or
result "will," "may," "could," or "should" occur, be taken or be achieved,
identify "forward-looking" statements. Such forward-looking statements reflect
our current views with respect to future events and are subject to certain
risks, uncertainties and assumptions, including, the risks and uncertainties
outlined under the sections titled "Risk Factors and Uncertainties" beginning at
page 4 of this prospectus, "Description of the Business" beginning at page 31 of
this prospectus and "Management's Discussion and Analysis" beginning at page 41
of this prospectus. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, believed, estimated or expected.
These forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results and
performance to be materially different from any future results or performance
expressed or implied by these forward-looking statements. These factors include,
among other things, those matters discussed under the caption "Risk Factors," as
well as the following:
o the impact of general economic conditions in the Peru;
o industry conditions, including competition;
o business strategies and intended results;
o our ability to integrate acquisitions into our operations and
management;
o risks associated with the hotel industry and real estate markets in
general;
o the impact of terrorist activity or war, threats of terrorist activity
or war and responses to terrorist activity on the economy in general
and the travel and hotel industries in particular;
o travelers' fears of exposure to contagious diseases;
o legislative or regulatory requirements; and
o access to capital markets.
Although we believe that these statements are based upon reasonable
assumptions, we can give no assurance that our goals will be achieved. Given
these uncertainties, prospective investors are cautioned not to place undue
reliance on these forward-looking statements. These forward-looking statements
are made as of the date of this report. We assume no obligation to update or
revise them or provide reasons why actual results may differ.
DIVIDEND POLICY
We do not expect to pay cash dividends in the foreseeable future. Any
further determination to pay cash dividends will be at the discretion of our
board of directors and will be dependent on the financial condition, operating
results, capital requirements and other factors that our board deems relevant.
13
SELLING SHAREHOLDERS
This prospectus covers the offering of up to 6,481,334 shares of our common
stock by Selling Shareholders. We will not receive any proceeds from the sale of
the shares by the Selling Shareholders.
If we issue all of the common stock issuable upon exercise of the Class A
Warrants held by Selling Shareholders, we will receive proceeds of $2,781,334.
We intend to use such proceeds, if any, for general working capital purposes. We
cannot assure you that any of the warrants will be exercised.
The shares issued to the Selling Shareholders or issuable to Selling
Shareholders upon exercise of the Class A Warrants are "restricted" shares under
applicable federal and state securities laws and are being registered to give
the Selling Shareholders the opportunity to sell their shares. The registration
of such shares does not necessarily mean, however, that any of these shares will
be offered or sold by the Selling Shareholders. The Selling Shareholders may
from time to time offer and sell all or a portion of their shares in the
over-the-counter market, in negotiated transactions, or otherwise, at market
prices prevailing at the time of sale or at negotiated prices.
The registered shares may be sold directly or through brokers or dealers,
or in a distribution by one or more underwriters on a firm commitment or best
efforts basis. To the extent required, the names of any agent or broker-dealer
and applicable commissions or discounts and any other required information with
respect to any particular offer will be set forth in an accompanying prospectus
supplement. See "Plan of Distribution" beginning on page 19 of this prospectus.
The Selling Shareholders reserve the sole right to accept or reject, in whole or
in part, any proposed purchase of the registered shares to be made directly or
through agents. The Selling Shareholders and any agents or broker-dealers that
participate with the Selling Shareholders in the distribution of their
registered shares may be deemed to be "underwriters" within the meaning of the
Securities Act of 1933, as amended, and any commissions received by them and any
profit on the resale of the registered shares may be deemed to be underwriting
commissions or discounts under the Securities Act.
We will receive no proceeds from the sale of the registered shares, and we
have agreed to bear the expenses of registration of the shares, other than
commissions and discounts of agents or broker-dealers and transfer taxes, if
any.
SELLING SHAREHOLDERS INFORMATION
The following are the Selling Shareholders who own and/or have the right to
acquire pursuant to the exercise of Class A Warrants shares of our common stock
covered in this prospectus. Certain Selling Shareholders have the right to
acquire the shares of common stock upon the exercise of Class A Warrants sold in
our private placements. See "Transactions with Selling Shareholders" beginning
on page 18 of this prospectus for further details. At May 19, 2006, we had
21,815,667 shares of common stock issued and outstanding.
Number of
Before Offering Shares Offered After Offering
- -----------------------------------------------------------------------------------------------------------------------------------
Percentage of
Total Number of Shares owned
Shares Beneficially Percentage of Shares Owned After
Name Owned(1) Shares Owned(1) After Offering(2) Offering(3)
- -----------------------------------------------------------------------------------------------------------------------------------
IFG Investments Services Inc.(4) 500,000 2.27% 500,000 -- --
Suite 4 Temple Bldg
Prince William & Main Street
Charlestown, Federation of St.
Kits & Nevis, West Indies
IFG Investments Services Inc.(4) 820,000 3.69% 820,000 -- --
Suite 4 Temple Bldg
Prince William & Main Street
Charlestown, Federation of St.
Kits & Nevis, West Indies
14
Number of
Before Offering Shares Offered After Offering
- -----------------------------------------------------------------------------------------------------------------------------------
Percentage of
Total Number of Shares owned
Shares Beneficially Percentage of Shares Owned After
Name Owned(1) Shares Owned(1) After Offering(2) Offering(3)
- -----------------------------------------------------------------------------------------------------------------------------------
Merle Lelievre-Parsons(5) 20,000 * 20,000 -- --
#4 - 529 Johnstone Rd
Parksville, BC
Canada V9P 2K1
Lee Yule Investments(6) 7,000 * 7,000 -- --
17718 - 64 Avenue
Edmonton, AB
Canada T5T 4J5
Frederick H. Drury(7) 132,000 * 132,000 -- --
229 - 279 Suder Greens Drive
Edmonton, AB
Canada T5T 6X6
T. Ron Harper(8) 40,000 * 40,000 -- --
3129 - 30th Avenue
Vernon, BC
Canada V1T 2C4
Caroline Gilchrist(9) 40,000 * 40,000 -- --
370 Poplar Point Drive
Kelowna, BC
Canada V1Y 1Y1
Herbert Woo(10) 6,000 * 6,000 -- --
#439, 1406 Hodgson Way
Edmonton, AB
Canada T6R 3K1
Tough Equities Inc.(11) 6,800 * 6,800 -- --
9 Paquette Place
St. Albert, Alberta
Canada T8N 5K8
Amir Khoury(12) 12,000 * 12,000 -- --
3 Lorrain C'r
St. Albert
Judson Rich(13) 8,000 * 8,000 -- --
11107 - 21 Avenue
Edmonton, AB
Canada T6J 5C7
15
Number of
Before Offering Shares Offered After Offering
- -----------------------------------------------------------------------------------------------------------------------------------
Percentage of
Total Number of Shares owned
Shares Beneficially Percentage of Shares Owned After
Name Owned(1) Shares Owned(1) After Offering(2) Offering(3)
- -----------------------------------------------------------------------------------------------------------------------------------
Suhail Khoury(14) 13,400 * 13,400 -- --
#100 Quesnell Crest
Edmonton, AB
Canada
Matt Saunders(15) 4,000 * 4,000 -- --
5891 Vardon Place
Delta, BC
Canada V4L 1E8
Mark Koroll(16) 33,300 * 33,300 -- --
9300 Aberdeen Rd
Coldstream, BC
Canada V1B 2K5
Ross Parsons(17) 33,300 * 33,300 -- --
12009 Husband Road
Vernon, BC
Canada V1B 1M9
695809 B.C. Ltd.(18) 4,000 * 4,000 -- --
620 - 800 W. Pender St
Vancouver, BC
Canada V6A 4E1
Robert J. Kaplan(19) 33,334 * 33,334 -- --
245 E. 87th Street
New York NY 10128
690044 BC Ltd.(20) 70,000 * 70,000 -- --
4 - 1037 W. Broadway
Vancouver, BC
Canada V6H 1E3
Raymond Lim(21) 6,000 * 6,000 -- --
3493 William Street
Vancouver, BC
Canada V5K 2Z5
John Fraser(22) 100,000 * 100,000 -- --
300 - 31 Bastion Square
Victoria, BC
Canada V8W 1J1
16
Number of
Before Offering Shares Offered After Offering
- -----------------------------------------------------------------------------------------------------------------------------------
Percentage of
Total Number of Shares owned
Shares Beneficially Percentage of Shares Owned After
Name Owned(1) Shares Owned(1) After Offering(2) Offering(3)
- -----------------------------------------------------------------------------------------------------------------------------------
Alan R. Mabee(23) 6,000 * 6,000 -- --
10205 - 137 St. NW
Edmonton, AB
Canada
Clear Channel Inc.(24) 1,800,000 8.1% 1,000,000 -- --
Temple Financial Centre
Leeward Highway
Providenciales, Turks &
Caicos Isl., B.W.I
Anthony Boyden(25) 36,200 * 36,200 -- --
14 Willies Round
Stouffville, ON
Canada L1N 4A6
Blackpool Ltd.(26) 1,800,000 8.1% 800,000 -- --
Temple Financial Centre
Leeward Highway
Providenciales, Turks &
Caicos Isl., B.W.I
David Wong Liu(27)(32) 5,942,095 27.74% 1,500,000(27) 3,942,095(27) 13.49%
355 Lemon Ave., Suite C
Walnut, CA 91789
Lee Kuen Cheung(28)(32) 1,399,353 6.41% 500,000 899,353 4.12%
RM 1111, 11/F Hang Lung
Centre Arcad
2-28 Paterson Street,
Causeway Bay
Hong Kong
Guoxiu Yan(29)(32) 5,942,095 27.24% 1,500,000(29) 3,942,095(27) 13.49%
355 Lemon Ave., Suite C
Walnut, CA 91789
Zheng Liu(30)(32) 215,285 0.99% 100,000 115,285 *
355 Lemon Ave., Suite C
Walnut, CA 91789
Luisa Hong Wong(31)(32) 215,285 0.99% 100,000 115,285 *
355 Lemon Ave., Suite C
Walnut, CA 91789
17
Number of
Before Offering Shares Offered After Offering
- -----------------------------------------------------------------------------------------------------------------------------------
Percentage of
Total Number of Shares owned
Shares Beneficially Percentage of Shares Owned After
Name Owned(1) Shares Owned(1) After Offering(2) Offering(3)
- -----------------------------------------------------------------------------------------------------------------------------------
Tao Tao Chow(33) 40,000 * 40,000 -- --
235 El Vado Road
Diamond Bar, CA 91765
Richworld Resources Inc.(34) 10,000 * 10,000 -- --
16322 E. Citrus PL
La Puente, CA 91744
- -----------------------------------------------------------------------------------------------------------------------------------
Total 11,553,35 52.03% 6,481,334 5,072,018 21.85%
* Less than 1%.
(1) All percentages are based on 21,815,667 shares of common stock issued and
outstanding on May 19, 2006. Beneficial ownership is calculated based on
the number of shares of common stock that each selling shareholder owns or
controls or has the right to acquire within 60 days of May 19, 2006.
(2) This table assumes that the Selling Shareholders will sell all of their
shares available for sale during the effectiveness of the registration
statement that includes this prospectus. The Selling Shareholders are not
required to sell their shares. See "Plan of Distribution" beginning on page
19.
(3) Assumes that all shares registered for resale by this prospectus have been
issued and sold.
(4) IFG Investments Services Inc. is organized under the laws of Nevis. Daniel
McMullin has sole investment and voting control over the securities. The
Selling Shareholder holds 660,000 shares of common stock of Chilco and
Class A Warrants exercisable to acquire 660,000 shares of common stock at
$2.00 per share for a period of one year. The Class A warrants may not be
exercised if the exercise would result in the holder beneficially owning
more than 9.99% of our issued and outstanding common stock.
(5) Merle Lelievre-Parsons holds 10,000 shares of common stock of Chilco and
Class A Warrants exercisable to acquire 10,000 shares of common stock at
$2.00 per share for a period of one year.
(6) Lee Yule Investments is organized under the laws of Alberta. Lee Yule has
sole investment and voting control over the securities. The Selling
Shareholder holds 3,500 shares of common stock of Chilco and Class A
Warrants exercisable to acquire 3,500 shares of common stock at $2.00 per
share for a period of one year.
(7) Frederick H. Drury holds 66,000 shares of common stock of Chilco and Class
A Warrants exercisable to acquire 66,000 shares of common stock at $2.00
per share for a period of one year.
(8) T. Ron Harper holds 20,000 shares of common stock of Chilco and Class A
Warrants exercisable to acquire 20,000 shares of common stock at $2.00 per
share for a period of one year.
(9) Caroline Gilchrist holds 20,000 shares of common stock of Chilco and Class
A Warrants exercisable to acquire 20,000 shares of common stock at $2.00
per share for a period of one year.
(10) Herbert Woo holds 3,000 shares of common stock of Chilco and Class A
Warrants exercisable to acquire 3,000 shares of common stock at $2.00 per
share for a period of one year.
(11) Tough Equities Inc. is organized under the laws of Alberta. Barry Touch and
Ruby Tough have sole investment and voting control over the securities. The
Selling Shareholder holds 3,400 shares of common stock of Chilco and Class
A Warrants exercisable to acquire 3,400 shares of common stock at $2.00 per
share for a period of one year.
(12) Amir Khoury holds 6,000 shares of common stock of Chilco and Class A
Warrants exercisable to acquire 6,000 shares of common stock at $2.00 per
share for a period of one year.
(13) Judson Rich holds 4,000 shares of common stock of Chilco and Class A
Warrants exercisable to acquire 4,000 shares of common stock at $2.00 per
share for a period of one year.
(14) Suhail Khoury holds 6,700 shares of common stock of Chilco and Class A
Warrants exercisable to acquire 6,700 shares of common stock at $2.00 per
share for a period of one year.
(15) Matt Saunders holds 2,000 shares of common stock of Chilco and Class A
Warrants exercisable to acquire 2,000 shares of common stock at $2.00 per
share for a period of one year.
(16) Mark Koroll holds 16,650 shares of common stock of Chilco and Class A
Warrants exercisable to acquire 16,650 shares of common stock at $2.00 per
share for a period of one year.
(17) Ross Parsons holds 16,650 shares of common stock of Chilco and Class A
Warrants exercisable to acquire 16,650 shares of common stock at $2.00 per
share for a period of one year.
(18) 695809 B.C. Ltd. is organized under the laws of British Columbia. Robert
Krause, our former President and a former director, has sole investment and
voting control over the securities. The Selling Shareholder holds 2,000
shares of common stock of Chilco and Class A Warrants exercisable to
acquire 2,000 shares of common stock at $2.00 per share for a period of one
year.
18
(19) Robert J. Kaplan holds 16,667 shares of common stock of Chilco and Class A
Warrants exercisable to acquire 16,667 shares of common stock at $2.00 per
share for a period of one year.
(20) 690044 BC Ltd. is organized under the laws of British Columbia. Andrew
Britnell has sole investment and voting control over the securities. The
Selling Shareholder holds 35,000 shares of common stock of Chilco and Class
A Warrants exercisable to acquire 35,000 shares of common stock at $2.00
per share for a period of one year.
(21) Raymond Lim holds 3,000 shares of common stock of Chilco and Class A
Warrants exercisable to acquire 3,000 shares of common stock at $2.00 per
share for a period of one year.
(22) John Fraser holds 50,000 shares of common stock of Chilco and Class A
Warrants exercisable to acquire 50,000 shares of common stock at $2.00 per
share for a period of one year.
(23) Ian R. Mabee holds 3,000 shares of common stock of Chilco and Class A
Warrants exercisable to acquire 3,000 shares of common stock at $2.00 per
share for a period of one year.
(24) Blackpool Ltd. is organized under the laws of Turks & Caicos. Janice
Stevens has sole investment and voting control over the securities.
Blackpool Ltd. holds 400,000 shares of common stock of Chilco and Class A
Warrants exercisable to acquire 400,000 shares of common stock at $2.00 per
share for a period of one year. Janice Stevens and John Meyer are married,
and consequently, Blackpool Ltd. and Clear Channel Inc. are deemed to have
the same beneficial owner. The Class A warrants may not be exercised if the
exercise would result in the holder benefically owning more than 9.99% of
our issued and outstanding common stock.
(25) Anthony Boyden holds 43,100 shares of common stock of Chilco and Class A
Warrants exercisable to acquire 43,100 shares of common stock at $2.00 per
share for a period of one year.
(26) Clear Channel Inc. is organized under the laws of Turks & Caicos, and owns
1,000,000 shares of common stock. John Meyer has sole investment and voting
control over the securities. Janice Stevens and John Meyer are married, and
consequently, Blackpool Ltd. and Clear Channel Inc. are deemed to have the
same beneficial owner. The Class A warrants may not be exercised if the
exercise would result in the holder benefically owning more than 9.99% of
our issued and outstanding common stock.
(27) Includes 1,753,640 shares of common stock held in escrow pursuant to escrow
arrangements entered into in connection with our acquisition of Kubuk
International Inc. David Lui is the father of Tom Liu, our Chief Executive
Officer, and husband of Guoxiu Yan, a selling shareholder. The Principal
Shareholders of Kubuk, Tom Liu and David Liu, contributed a total of
1,250,000 Exchange Shares into escrow (of which David Liu contributed
499,622 shares) for the purposes of exercising certain co-sale rights
granted by the Registrant to the Shareholder Principals. David Liu and
Guoxin Yan, as husband and wife, are deemed to beneficially own each
other's common stock.
(28) Includes 405,609 shares of common stock held in escrow pursuant to escrow
arrangements entered into in connection with our acquisition of Kubuk
International Inc.
(29) Includes 469,589 shares of common stock held in escrow pursuant to escrow
arrangements entered into in connection with our acquisition of Kubuk
International Inc. Guoxiu Yan is the mother of Tom Liu, Chief Executive
Officer of Chilco River Holdings Inc., and the wife of David Liu, a selling
shareholder and major shareholder of Chilco. David Liu and Guoxin Yan, as
husband and wife, are deemed to beneficially own each other's common stock.
(30) Includes 62,402 shares of common stock held in escrow pursuant to escrow
arrangements entered into in connection with our acquisition of Kubuk
International Inc. Zheng Liu is the sister of Tom Liu and daughter of David
Liu and Guoxin Yan. However, they do not control the right to vote or
investment power of each other's common stock.
(31) Includes 62,402 shares of common stock held in escrow pursuant to escrow
arrangements entered into in connection with our acquisition of Kubuk
International Inc.
(32) This shareholder was a shareholder of Kubuk International and received
these shares in the Share Exchange, which closed on July 15, 2005. Each
Kubuk Shareholder received 0.3749970588 shares of common stock of Chilco
River Holdings, Inc. for each share of Kubuk International common stock
tendered in connection with the Share Exchange. The Kubuk Shareholders
placed a total of 5,000,000 Exchange Shares into escrow to secure certain
obligations by Chilco and the Principal Shares to raise $5,000,000 at a
minimum share price of $1.00 per share. The Kubuk Shareholders placed a
total of 2,000,000 Exchange Shares into escrow to satisfy certain
obligations to consultants to Kubuk, which shares were cancelled and
returned to treasury on December 30, 2005. The Kubuk Shareholders have
voting power over these shares pending release from escrow.
(33) Tao Tao Chow holds 20,000 shares of common stock of Chilco and Class A
Warrants exercisable to acquire 20,000 shares of common stock at $2.00 per
share for a period of one year.
(34) Richworld Resources Inc. holds 5,000 shares of common stock of Chilco and
Class A Warrants exercisable to acquire 5,000 shares of common stock at
$2.00 per share for a period of one year. Jason Liu has sole investment and
voting control over the securities.
Based on information provided to us, none of the selling shareholders are
affiliated or have been affiliated with any broker-dealer in the United States.
Except as otherwise provided in this prospectus, none of the selling
shareholders are affiliated or have been affiliated with us, any of our
predecessors or affiliates during the past three years.
19
TRANSACTIONS WITH SELLING SHAREHOLDERS
TRANSACTIONS WITH PRIVATE PLACEMENT SELLING SHAREHOLDERS
On December 17, 2005, our Board of Directors authorized an initial direct
private placement offering of Units at $1.50 per Unit under the terms of a Unit
Purchase Agreement. Each Unit consists of one share of common stock, and a Class
A Warrant exercisable at $2.00 per share for one year from the date of Closing.
Under the terms of the Unit Purchase Agreement, we are required to use $1
million from proceeds from the offering to renovate the casino floor of the
Bruce Hotel and Casino and $1 million for marketing and business development. We
also granted the investors registration rights and agreed to file a resale
registration statement with the Securities and Exchange Commission within 60
days of the closing date of the private placement. If we failed to file the
registration statement within 60 days, we agreed to pay the investors liquidated
damages equal to 2% of the number of shares of common stock issued to the
investor in the private placement for each month we are in default. We also
agreed not to offer and sell shares of common stock or common stock equivalents
for a period of 120 days following the effectiveness of the registration
statement, except for certain specified transactions, including an offer and
sale of up to 2,000,000 shares of common stock at $1.50 per share. The private
placement was made to non-U.S. persons in off-shore transactions in reliance
upon the exemption from registration available under Rule 903 of Regulation S of
the Securities Act and one accredited investor in the United States pursuant to
an exemption available under Section 4(2) of the Securities Act.
We issued 1,390,667 Units to raise gross proceeds of $2,086,000. 695809
B.C. Ltd., a British Columbia corporation controlled by Robert Krause, our
former President and a former director, purchased 2,000 units in the private
placement.
We are registering the shares of common stock issued in the private
placements and the shares of common stock issuable upon exercise of the Class A
Warrants for resale by the selling shareholders in the registration statement in
which this prospectus is included.
TRANSACTIONS WITH CLEAR CHANNEL
Effective on December 29, 2005, we entered into a Consulting Agreement with
Clear Channel Inc. under which we retained Clear Channel to provide us with
strategic marketing and business planning consulting services and to assist us
in developing corporate governance policies, recruiting qualified officers and
director candidates and developing a corporate finance strategy. We paid Clear
Channel a consulting fee of one million (1,000,000) shares of our common stock.
The Consulting Agreement was for an initial term of one year; however, due to
delays in our ability to raise capital and complete the renovations of our
casino and slot room, we and Clear Channel agreed to delay the implementation of
our marketing efforts and business development program until sufficient capital
is available and our renovations near completion. As a result of this decision,
we amended the Consulting Agreement to extend the term of the Agreement to three
years. The shares issued to Clear Channel were issued under the assumption that
the term of the Agreement would be one year, and the shares are non-
forfeitable. Clear Channel is a non-U.S. person and the offer and sale was made
in a private placement in reliance upon Section 4(2) of the Securities Act. The
fair value of the one million shares issued to Clear Channel is determined as
roughly $1,300,000 and will be expensed as consulting fees over the next three
years starting January 2006. Clear Channel was at arms' length to us when the
consulting agreement was negotiated. We believe that this transaction was on
comparable terms as transactions we could have obtained from unaffiliated
third-parties.
John Meyer has sole investment and voting power over the common stock owned
by Clear Channel and is married to Janice Stevens, who has sole investment and
voting power over the common stock owned by Blackpool Ltd. Consequently, Clear
Channel and Blackpool are deemed to have the same beneficial owner. Blackpool is
named as a selling shareholder in this prospectus.
TRANSACTIONS WITH FORMER SHAREHOLDERS OF KUBUK INTERNATIONAL INC.
Each of David Wong Liu, Lee Kuen Cheung, Guoxiu Yan, Zheng Liu and Luisa
Hong Wong was a shareholder of Kubuk International and received shares in the
Share Exchange, which closed on July 15, 2005. Each Kubuk Shareholder received
0.3749970588 shares of common stock of Chilco River Holdings, Inc. for each
share of Kubuk International common stock tendered in connection with the Share
Exchange. The Kubuk Shareholders placed a total of 5,000,000 Exchange Shares
into escrow to secure certain obligations by Chilco and the Principal Shares to
raise $5,000,000 at a minimum share price of $1.00 per share. The Kubuk
Shareholders placed a total of 2,000,000 Exchange Shares into escrow to satisfy
certain obligations to consultants to Kubuk, which shares were
20
cancelled and returned to treasury on December 30, 2005. The Kubuk Shareholders
have voting power over these shares pending release from escrow. We are
registering 2,700,000 shares of common stock of these former shareholders of
Kubuk International Inc. in the registration statement in which this prospectus
is included.
David Wong Liu is the husband of Guoxiu Yan, a selling shareholder, and
father of Tom Liu, our Chief Executive Officer, and was a principal shareholder,
founder, officer and director of Kubuk International Inc. Guoxiu Yan is the wife
of David Wong Liu and mother of Tom Liu, our Chief Executive Officer.
PLAN OF DISTRIBUTION
We are registering the shares of common stock on behalf of the selling
shareholders. When we refer to selling shareholders, we intend to include donees
and pledgees selling shares received from a named selling shareholder after the
date of this prospectus. All costs, expenses and fees in connection with this
registration of the shares offered under this registration statement will be
borne by us. Brokerage commissions and similar selling expenses, if any,
attributable to the sale of shares will be borne by the selling shareholders.
After the effectiveness of the registration statement in which this prospectus
forms a part, sales of shares may be effected by the selling shareholders from
time-to-time in one or more types of transactions (which may include block
transactions) on the over-the-counter market, in negotiated transactions,
through put or call options transactions relating to the shares, through short
sales of shares, or a combination of such methods of sale, at market prices
prevailing at the time of sale, or at negotiated prices. Such transactions may
or may not involve brokers or dealers. The selling shareholders have advised us
that they have not entered into any agreements, understandings or arrangements
with any underwriters or broker-dealers regarding the sale of their securities,
nor is there an underwriter or coordinating broker acting in connection with the
proposed sale of shares by the selling shareholders.
The selling shareholders may effect such transactions by selling shares
directly to purchasers or through broker-dealers, which may act as agents or
principals. Such broker-dealers may receive compensation in the form of
discounts, concessions, or commissions from the selling shareholders and/or
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal, or both (which compensation as to a particular
broker-dealer might be in excess of customary commissions).
The selling shareholders and any broker-dealers that act in connection with
the sale of shares might be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act, and any commissions received by such
broker-dealers and any profit on the resale of shares sold by them while acting
as principals might be deemed to be underwriting discounts or commissions under
the Securities Act. The selling shareholders may agree to indemnify any agent,
dealer or broker-dealer that participates in transactions involving sales of the
shares against some liabilities arising under the Securities Act.
Because the selling shareholders may be deemed to be "underwriters" within
the meaning of Section 2(11) of the Securities Act, the selling shareholders
will be subject to the prospectus delivery requirements of the Securities Act.
We have informed the selling shareholders that the anti-manipulative provisions
of Regulation M promulgated under the Exchange Act may apply to their sales in
the market.
In the event that the registration statement is no longer effective, the
selling shareholders may resell all or a portion of the shares in open market
transactions in reliance upon Rule 144 under the Securities Act, provided they
meet the criteria and conform to the requirements of such Rule, including the
minimum one year holding period.
Upon being notified by any selling shareholder that any material
arrangement has been entered into with a broker-dealer for the sale of shares
through a block trade, special offering, exchange distribution or secondary
distribution or a purchase by a broker or dealer, we will file a supplement to
this prospectus, if required, under Rule 424(b) of the Act, disclosing:
o the name of each selling shareholder(s) and of the participating
broker-dealer(s),
o the number of shares involved,
o the price at which the shares were sold,
21
o the commissions paid or discounts or concessions allowed to the
broker-dealer(s), where applicable,
o that the broker-dealer(s) did not conduct any investigation to verify
information set out or incorporated by reference in this prospectus;
and
o other facts material to the transaction.
LEGAL PROCEEDINGS
Neither we nor any of our property are currently subject to any material
legal proceedings or other regulatory proceedings.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth certain information with respect to our
current directors, executive officers and key employees. The term for each
director expires at our next annual meeting or until his or her successor is
appointed. The ages of the directors, executive officers and key employees are
shown as of March 31, 2006.
Name and Municipality of Director/Officer
Residence Current Office Principal Occupation Since Age
- ------------------------------------------------------------------------------------------------------------------------
Tom Liu Chairman, Chief Chief Executive Officer of August 3, 2005 25
Executive Officer the corporation; General
Manager for Kubuk Investment
S.A.C. and Kubuk Gaming S.A.C
Winston Yen Chief Financial Officer Certified Public Accountant December 30, 2005 39
and managing member of
Accellence, LLP; Chief
Financial Officer of the
corporation
Gavin Roy Director Principal of Magellan May 10, 2005 39
Management Limited
Wai Yung Lau Director Chief Financial Officer of August 3, 2005 43
Bruce Group International,
Hong Kong
Jack Xu Director Consultant to Kubuk August 3, 2005 57
Investment
Yong Yang Director General Manager for Canada August 3, 2005 44
Higher Investment Co. Ltd.
The following is a description of the business background of the directors
and executive officers of Chilco River Holdings, Inc.
TOM LIU
Tom Liu has been Chief Executive Officer of Chilco River Holdings Inc.
since July 15, 2005. Prior to the Share Exchange, Mr. Liu has been with Bruce
Grupo Diversion since 1998. Mr. Liu is fluent in four languages, English,
Spanish, Cantonese, and Mandarin. He was appointed as the Casino Vault Manager
of the Bruce Hotel and Casino in 1998, and worked closely with the gaming
commission in the casino's daily results. By 2000, he was promoted to Casino
Floor Manager, where he worked directly with the casino floor operations and
assisted in marketing and promotions. Mr. Liu serves as the General Manager for
Kubuk Investment S.A.C. and Kubuk Gaming S.A.C., each a wholly-owned operating
subsidiary of Chilco. Mr. Liu dedicates 100% of his time as Chief Executive
Officer of Chilco.
22
WINSTON YEN
Winston Yen is a certified public accountant and founding member of
ACCellence, LLP, based in Los Angeles and offers extensive accounting, tax, and
consulting services to local and international clients. Mr. Yen graduated from
the National Chen-Chi University with an accounting degree in 1990. He worked as
an audit staff on an internship at the Taipei office of Touche Ross in
1989-1990, and attended the University of Illinois at Urbana-Champaign and
received a Master of Accounting Science degree in 1994. Mr. Yen began his public
accounting career in 1994 with Tang, Chen, Chang and Lin, CPAs, a local
accounting firm in City of Industry, California. In 1997, he was a supervising
senior in the tax department of Parks Palmer Turner & Yemenidjian, LLP, which
later became part of CBIZ Inc. In 2000 and 2001, Mr. Yen was a manager in the
Los Angeles tax department of Moss Adams, LLP, a west coast regional public
accounting firm. In 2001, Mr. Yen joined the practice of Mr. Harry C. Lin. In
2005, he founded ACCellence, LLP and is now the managing partner of the LLP. Mr.
Yen was appointed Chief Financial Officer of Chilco River Holdings Inc. on
December 30, 2005, and dedicates approximately 20 hours per month in his role as
Chief Financial Officer of Chilco.
GAVIN ROY
Mr. Roy has extensive experience in the financial services business. Mr.
Roy is currently the principal of Magellan Management Company, a venture capital
firm in Vancouver, British Columbia. Prior to forming Magellan Management in
2005, Mr. Roy's principal occupation during the past five years has been as an
investment advisor with Canaccord Capital Corporation, Octagon Capital
Corporation, and Global Securities Corporation. Mr. Roy has been a registrant in
Canada with the British Columbia, Alberta, Saskatchewan and Ontario securities
commissions. Mr. Roy is the founding shareholder of Chilco River Holdings, Inc.
WAI YUNG LAU
Since 2004, Wai Yung Lau has served as the Chief Financial Officer of Bruce
Grupo Hong Kong Limited. Mrs. Lau moved to Hong Kong in 2003 and was employed by
ING Insurance Group, where she was an advisor in investments, life insurance and
finance until 2004. Prior to joining ING, she was the Chief Financial Officer
since 1997 of WuJin Construction Co., Chengdu, China, a construction company
involved in many projects in Chengdu, China, such as the Chengdu Technology
Tower and SiChuan Lung Quan Resort.
YONG YANG
Yong Yang received his bachelor degree in finance from the Northwest
University of Business in 1989. Soon after graduation, Mr. Yang was appointed
General Manager of NanChong Securities Exchange Company. During his term, Mr.
Yang helped two state owned companies go public on the Chinese stock exchange.
From 1994 to 1999, Mr. Yang joined HuaXia Securities, Chengdu branch, and served
as General Manager, specializing in investment banking and acquisitions. Mr.
Yang then joined the New Light Technology Investment Company as the President of
the company. The company engaged in retro-reflecting material development and
production; now the company's product dominates the market in Sichuan, China.
Mr. Yang immigrated to Canada in July of 2000, where he joined Canada Higher
Investment Co. Ltd. as General Manager.
23
JACK XU
Jack Xu studied in the School of Business of HaErBin, China and received
degrees in business administration and finance. From 1982 to 1995, Mr. Xu helped
establish SiChuan Investment Bank, where he served as vice president, and
specialized in bonds, securities, and investment banking. Mr. Xu then served as
President of the SiChuan JiaLin Investment in Hong Kong from 1995 to 2000, where
he provided advice on investment banking, stock analysis and mergers and
acquisitions. Since 2001, Mr. Xu has been an employee of Kubuk Investments, a
company that holds interests in a variety of companies, including companies in
the manufacturing, retail and service industries. Mr. Xu manages and oversees
the daily operations of Kubuk Investments, including personnel, logistic control
and other management decisions.
Set forth below are our company's current practices relating to the
functions associated with an audit committee, a compensation committee and a
corporate governance and nominating committee.
AUDIT COMMITTEE
We have no standing audit committee. Our Board of Directors performs the
function of an audit committee. None of the members of our board of directors
satisfies the criteria for an audit committee financial expert under Item 401(e)
of Regulation S-B of the rules of the Securities and Exchange Commission. Due to
our relatively small size, the relatively small number of financial transactions
during the proceeding fiscal year and the fact that we have negative working
capital at this time we have been unable to secure the services of an audit
committee financial expert. Only Winston Yen would be considered independent as
defined by American Stock Exchange listing standards.
Our board of directors will meet with our management and our external
auditors to review matters affecting financial reporting, the system of internal
accounting and financial controls and procedures and the audit procedures and
audit plans. Our board of directors will review our significant financial risks,
will be involved in the appointment of senior financial executives and will
annually review our insurance coverage and any off-balance sheet transactions.
Our board of directors will monitor our audit and the preparation of
financial statements and all financial disclosure contained in our SEC filings.
Our board of directors will appoint our external auditors, monitor their
qualifications and independence and determine the appropriate level of their
remuneration. The external auditors report directly to the board of directors.
Our board of directors has the authority to terminate our external auditors'
engagement and approve in advance any services to be provided by the external
auditors which are not related to the audit.
COMPENSATION
We have no Compensation Committee. Our board of directors is responsible
for considering and authorizing terms of employment and compensation of
executive officers and providing advice on compensation structures in the
various jurisdictions in which we operate. In addition, our board of directors
reviews both our overall salary objectives and significant modifications made to
employee benefit plans, including those applicable to executive officers, and
proposes any awards of stock options.
CORPORATE GOVERNANCE AND NOMINATING
We have no Corporate Governance and Nominating Committee due to our small
size.
Our board of directors is responsible for developing our approach to
corporate governance issues.
CODE OF ETHICS
We have adopted a corporate code of ethics. We believe our code of ethics
is reasonably designed to deter wrongdoing and promote honest and ethical
conduct, to provide full, fair, accurate, timely and understandable
24
disclosure in public reports, to comply with applicable laws, to ensure prompt
internal reporting of code violations, and to provide accountability for
adherence to the code.
CORPORATE CEASE TRADE ORDERS AND BANKRUPTCIES
Except as disclosed in this report, none of our directors or officers is,
or has been within the ten years before the date of this report, a director or
officer of any other company that, while such person was acting in that
capacity, was the subject of a cease trade or similar order, or an order that
denied the company access to any statutory exemptions under applicable
securities legislation, for a period of more than 30 consecutive days, or was
declared bankrupt, made a proposal under any legislation relating to bankruptcy
or insolvency or was subject to or instituted any proceedings, arrangements or
compromise with creditors or had a receiver, receiver manager or trustee
appointed to hold the assets of that company.
PENALTIES AND SANCTIONS
None of our directors or officers has been subject to any penalties or
sanctions imposed by a court relating to any securities legislation or by any
securities regulatory authority or has entered into a settlement agreement with
any securities regulatory authority or been subject to any other penalties or
sanctions imposed by a court or regulatory body that would likely be considered
important to a reasonable investor in making an investment decision.
PERSONAL BANKRUPTCIES
None of our directors or officers has, within the ten years before the date
of this report, become bankrupt, made a proposal under any legislation relating
to bankruptcy or insolvency or was subject to or instituted any proceedings,
arrangements or compromises with creditors, or had a receiver, receiver manager
or trustee appointed to hold the assets of the director or officer.
CONFLICTS OF INTEREST
To our knowledge, and other than as disclosed in this report, there are no
known existing or potential conflicts of interest among us, our promoters,
directors and officers, or other members of management, or of any proposed
director, officer or other member of management as a result of their outside
business interests except that certain of the directors and officers serve as
directors and officers of other companies, and therefore it is possible that a
conflict may arise between their duties to us and their duties as a director or
officer of such other companies.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Our former President, Robert Krause, provided us with management services
and office premises. The management services are valued at $500 per month and
the office premises are valued at $500 per month. During the year ended December
31, 2004, donated services of $6,000 (2003 -- $4,000) and donated rent expense
of $6,000 (2003 -- $4,000) were charged to operations.
We acquired all of the issued and outstanding common stock of Kubuk
International Inc. in a share exchange transaction. We appointed five new
directors to our Board of Directors: Tom Liu, Wai Yung Lau, Nan Zheng Zhang,
Yong Yang and Sean Sullivan. After the Closing of the Share Exchange Agreement
with Kubuk, our Board of Directors consists of six members, the newly appointed
board members and Gavin Roy. Tom Liu was appointed as our Chairman of the Board
of Directors and Chief Executive Officer effective immediately upon the closing
of the Share Exchange. Mr. Sullivan resigned as a director in December 2005, and
Winston Yen was approved to our Board on December 30, 2005.
Effective on December 29, 2005, we entered into a Consulting Agreement with
Clear Channel Inc. under which we retained Clear Channel to provide us with
strategic marketing and business planning consulting services and to assist us
in developing corporate governance policies, recruiting qualified officers and
director candidates and developing a corporate finance strategy. We paid Clear
Channel a consulting fee of one million (1,000,000) shares
25
of our common stock. The Consulting Agreement had an initial term of one
year, which was subsequently extended to three years. John Meyer has sole
investment and voting power over the common stock owned by Clear Channel and is
married to Janice Stevens, who has sole investment and voting power over the
common stock owned by Blackpool Ltd. Consequently, Clear Channel and Blackpool
are deemed to have the same beneficial owner. Clear Channel was at arms' length
to us when the consulting agreement was negotiated.
As of December 31, 2005, we had no major indebtedness except for loans from
a major shareholder David Liu and a California corporation solely owned by Mr.
Liu. Mr. Liu and his wholly-owned entity advanced payments for our web design
fees, legal and accounting expenses, travel expenses, and casino renovation
costs during the year. The loans were evidenced by loan agreements and
promissory notes bearing zero interest. The unpaid loan balances owed to Mr. Liu
and his California corporation as of December 31, 2005 were $97,289 and $96,742,
respectively. We fully repaid these balances in January 2006.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth compensation paid to each of the individuals
who served as our Chief Executive Officer and our other most highly compensated
executive officers, our named executive officers, for the fiscal years ended
December 31, 2005, 2004 and 2003. The determination as to which executive
officers were most highly compensated was made with reference to the amounts
required to be disclosed under the "Salary" and "Bonus" columns in the table.
Annual Compensation Long Term Compensation
------------------- ----------------------
Awards Payouts
------ -------
Common Restricted
Shares Under Shares or Long Term
Other Annual Options/SARs Restricted Incentive All Other
Name and Fiscal Salary Bonus Compensation Granted Share Units Plan Payouts Compensation
Principal Position Year $ $ $ (#) ($) ($) ($)
- ------------------------------------------------------------------------------------------------------------------------------
Tom Liu(1) 2005 -- -- -- -- -- -- --
Chairman & CEO 2004 -- -- -- -- -- -- --
2003 -- -- -- -- -- -- --
Winston Yen(2) 2005 -- -- -- -- -- -- --
Chief Financial
Officer
Brent Krause(3) 2004 -- -- -- -- -- -- --
President 2003 -- -- -- -- -- -- --
Gavin Roy(4) 2004 -- -- -- -- -- -- --
Treasurer
- ------------------------------------------------------------------------------------------------------------------------------
(1) Tom Liu was appointed as our Chief Executive Officer on July 15, 2005.
(2) Mr. Yen was appointed as Chief Financial Officer on December 30, 2005.
(3) Mr. Krause resigned as our President and as a director on August 3, 2005.
(4) Mr. Roy was appointed as our secretary and a director on May 10, 2005.
DIRECTOR AND OFFICER STOCK OPTION/STOCK APPRECIATION RIGHTS (SARS) GRANTS
We have never granted any stock options or stock appreciation rights.
26
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR- AND FISCAL YEAR-END
OPTION/SAR VALUES
We have never granted any stock options or stock appreciation rights.
LONG TERM INCENTIVE PLAN AWARDS
No long-term incentive awards have been made by us to date.
DEFINED BENEFIT OR ACTUARIAL PLAN DISCLOSURE
We do not provide retirement benefits for the directors or officers.
COMPENSATION OF DIRECTORS
We had no arrangements pursuant to which our officers and directors are
compensated by us for their services in their capacity as directors or officers,
or for committee participation, involvement in special assignments or for
services as consultants or experts during the most recently completed financial
year.
Our former President, Robert Krause, provided us with management services
and office premises. The management services were valued at $500 per month and
the office premises were valued at $500 per month. During the year ended
December 31, 2004, donated services of $6,000 and donated rent expense of $6,000
were charged to operations. Mr. Krause resigned as our President and director
effective on August 3, 2005.
Our officers and directors may be reimbursed for any out-of-pocket expenses
incurred by them on our behalf.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
None
ADDITIONAL INFORMATION WITH RESPECT TO COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION IN COMPENSATIONDECISIONS
None.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The primary objectives of our executive compensation program are to enable
us to attract, motivate and retain outstanding individuals and to align their
success with that of our shareholders through the achievement of strategic
corporate objectives and creation of shareholder value. The level of
compensation paid to an individual is based on the individual's overall
experience, responsibility and performance. Our executive compensation program
consists of a base salary, performance bonuses and stock options. Our board of
directors approves all compensation to our executive officers.
27
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth information as of May 4, 2006 regarding the
ownership of our common stock by:
o each person who is known by us to own more than 5% of our shares of
common stock; and
o each named executive officer, each director and all of our directors
and executive officers as a group.
The number of shares beneficially owned and the percentage of shares
beneficially owned are based on 21,815,667 shares of common stock outstanding as
of May 4, 2006 .
Beneficial ownership is determined in accordance with the rules and
regulations of the Securities and Exchange Commission. Shares subject to options
that are exercisable within 60 days following May 4, 2006 are deemed to be
outstanding and beneficially owned by the optionee for the purpose of computing
share and percentage ownership of that optionee but are not deemed to be
outstanding for the purpose of computing the percentage ownership of any other
person. Except as indicated in the footnotes to this table, and as affected by
applicable community property laws, all persons listed have sole voting and
investment power for all shares shown as beneficially owned by them.
OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS
Name and Address of Beneficial Owner
Number of Percentage of Issued
Name/Position Address Shares(1)(2) and Outstanding
- --------------------------------------------------------------------------------------------------------------
Officers and Directors
- --------------------------------------------------------------------------------------------------------------
Tom Yu Liu, 355 Lemon Ave., Suite C 6,463,991(2)(3) 29.63%
Chairman and Chief Walnut, CA 91789
Executive Officer
Gavin Roy,(4) 595 Howe Street, Suite 206 86,000(4) *
Director Vancouver, B.C, V6C 2T5
Wai Yung Lau, 355 Lemon Ave., Suite C 2,475,779(2)(5) 11.35%
Director Walnut, CA 91789
Yong Yang 355 Lemon Ave., Suite C 215,285(2)(6) 0.99%
Director Walnut, CA 91789
Jack Xu, 355 Lemon Ave., Suite C 215,285(2)(7) 0.99%
Director Walnut, CA 91789
Winston Yen, 445 South Figueroa Street -0- Nil
Chief Financial Officer Suite 2600
Los Angeles, CA 90071
- --------------------------------------------------------------------------------------------------------------
5% Shareholders
- --------------------------------------------------------------------------------------------------------------
David Wong Liu 355 Lemon Ave., Suite C 5,942,095(2)(8) 27.24%
Walnut, CA 91789
Lee Kuen Cheung RM 1111, 11F, Hang Lung 1,399,353(2)(9) 6.41%
Centre Arcad
2-28 Paterson Street,
Causeway Bay
Hong Kong
28
Number of Percentage of Issued
Name/Position Address Shares(1)(2) and Outstanding
- --------------------------------------------------------------------------------------------------------------
Officers and Directors
- --------------------------------------------------------------------------------------------------------------
Guoxiu Yan 355 Lemon Ave., Suite C 5,942,095(2)(10) 27.24%
Walnut, CA 91789
Clear Channel Inc.(11) Temple Financial Centre 1,800,000 8.3%
Leeward Highway
Providenciales, Turks &
Caicos, Isl., BWI
Blackpool Ltd. (12) Temple Financial Centre 1,800,000 8.3%
Leeward Highway
Providenciales, Turks &
Caicos, Isl., BWI
- --------------------------------------------------------------------------------------------------------------
Officers and Directors as 9,456,340 43.35%
a Group (6 persons)(7)
- --------------------------------------------------------------------------------------------------------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the SEC
and includes voting and investment power with respect to shares. Unless
otherwise indicated, the persons named in this table have sole voting and
sole investment control with respect to all shares beneficially owned.
Figures shown are on a non-diluted basis.
(2) Shareholder received 0.3749970588 shares of common stock of Chilco River
Holdings, Inc. for each share of Kubuk International common stock tendered
in connection with the Share Exchange. The Kubuk Shareholders placed a
total of 5,000,000 Exchange Shares into escrow to secure certain
obligations by Chilco and the Principal Shares to raise $5,000,000 at a
minimum share price of $1.00 per share. The Kubuk Shareholders placed a
total of 2,000,000 Exchange Shares into escrow to satisfy certain
obligations to consultants to Kubuk, which shares were cancelled and
returned to treasury on December 30, 2005. The Kubuk Shareholders have
voting power over these shares pending release from escrow. The Principal
Shareholders of Kubuk, Tom Liu and David Liu, contributed a total of
1,250,000 Exchange Shares into escrow for the purposes of exercising
certain co-sale rights granted by the Registrant to the Shareholder
Representatives.
(3) Includes 2,622,738 shares of common stock held in escrow pursuant to escrow
arrangements entered into in connection with our acquisition of Kubuk
International Inc.
(4) In connection with the Share Exchange, Chilco and Mr. Roy entered into a
Share Contribution Agreement dated effective as of August 3, 2005, under
which Mr. Roy contributed an aggregate of 3,564,000 shares of the
Registrant's common stock to Chilco as a Capital Contribution. The
Registrant accepted the Capital Contribution and cancelled 3,564,000 shares
of common stock.
(5) Includes 717,617 shares of common stock held in escrow pursuant to escrow
arrangements entered into in connection with our acquisition of Kubuk
International Inc.
(6) Includes 62,402 shares of common stock held in escrow pursuant to escrow
arrangements entered into in connection with our acquisition of Kubuk
International Inc.
(7) Includes 62,402 shares of common stock held in escrow pursuant to escrow
arrangements entered into in connection with our acquisition of Kubuk
International Inc.
(8) David Liu owns 4,322,018 shares of common stock, which includes 1,753,640
shares of common stock held in escrow pursuant to escrow arrangements
entered into in connection with our acquisition of Kubuk International Inc.
David Lui is the father of Tom Liu, our Chief Executive Officer, and
husband of Guoxiu Yan, a selling shareholder. The Principal Shareholders of
Kubuk, Tom Liu and David Liu, contributed a total of 1,250,000 Exchange
Shares into escrow (of which David Liu contributed 499,622 shares) for the
purposes of exercising certain co-sale rights granted by the Registrant to
the Shareholder Representatives. David Liu and Guoxin Yan, as husband and
wife, are deemed to beneficially own each other's common stock.
(9) Includes 405,609 shares of common stock held in escrow pursuant to escrow
arrangements entered into in connection with our acquisition of Kubuk
International Inc.
(10) Guoxin Yan owns 1,620,077 shares of common stock, which includes 469,589
shares of common stock held in escrow pursuant to escrow arrangements
entered into in connection with our acquisition of Kubuk International Inc.
Guoxiu Yan is the mother of Tom Liu, Chief Executive Officer of Chilco
River Holdings Inc., and the wife of David Liu, a selling shareholder and
major shareholder of Chilco. David Liu and Guoxin Yan, as husband and wife,
are deemed to beneficially own each other's common stock.
29
(11) Clear Channel Inc. is organized under the laws of Turks & Caicos, and owns
1,000,000 shares of common stock. John Meyer has sole investment and voting
control over the securities. Janice Stevens and John Meyer are married, and
consequently, Blackpool Ltd. and Clear Channel Inc. are deemed to have the
same beneficial owner. The Class A warrants may not be exercised if the
exercise would result in the holder beneficially owning more than 9.99% of
our issued and outstanding common stock.
(12) Blackpool Ltd. is organized under the laws of Turks & Caicos. Janice
Stevens has sole investment and voting control over the securities.
Blackpool Ltd. holds 400,000 shares of common stock of Chilco and Class A
Warrants exercisable to acquire 400,000 shares of common stock at $2.00 per
share for a period of one year. Janice Stevens and John Meyer are married,
and consequently, Blackpool Ltd. and Clear Channel Inc. are deemed to have
the same beneficial owner. The Class A warrants may not be exercised if the
exercise would result in the holder beneficially owning more than 9.99% of
our issued and outstanding common stock.
We have no knowledge of any arrangements, including any pledge by any
person of our securities, the operation of which may at a subsequent date result
in a change in our control.
We are not, to the best of our knowledge, directly or indirectly owned or
controlled by another corporation or foreign government.
EQUITY COMPENSATION PLAN INFORMATION
=======================================================================================================================
Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining available
Category exercise of outstanding options, for future issuance
outstanding options, warrants and rights under equity
warrants and rights (b) compensation plans
(a) (excluding securities
reflected in column
(a)) (c)
=======================================================================================================================
Equity compensation plans approved by n/a n/a n/a
security holders
- ----------------------------------------------------------------------------------------------------------------------
Equity compensation plans not approved by n/a n/a n/a
security holder
=======================================================================================================================
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 100,000,000 shares of common
stock, with a par value of $0.001 per share. As at May 19, 2006, there were
21,815,667 shares of our common stock issued and outstanding.
30
COMMON STOCK
Our common stock is entitled to one vote per share on all matters submitted
to a vote of the stockholders, including the election of directors. Except as
otherwise required by law the holders of our common stock will possess all
voting power. Generally, all matters to be voted on by stockholders must be
approved by a majority (or, in the case of election of directors, by a
plurality) of the votes entitled to be cast by all shares of our common stock
that are present in person or represented by proxy. Holders of our common stock
representing a majority of our capital stock issued, outstanding and entitled to
vote, represented in person or by proxy, are necessary to constitute a quorum at
any meeting of our stockholders. A vote by the holders of a majority of our
outstanding shares is required to effectuate certain fundamental corporate
changes such as liquidation, merger or an amendment to our Articles of
Incorporation. Our Articles of Incorporation do not provide for cumulative
voting in the election of directors.
The holders of shares of our common stock will be entitled to such cash
dividends as may be declared from time to time by our board of directors from
funds available therefor.
Upon liquidation, dissolution or winding up, the holders of shares of our
common stock will be entitled to receive pro rata all assets available for
distribution to such holders.
In the event of any merger or consolidation with or into another company in
connection with which shares of our common stock are converted into or
exchangeable for shares of stock, other securities or property (including cash),
all holders of our common stock will be entitled to receive the same kind and
amount of shares of stock and other securities and property (including cash).
Holders of our common stock have no pre-emptive rights or conversion rights
and there are no redemption provisions applicable to our common stock.
CLASS A WARRANTS
The Class A Warrants are non-transferable. Each Class A Warrant is
exercisable to acquire one share of common stock of a period of one year from
the date of issuance. The Class A Warrants have standard anti-dilution
provisions in the event of stock splits, stock dividends, reorganizations and
similar transactions.
NEVADA CORPORATE LAW
The Nevada Business Corporation Law contains a provision governing
"acquisition of controlling interest." This law provides generally that any
person or entity that acquires 20% or more of the outstanding voting shares of a
publicly-held Nevada corporation in the secondary public or private market may
be denied voting rights with respect to the acquired shares, unless a majority
of the disinterested shareholders of the corporation elects to restore such
voting rights in whole or in part. The Control Share Acquisition Act provides
that a person or entity acquires "control shares" whenever it acquires shares
that, but for the operation of the Control Share Acquisition Act, would bring
its voting power within any of the following three ranges:
o 20 to 33 1/3%;
o 33 1/3 to 50%; or
o more than 50%.
A "control share acquisition" is generally defined as the direct or
indirect acquisition of either ownership or voting power associated with issued
and outstanding control shares. The shareholders or board of directors of a
corporation may elect to exempt the stock of the corporation from the provisions
of the Control Share Acquisition Act through adoption of a provision to that
effect in the articles of incorporation or bylaws of the corporation. Our
articles of incorporation and bylaws do not exempt our common stock from the
Control Share Acquisition Act.
The Control Share Acquisition Act is applicable only to shares of "Issuing
Corporations" as defined by the Nevada law. An Issuing Corporation is a Nevada
corporation, which:
31
o has 200 or more shareholders, with at least 100 of such shareholders
being both shareholders of record and residents of Nevada; and
o does business in Nevada directly or through an affiliated corporation.
At this time, we do not have 100 shareholders of record resident of Nevada.
Therefore, the provisions of the Control Share Acquisition Act do not apply to
acquisitions of our shares and will not until such time as these requirements
have been met. At such time as they may apply, the provisions of the Control
Share Acquisition Act may discourage companies or persons interested in
acquiring a significant interest in or control of our company, regardless of
whether such acquisition may be in the interest of our shareholders.
The Nevada "Combination with Interested Shareholders Statute" may also have
an effect of delaying or making it more difficult to effect a change in control
of our company. This statute prevents an "interested shareholder" and a resident
domestic Nevada corporation from entering into a "combination," unless certain
conditions are met. The statute defines "combination" to include any merger or
consolidation with an "interested shareholder," or any sale, lease, exchange,
mortgage, pledge, transfer or other disposition, in one transaction or a series
of transactions with an "interested shareholder" having:
o an aggregate market value equal to 5 percent or more of the aggregate
market value of the assets of the corporation;
o an aggregate market value equal to 5 percent or more of the aggregate
market value of all outstanding shares of the corporation; or
o representing 10 percent or more of the earning power or net income of
the corporation.
An "interested shareholder" means the beneficial owner of 10 percent or
more of the voting shares of a resident domestic corporation, or an affiliate or
associate thereof. A corporation affected by the statute may not engage in a
"combination" within three years after the interested shareholder acquires its
shares unless the combination or purchase is approved by the board of directors
before the interested shareholder acquired such shares. If approval is not
obtained, then after the expiration of the three-year period, the business
combination may be consummated with the approval of the board of directors or a
majority of the voting power held by disinterested shareholders, or if the
consideration to be paid by the interested shareholder is at least equal to the
highest of:
o the highest price per share paid by the interested shareholder within
the three years immediately preceding the date of the announcement of
the combination or in the transaction in which he became an interested
shareholder, whichever is higher;
o the market value per common share on the date of announcement of the
combination or the date the interested shareholder acquired the
shares, whichever is higher; or
o if higher for the holders of preferred stock, the highest liquidation
value of the preferred stock.
TRANSFER AGENT
The transfer agent and registrar for the our common stock is Pacific
Corporate Trust Company, 625 Howe Street, 10th Floor, Vancouver, British
Columbia, Canada V6C 3B8.
THE SEC'S POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our bylaws provide that directors and officers shall be indemnified by us
to the fullest extent authorized by the Nevada Revised Statutes Section 78.7502,
against all expenses and liabilities reasonably incurred in connection with
services for us or on our behalf. This includes indemnifying each such person
for all expenses and liabilities, including criminal monetary judgments,
penalties and fines, incurred by such person in connection with any criminal or
civil action brought or threatened against such person by reason of such person
being or having been our officer or director or employee, except for gross
negligence or willful misconduct. The bylaws also authorize the board of
directors to indemnify any other person who we have the power to indemnify under
Nevada law, and indemnification for such a person may be greater or different
from that provided in the bylaws.
32
To the extent that indemnification for liabilities arising under the
Securities Act may be permitted for our directors, officers and controlling
persons, we have been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
DESCRIPTION OF THE BUSINESS
OVERVIEW
We, Chilco River Holdings, Inc., through our wholly-owned subsidiaries, own
all of the assets of and operate the Bruce Hotel and Casino. The Bruce Hotel and
Casino is located Jiron Francisco Bolognesi # 171-191 in the Miraflores
District, Province and Department of Lima, Peru, approximately 30 minutes from
Jorge Charvez International Airport in the heart of Miraflores. The Bruce Hotel
and Casino is a "destination" hotel and casino location for visitors traveling
to the Republic of Peru, and we cater to local and foreign visitors, including
visitors from the People's Republic of China. The Bruce Hotel and Casino
business consists of a hotel, restaurants, a gaming casino and real property. We
acquired the Bruce Hotel and Casino in connection with a Share Exchange
transaction with the shareholders of Kubuk International, Inc., which we refer
to in this report as Kubuk, on July 15, 2005.
The Bruce Hotel and Casino is a full-service hospitality facility with
standard and premium lodging accommodations (rooms and suites). In addition, the
hotel encompasses several dining facilities and a full-featured Gambling Casino
with traditional gaming tables and slot machines.
Prior to signing the Share Exchange Agreement with Kubuk International, we
developed a plan to expand, renovate and modernize the current facilities of the
Bruce Hotel and Casino and temporarily suspended the operation of the gaming
room in February 2005 and operation of the restaurant and slot room in November
2005. We intend to raise capital to fund the expansion, renovation and
modernization of the Bruce Hotel and Casino.
We maintain our registered agent's office at 6100 Neil Road, Suite 500,
Reno, Nevada 89511, and an office at the Bruce Hotel and Casino at Jiron
Francisco Bolognesi # 171-191 in the Miraflores District, Province and
Department of Lima. Our executive offices are located at 355 Lemon Ave., Suite
C, Walnut, CA 91789, and our phone number is (909)869-7933.
HISTORY
We were incorporated on May 8, 2003 under the laws of the State of Nevada.
OUR ABANDONED MINERAL EXPLORATION BUSINESS
We were previously engaged in the business of acquiring mineral exploration
properties. We purchased all right, title and interest in one unpatented claim
in the New Westminster Mining Division of the Province of British Columbia,
known as the PEG Claim under an agreement dated November 3, 2003. We were unable
to secure funding to conduct additional exploration work on the PEG Claim and we
suspended work on the PEG Claim. Our management began exploring other business
opportunities at the beginning of 2005. After we acquired our interest in the
Bruce Hotel and Casino, we abandoned the PEG Claim by giving notice to the
property owner to terminate the agreement. We are no longer engaged in the
mineral exploration business. We no longer own any mineral exploration
properties.
FORWARD STOCK SPLIT
On July 11, 2005 at 5:00 p.m. (Eastern Standard Time)(Record Date), we
effected a 2 for 1 forward stock split of our issued and outstanding shares of
common stock, par value $0.001, by way of share dividend payable upon surrender
of certificates pursuant to Section 78.215 of the Nevada General Registrant Law.
The share dividend is payable upon surrender of the outstanding share
certificates. Shareholders were required to surrender their existing share
certificates representing shares of common stock issued before the Record Date
by tendering the such share certificates to our transfer agent. Upon surrender
of the outstanding share certificates representing the issued
33
and outstanding shares of common stock held by shareholders on the Record Date,
our transfer agent issued new share certificates giving effect to the share
dividend so that each one share of common stock of Chilco issued and outstanding
prior to the Record Date shall represent two post-split shares of our common
stock. Immediately prior to the stock dividend, we had 3,057,000 shares of
common stock issued and outstanding. After giving effect to the stock dividend,
we had 6,114,000 shares of common stock issued and outstanding.
ACQUISITION OF BRUCE HOTEL AND CASINO
On July 15, 2005, we entered into a Share Exchange Agreement with Kubuk
International, Inc., a California corporation; its shareholders, Tom Liu, David
Liu, Lee Kuen Cheung, Wai Yung Lau, Zheng Liu, Yizhi Zeng, Luisa Wong, Jack Xu,
Yong Yang and Guoxiu Yan. Tom Liu was designated as Shareholders Representative.
Under the terms of the Share Exchange Agreement, we agreed to acquire all of the
issued and outstanding capital stock of Kubuk from the Kubuk Shareholders. Kubuk
owns and operates, through its wholly-owned subsidiaries, Kubuk Investment SAC
and Kubuk Gaming SAC, the Hotel Cinco Estrellas in Lima, Peru (also known as the
Bruce Hotel and Casino), and owns all of the assets, licenses and other rights
used in connection with the business of the Bruce Hotel and Casino. We closed
the share exchange transaction on August 3, 2005, and Kubuk International, Inc.
became our wholly-owned subsidiary.
The Share Exchange was negotiated at arms' length. None of the shareholders
of Kubuk International, Inc. were affiliates of Chilco River Holdings, Inc.
prior to the share exchange.
SHARE EXCHANGE AGREEMENT
Under the terms of the Share Exchange Agreement dated July 15, 2005, we
agreed to acquire or cause one or more of our affiliates to acquire all of the
outstanding capital stock and other equity interests of Kubuk from its
Shareholders by issuing 19,250,000 shares of Chilco's common stock as
consideration on the terms and subject to the conditions set forth in the Share
Exchange Agreement. We did not assume any accounts receivables of Kubuk in
connection with the share exchange.
Five new directors were appointed to our Board of Directors: Tom Liu, Wai
Yung Lau, Jack Xu , Yong Yang and Sean Sullivan. Robert Krause resigned as a
member of the Board of Directors. Following the Share Exchange transaction with
Kubuk, our Board of Directors consists of six members -- the newly appointed
board members and Gavin Roy. Tom Liu was appointed as Chairman and Chief
Executive Officer effective immediately upon closing. Mr. Sullivan resigned as a
director on December 29, 2005.
ESCROW AGREEMENT
Under the terms of the Share Exchange Agreement, our company along with
Kubuk, the Kubuk Shareholders, Tom Liu and David Liu, as the Principal
Shareholders of Kubuk, and an escrow agent were required to enter into an escrow
agreement under which the Shareholders were required to place shares of common
stock issued in the Share Exchange into escrow to satisfy certain obligations
under the Share Exchange Agreement.
In connection with the closing of the Share Exchange, Chilco, the
Shareholders, the Shareholder Representative and Wasserman, Comden, Casselman &
Pearson, LLP, as the Escrow Agent, entered into an escrow agreement dated August
3, 2005.
The parties agreed that we would place a total of 8,250,000 of the shares
issued in connection with the Share Exchange into three separate escrows under
one escrow agreement. We entered into the escrow arrangements to ensure that a
portion of our stock would only become available to the other parties to the
escrow agreement upon the occurrence of certain events, such as our company's
ability to raise additional capital and our receipt of corporate documents and
materials from Kubuk. The shares are subject to release from each of the escrows
on the following terms and conditions:
34
ESCROW NUMBER ONE - THE FINANCING TRANSACTION ESCROW
In order to provide some assurance that the new management would be able to
raise sufficient financing to fund the renovation of the Bruce Hotel and
Casino without significant dilution to the existing shareholders of Chilco,
the Shareholders placed an aggregate of 5,000,000 Exchange Shares into
Escrow, which we refer to as the Shareholder Escrow Shares. The
Shareholders and Chilco agreed that the Chilco and its management would
take all reasonable actions to obtain the highest price per share in
raising $5,000,000 for renovating the Bruce Hotel and Casino and to provide
capital for the on-going operations of Chilco. The management of Kubuk, who
became the management of Chilco, agreed that the minimum price per share of
common stock (or any rights, options or warrants to purchase, or securities
of any type whatsoever) issued by Chilco in connection with the financing
would be $1.00 per share. We refer to this undertaking as the Minimum Price
Covenant. The minimum price was determined after arms' length negotiations
between the board of directors of Kubuk and Chilco based on the estimated
value of the combined company; however, no formal valuation was conducted.
The Shareholder Escrow Shares will be released from the Financing
Transaction Escrow as liquidated damages for breach of the Minimum Price
Covenant if Minimum Price Covenant is breached, then the number of
Shareholder Escrow Shares to be cancelled as liquidated damages shall be
calculated as follows:
X = (A/B) - A
where: X = Number of Shareholder Escrow Shares Cancelled
A = 5,000,000
B = Purchase Price Per Share
For the purposes of the Financing Transaction Escrow, the Purchase Price
Per Share is to be determined based on completing a financing transaction
to raise a minimum of $5,000,000 and is defined as cash consideration
received or to be received by Chilco or the fair market value of any
property received or to be received by Chilco (as shall be verified by
Chilco's independent accounting firm) for each Chilco Common Share issued
or to be issued pursuant to exercise or conversion of any convertible or
exchangeable security. As of December 31, 2005, Chilco has raised
approximately $2 million at a price in excess of $1.00 per share.
In addition, the Kubuk Shareholders and Kubuk, jointly and severally,
agreed that Kubuk would deliver audited financial statements of Kubuk to
Chilco no later than the earlier of (i) 60 days after the Closing Date or
(ii) the date that permits the filing of any registration statement
required to be filed under the terms of the Financing Transaction. If Kubuk
failed to deliver the Kubuk financial statements in a timely manner, then
360,000 Shareholder Escrow Shares were to be released and cancelled as
liquidated damages and not a penalty for the breach of the covenant. The
financial statements were delivered in accordance with the terms of the
Financing Transaction Escrow.
ESCROW NUMBER TWO - THE RIGHTHOLDER ESCROW
The Kubuk Shareholders also placed an aggregate of 2,000,000 shares issued
in connection with the Share Exchanges into escrow for the purposes of
satisfying certain obligations of Kubuk to Nefilim Associates, LLC, a
Massachusetts limited liability company, T Morgan LLC, a Delaware limited
liability company, and Sean Sullivan. Kubuk had an existing obligation to
Nefilim, T Morgan and Mr. Sullivan to issue capital stock of Kubuk or an
entity acquired by or acquiring Kubuk upon satisfaction of certain
conditions under the terms of Consulting Agreements dated May 9, 2005 with
respect to Sean Sullivan, May 19, 2005 with respect to Nefilim Associates,
LLC and June 1, 2005 with respect to T Morgan LLC.
Under the terms of the Rightholder Escrow shares were to be released from
escrow to Nefilim, T Morgan and Mr. Sullivan, if Chilco was able to raise a
total of $5,000,000 within thirty (30) days of Kubuk delivering the audited
financial statements of Kubuk to Chilco. The shares issued to Nefilim, T
Morgan and Mr. Sullivan were subject to a redemption and cancellation right
by Chilco with respect to sixty percent (60%) of the shares, if Chilco has
not raised a total of $5,000,000, $10,000,000, $15,000,000 and
35
$20,000,000 in subsequent financing transactions for Chilco within six (6)
or twelve (12) months from the Closing Date. However, the Escrow Agent was
required to release one hundred percent (100%) of the shares to Chilco for
cancellation if Chilco did not raised a total of $5,000,000 within thirty
(30) days of Kubuk delivering the audited financial statements of Kubuk to
Chilco.
We failed to raise $5,000,000 within thirty days of the delivery of the
audited financial statements to Chilco and the 2,000,000 shares held in the
Rightholder Escrow were returned and cancelled.
ESCROW NUMBER THREE - THE CO-SALE ESCROW
Tom Liu and David Liu, as the Principal Shareholders of Kubuk, placed
1,250,000 shares issued in the Share Exchange into a Co-Sale Escrow. We
agreed to use commercially reasonable efforts to permit Tom Liu and David
Liu to offer and sale up to 1,250,000 Exchange Shares to investors on a
co-sale basis, in one or more private transactions, subject to us raising
at least $20,000,000. After we raise at least $20,000,000, we agreed not to
raise additional capital until Tom Liu and David Liu have sold shares from
the Co-Sale Escrow for proceeds of $5,000,000 or all of the shares are
released from Escrow. The Shareholder Representatives shall receive all of
proceeds from the sale of the shares from the Co-Sale Escrow. The Escrow
Agent shall release the shares from the Co-Sale Escrow to Tom Liu and David
Liu if we have not raised at least $20,000,000 prior to the third
anniversary of the Closing Date of the Share Exchange.
SHARE CONTRIBUTION AGREEMENT
Under the terms of the Share Exchange Agreement, Chilco, Kubuk and the
Kubuk Shareholders agreed that Chilco shall have 2,200,000 shares of common
stock issued and outstanding immediately prior to the closing of the Share
Exchange.
In connection with the Share Exchange, Chilco and Mr. Roy entered into a
Share Contribution Agreement dated effective as of August 3, 2005, under which
Mr. Roy contributed an aggregate of 3,564,000 shares of Chilco's common stock to
Chilco as a Capital Contribution. Former officers and directors, contributed a
total of 400,000 shares of common stock: Robert Krause contributed 200,000
shares and Thomas Brady contributed 200,000 shares. Chilco accepted Mr. Roy's
capital contribution and the cancellation of shares by Mr. Krause and Mr. Brady
and cancelled 3,964,000 shares of common stock. No consideration was paid to Mr.
Roy in connection with the contribution and cancellation of the shares.
STOCK SUBSCRIPTION AGREEMENT
Under the terms of the Share Exchange Agreement, Chilco, Kubuk and the
Kubuk Shareholders agreed that Chilco would repay $100,000 in bridge loans prior
to the closing of the Share Exchange. Chilco borrowed $100,000 in a bridge loan
from United Triump Inc. to satisfy current liabilities due immediately prior to
Closing. United and Chilco agreed to convert the bridge loan into shares of
common stock of Chilco at $2.00 per share. United was arms' length to Chilco and
was not an affiate.
Chilco and United entered into a stock subscription agreement under which
Chilco issued 50,000 shares of common stock to United in full satisfaction of
the $100,000 bridge loan.
36
SUBSIDIARIES
We manage our business through our wholly-owned subsidiaries.
----------------------------------------------
Chilco River Holdings, Inc.
a Nevada corporation
|
----------------------------------------------
|
Kubuk International Inc.
a California corporation
---------------------- -----------------------
| |
---------------------------------- ---------------------------------
Kubuk Investment S.A.C. Kubuk Gaming S.A.C.
a Peruvian corporation a Peruvian corporation
---------------------------------- ---------------------------------
HISTORY OF THE BRUCE HOTEL AND CASINO
Prior to the closing of the Share Exchange transaction, Kubuk, through its
wholly-owned subsidiaries, Kubuk Investment S.A.C. and Kubuk Gaming S.A.C.,
owned all of the assets of and operated the Bruce Hotel and Casino. Kubuk
acquired the Bruce Hotel and Casino from Bruce Grupo Diversion S.A.C., a
corporation owned and controlled by David Liu. Bruce Grupo Diversion S.A.C.
operated the Bruce Hotel and Casino since 2002. The Bruce Hotel and Casino has
been in operation since 1997.
The Bruce Hotel and Casino is located Jiron Francisco Bolognesi # 171-191
in the Miraflores District, Province and Department of Lima, approximately 30
minutes from Jorge Charvez International Airport in the heart of Miraflores. The
Bruce Hotel and Casino is a "destination" hotel location for visitors traveling
to the Republic of Peru, including travelers from the Peoples' Republic of
China. The casino is also popular with local residents. The Bruce Hotel and
Casino business consists of a hotel, restaurants, a gaming casino and real
property. Prior to signing the Share Exchange Agreement, we developed a plan to
expand, renovate and modernize the current facilities of the Bruce Hotel and
Casino and temporarily suspended the operation of the gaming room in February
2005 and operation of the restaurant and slot room in November 2005. We intend
to raise capital to fund the expansion, renovation and modernization of the
Bruce Hotel and Casino.
ACQUISITION OF THE BRUCE HOTEL AND CASINO FROM BRUCE GRUPO DIVERSION S.A.C.
On August 4, 2001, Bruce Grupo Diversion S.A.C. and Kubuk Investment S.A.C.
entered into a sale and purchase agreement of the real property at Jiron
Francisco Bolognesi # 171-191 in the Miraflores District, Province and
Department of Lima. The 14 story building which is the location of the Bruce
Hotel and Casino was contributed into Kubuk Investment S.A.C. The sale and
purchase agreement was registered into the Public Records of Lima, and was
notarized by Dra. Maria Soledad Perez Tello. The purchase price was $2,904,000
and was divided into five installments after the initial payment of $400,000.
The entire purchase prices was paid off on May 21, 2005.
In Febuary of 2005, Bruce Grupo Diversion S.A.C. and Kubuk Investment
S.A.C. entered a sale and purchase agreement of the real property at Jiron
Francisco Bolognesi # 155-191 in the Miraflores District, Province and
Department of Lima; the 7 story building along with parking garage was the
location of Bruce Grupo Diversion S.A.C. and was contributed into Kubuk
Investment S.A.C. The sale and purchase agreement was registered into the Public
Records of Lima, and was notarized by Dr. Fredy Cruzado Rios. The purchase price
was $400,000, which was paid in full.
The personal property and movable property necessary for the operation of a
hotel and casino were transferred to Kubuk Investment and Kubuk Gaming in 2005.
37
On June 15, 2005, all of the issued and outstanding shares of capital stock
of Kubuk Investment S.A.C. and Kubuk Gaming S.A.C. were acquired by Kubuk
International, Inc. in a share exchange by which the stockholders of Kubuk
Investment and Kubuk Gaming acquired the voting common stock of Kubuk
International in exchange for the common stock of Kubuk International pursuant
to Internal Revenue Code Section 368(a)(1)(B).
On July 1, 2005, the Peruvian gaming authority, known as MINCETUR, issued a
gaming license to Kubuk Gaming S.A.C. There is currently no limitation on the
number of gaming licenses MINCETUR may issue.
Bruce Grupo Diversion S.A.C. was a corporation owned and controlled by
David Liu, a principal of Kubuk International, Inc. Consequently, the
acquisition of the Bruce Hotel and Casino by Kubuk International, Inc. from
Bruce Grupo Diversion S.A.C. was among affiliated parties.
BRUCE HOTEL AND CASINO BUSINESS
The Bruce Hotel and Casino is located at Jiron Francisco Bolognesi #
171-191 in the Miraflores District, Province and Department of Lima,
approximately 30 minutes from Jorge Charvez International Airport in the heart
of Miraflores. The Bruce Hotel and Casino is a "destination" hotel and casino
location for visitors traveling to the Republic of Peru, including tourists from
the People's Republic of China. The casino and slot room are also popular with
local residents in Peru.
The Bruce Hotel and Casino is a full-service hospitality facility with
standard and premium lodging accommodations (rooms and suites). In addition, the
hotel encompasses several dining facilities and a full-featured Gambling Casino
with traditional gaming tables and slot machines.
Hotel: The Bruce Hotel and Casino is a 60-room full-service hospitality
facility with standard and premium lodging accommodations (rooms and suites) and
dining facilities. The amenities include guest suites and rooms, sauna, air
conditioning, mini-bar, telephone, hair dryer, wake-up service/alarm-clock,
radio, satellite TV and safe deposit boxes. The hotel can accommodate 200
guests. In addition, the hotel offers a gaming room, meeting/banquet facilities
and a barber/beauty shop. The room fare ranges from $70 for a standard room to
$95 for an executive suite.
The Miraflores District is one of the most important financial and
commercial centers of Lima and approximately 20 minutes from the historical
center of Lima. The Bruce Hotel and Casino is supported by urban infrastructure,
such as asphalt roads, concrete sidewalks, city water and sewage, public
electricity and garbage collection and phone lines. The Bruce Hotel and Casino
is located on commercial property and is located on a major thoroughfare. Our
casino and restaurants attract local residents in Lima, Peru, and we believe a
significant amount of our historical gaming revenue was derived from local
residents. We have a historic occupancy rate of our hotel averaging
approximately 70% during 2004 and 2005. Our occupancy rate is not generally
subject to seasonal fluctuation. The following table sets forth the occupancy
rate for our hotel during 2005 and the first three months of 2006:
Hotel Occupancy Rate
Average Occupancy Rate
----------------------
Month 2005 2006
----- ---- ----
January 52.37% 64.88%
February 78.75% 68.31%
March 77.19% 70.85%
April 69.57%
May 63.11%
June 83.68%
July 76.02%
August 67.27%
September 67.34%
October 71.46%
November 65.93%
December 82.67%
Restaurants: The Bruce Hotel and Casino features two full-service
restaurants serving Chinese and international cuisine. The restaurants seat 200
guests, respectively. The Bruce Hotel and Casino holds a retail liquor license.
The restaurants were closed for renovation in November 2005.
Gaming Casino: The gaming casino is a full-featured casino with 20
traditional gaming tables (blackjack, roulette, craps and poker) and
approximately 220 slot machines. The casino is located on the second floor of
the Hotel and is approximately 622 square meters. The casino features two full
bars, VIP area and can accommodate 300 guests.
The gaming casino operates under a gaming license issued to Kubuk Gaming
SAC by the Republic of Peru. The gaming casino is currently closed for
remodeling and is scheduled to reopen to the public in the last half of 2006,
assuming adequate financing is available.
Slot Room: The slot room is located on the first floor of the Hotel next to
the lobby. The slot room features 212 slot machines and can accommodate
approximately 300 guests. The slot room was closed for renovation in November
2005.
38
Real Property: Kubuk owns all of the real property and assets used in the
operation of the Bruce Hotel and Casino. The property consists of one
seven-story building and one fourteen-story building that are physically
connected and have been configured for use as a hotel, casino and office space.
Kubuk uses the office space in connection with its business and does not rent
office space to third parties. The property also includes a parking garage.
Kubuk owns all of the fixtures, improvements, systems, furniture, gaming
machines and gaming tables and the other contents currently used in the business
of the Bruce Hotel and Casino. See. "Description of Property" below.
The renovation of our casino, slot room and restaurants are expected to be
completed in the last half of 2006, assuming financing is available. We expect
to raise an additional $5 million in 2006 to complete the renovations.
In 2005, our operating revenue was derived from the following aspects of
our business:
---------------------------------------------------------------------------
Operations Percent of total operating revenue
---------------------------------------------------------------------------
2005 2004
---------------------------------------------------------------------------
Gaming - Casino and Slot Machines 58% 82%
Hotel and Hospitality Services 25% 9%
Restaurant 11% 5%
Other 6% 4%
---------------------------------------------------------------------------
Total 100% 100%
---------------------------------------------------------------------------
REGULATION AND LICENSING
Hotel: The Bruce Hotel and Casino maintains a Five Star Hotel license
issued by the Ministry Of External of Commerce and Tourism Assistant Ministry of
Tourism National Office of Tourism Development. Our Five Star Hotel license
expires on September 16, 2009.
Gaming Regulations: The ownership and operation of casino gaming facilities
are subject to extensive regulations by the National Bureau of Tourism of the
Department of Foreign Trade and Tourism. We are required to obtain and maintain
a gaming license to conduct gaming. The limitation, conditioning or suspension
of our gaming license could (and the revocation or non-renewal of gaming
license, or the failure to reauthorize gaming would) materially adversely affect
our operations. In addition, changes in law that restrict or prohibit our gaming
operations could have a material adverse effect on us.
In general, issuance of gaming license require the following:
(a) The exploitation of slots machines or casino must be complementary to
tourism activity. Therefore, it impossible to operate casino and slots machines,
without a hotel or a restaurant as principal activity. By regulations, the
casino and slot machines must be within a 5 star rating hotel or a 5 fork rating
restaurant if located in the country's capital city of Lima. Outside of Lima,
casinos can be in three- or four-star hotels or resorts and at five-star
restaurants.
(b) The principal shareholders must demonstrate economic solvency and moral
suitability in order to operate casino and slot machines. A series of background
checks must be conducted before the issuance of the license.
39
(c) The Peruvian law demands the delivery of a letter deposit before the
operation of the rooms. For the room of slot machines the letter deposit will be
equal to one thousand dollars for every slot machine. In the case of the casino,
the deposit will be equal to five hundred thousand dollars.
(d) There are restrictions for the geographical location of gaming
activities. The location of the operation needs to be 150 meters away from
churches, educational institutions, barracks and hospitals.
Licenses are valid for five years and renewable based on the above
criteria. There is no limitation on the number of gaming or hotel licenses that
can be issued in Peru.
Gaming License: Gaming licenses are issued under Law No. 27155, "Law that
Regulates the Exploitation of Casino Games and Slot Machines", which grants the
National Bureau of Tourism the administrative powers to authorize related to the
application of said Law, which states in subsection a) article 25, that the
National Bureau of Tourism has the powers to issue and revoke authorizations for
the exploitation of casino games.
Kubuk Gaming, SAC holds a license No. 060-MINCETUR/VMT/DNT, pursuant to the
Tourism Bureau's Director Resolution issued on July 1, 2005. Under this license,
the Bruce Hotel is authorized to operate twenty-one (21) gaming tables featuring
Black Jack, Roulette American Style, Roulette French Style, Pal Gow Polar, Punto
and Banca, Craps and Caribbean Poker. In addition, the Bruce Hotel and Casino
operates 220 slot machines. This license is valid for five years.
Kubuk Gaming, SAC holds a second license No. 145-MINCETUR/VMT/DNT pursuant
to the Tourism Bureau's Director Resolutions issued on July 1, 2005. Under this
license, the Bruce Hotel is authorized to operate 212 slot machines and 93
"read-only" game programs. This license expires on April 27, 2009.
Taxation: The Bruce Hotel and Casino is subject to regulatory, legal, tax
or ancillary government oversight of the Federal Republic of Peru. Net profits
derived from the operations of Kubuk Investment SAC and Kubuk Gaming SAC are
subject to taxation at the federal, state and local levels. The Federal Republic
of Peru imposes a 12% fixed gaming tax on the total amount of all wagers made by
players less all payments received by such players. We also collect a 19% (IGV)
sales tax from the consumers of the hotel, restaurant, and sauna. The corporate
tax is charged at 30% of total income. If Kubuk Gaming SAC or Kubuk Investment
SAC totally or partially distributes its profits (utilidades), an additional
rate of 4.1% will be imposed on the distributed amount, provided that the
company actually distributes its profits (utilidades) in cash or in kind.
COMPETITION
The gaming industry, including the development, operation and management of
casinos, racetracks and other types of gaming facilities, is highly competitive,
especially given the rapid rate at which the industry is expanding. For example,
we compete with a number of gaming facilities of varying quality and size,
including gaming facilities that are more established and have more resources,
along with other forms of gaming and entertainment. Many competitors have
available to them substantially greater financial and personnel resources than
us. Competition in the future may also be affected by overbuilding which can
adversely affect patronage levels. Given the current regulatory climate and
limited number of new gaming opportunities, it is likely that competition in our
industry will intensify in the future.
We compete with six local casinos -- Casino Golden Palace, Casino La
Hacienda, Casino Majestic, Casino Sheraton, Casino Los Delfines, Casino
Miraflores. Bruce Casino is the second largest casino, and the only one with
100% ownership to the hotel and restaurants and other related installations.
MARKETING
Latin America is the home to over 525 million people and is growing at an
average of 1.42% per year. Latin America is also becoming a key potential
tourism destination for business and leisure travelers, which is benefiting its
local growing gaming markets. Latin America's travel and tourism industry was
expected to generate 2.6 per cent of GDP and experience a total 2.6 per cent
real growth in 2003, and 5.4 per cent in 2004. The entire
40
Latin American gaming industry is estimated to have an effective gambling
turnover exceeding $40 billion. We will attempt to attract tourists to Latin
America through a campaign in cooperation with the Ministry of External Commerce
and Tourism.
We estimate that land-based casinos constitute a more than $2.5 billion per
year industry in Peru. We believe that there are over 50,000 gaming machines and
180 gaming tables in Peru.
The Bruce Hotel and Casino attracts customers to its casino by designing
and implementing marketing and promotional programs for local residents,
tourists and visitors. We place significant emphasis on attracting local
residents and seek to maintain a strong local identity by engaging in promotion,
primarily by direct mailing and posting flyers. Our casino and restaurants
attract local residents in Lima, Peru, and we believe a significant amount of
our historical gaming revenue was derived from local residents.
Approximately 70% of our hotel guests were visitors from the People's
Republic of China in 2005. We targeted tourist from the People's Republic of
China through marketing programs, including special rate programs for travel
agents and promoters. With a population of 1.3 billion people, China boasts some
20 million people with million-dollar fortunes and 100 million wealthy citizens
with money to travel, according to Argentina's trade group Feghra. The number of
Chinese tourists could rise to 100 million in 2020, according to the World
Tourism Organization.
In the year 2002 all Chinese citizens with a government issued work
passport could fly to the Republic of Peru without any additional Visa
requirements. This ease of travel prompted a tremendous number of visitors to
the Republic of Peru from the People's Republic of China and provided a high
level of occupancy and high casino gaming revenues for the Bruce Hotel and
Casino.
In 2003 the government of the People's Republic of China ceased issuing
work passports to its citizens and in doing so made it a requirement to secure a
visa to travel to the Republic of Peru. The visa requirement significantly
curtailed the number of travelers from the People's Republic of China to the
Republic of Peru and the financial results of the Bruce Hotel and Casino
suffered from reduced hotel occupancy and reduced casino gaming revenues.
In November 2004, China included Peru on its Approved Destination Status
list. This means that Chinese are able to travel more easily as part of
organized group and that Peruvian travel agents can advertise and promote
tourism inside China. We anticipate that the number of Chinese citizens visiting
the Bruce Hotel and Casino will increase as Chinese citizens take advantage of
the easing of travel restrictions to the Republic of Peru.
EMPLOYEES AND LABOR RELATIONS
As of March 31, 2006, we had 48 full time employees. Prior to temporary
closure of the casino for renovation, the Bruce Hotel and Casino employed
approximately 170 full time employees. We anticipate that we hire additional
employees and that our work force will increase to historical levels once our
casino. slot room and restaurants are reopened in the last half of 2006,
assuming adequate financing is available.
None of the Bruce Hotel and Casino employees are members of a union. We are
not a party to any collective bargaining agreement. We are subject to certain
federal and local safety and health, employment and environmental laws,
regulations and ordinances that apply to non-gaming businesses generally.
Individual workers choose one of two alternative social security and pension
plans. Under both, the employer pays 9% of the worker's monthly wage for social
security (health benefits). We have not made, and do not anticipate making,
material expenditures with respect to such regulations.
We believe that the Bruce Hotel and Casino has good relationships with its
employees.
41
REPUBLIC OF PERU
GOVERNMENT
The Toledo administration has continued to suffer political setbacks. In
response to this, on February 25, 2005, President Toledo announced a change in
the composition of the cabinet. Carlos Gamarra was replaced by Eduardo Salhuana
as Justice Minister; Javier Neves was replaced by Juan Sheput as Labour
Minister; Alfonso Velasquez was replaced by David Lemor as Production Minister;
and Alvaro Quijandria was replaced by Manuel Manrique as Agriculture Minister.
THE ECONOMY
Peru's gross domestic product, or GDP, grew by 4.8% during 2004, compared
to 4.0% in 2003. All sectors experienced positive growth rates with the
exception of agriculture, which was negatively affected by a severe drought in
the northern coast of Peru that mainly affected rice and sugar cane production.
Fishing grew by 30.5% in 2004, recovering from the decrease in 2003 of
12.5%, while non-primary manufacturing grew by 7.2%, followed by 4.8% in
wholesale and retail trade, 4.7% in construction and other services and 4.6% in
electricity and water.
In April 2005, GDP increased by 6.4%, as compared to the GDP in April 2004,
which grew 3.4% as compared to the GDP in April 2003. This rise in GDP growth
was largely a result of growth in the non-primary sector, mainly the non-primary
manufacturing and construction sectors, which increased 9.3% and 10.6%,
respectively, between May 2004 and April 2005.
According to preliminary figures, during the first quarter of 2005, Peru's
GDP expanded by 5.4%, as compared to 4.8% in the first quarter of 2004,
following an increase of 6.6% during the fourth quarter of 2004. Growth in the
first quarter of 2005 continued to be driven by the external sector as real
exports grew by 19.9%, and domestic demand, which grew by 4.4%, also had an
increasingly important role. Exports continued to grow for both traditional and
non-traditional products.
Traditional exports that increased included zinc, copper, molybdenum,
fishmeal and coffee, offsetting reduced exports of gold. Non-traditional exports
grew 25%, led by textiles, especially knitted garments for the United States
market, chemicals, agriculture and livestock and fish products.
Private investment has been growing since the third quarter of 2002 due to
a stable macroeconomic environment, allowing firms to enlarge production
capacity to respond to increasing levels of domestic consumption. During the
first quarter of 2005, private investment grew by 7.7% and private consumption
increased by 4.0% as compared to an increase of 3.1% in the same period in 2004,
national income grew 6.8% and employment grew 3.9%.
Currency
--------
In September 1991, the Nuevo Sol replaced the inti as the official currency
of Peru. In February 1985, the inti had replaced the original Sol. Between 1978
and 1985, the Sol was gradually devalued through a crawling-peg system of
mini-devaluations. Multiple exchange rates were utilized in the late 1980s in an
attempt to favor manufacturing exports but were abandoned in 1990 in favor of a
single-rate system.
42
The following table shows the nuevo sol/U.S. dollar exchange rate for the
dates and periods indicated.
Exchange Rates(1)
(S/. per US$)
End of Period Average
------------- -------
2001 3.44 3.45
2002 3.51 3.52
2003 3.46 3.48
2004 3.29 3.41
2005 3.43 3.31
------------------------
(1) Official rates offered by banks
Source: Peru Central Bank.
The Central Bank of Peru has a history of adopting a policy of
non-intervention in the exchange rate market. However, since 2003, the Central
Bank has conducted regular interventions in the foreign exchange market in order
to reduce volatility in the value of Peru's currency against the U.S. dollar and
to meet the demand for Nuevos Soles caused by pension funds and commercial banks
restructuring their portfolio to include more assets denominated in Nuevos Soles
as compared to foreign currency. The reduced volatility has enabled the Central
Bank to increase its international reserves.
Inflation
---------
Peru historically has experienced very substantial, and in some periods
extremely high and variable, rates of inflation. Annual inflation, as measured
by consumer price index (CPI), averaged 29.2% during the 1970s, accelerated in
the 1980s and reached 7,500% in 1990. The economic and monetary program that the
government implemented during the early 1990s achieved a drastic reduction in
inflation. CPI during 2003 demonstrated relative stability, with an average
inflation rate of 2.3%, as compared to 0.2% for 2002 and 2.0% for 2001. This
record has served to foster confidence in the stability of the Peruvian
currency.
The consumer price index increased 3.5% during 2004. This rise in prices
reflected supply shocks, including significant increases in the international
prices of petroleum, wheat and soya oil as well as in the prices of some
domestic foodstuffs such as rice and sugar, caused by the drought in the
northern coast of Peru and restrictions of imports; these factors together
account for 2.5 percentage points of annual inflation. These factors were
partially attenuated by an appreciation of Peru's currency. In the period from
January to May 2005, the annual inflation rate was 1.79%, lower than the
inflation rate for the same period in the previous year (3.18%).
DESCRIPTION OF PROPERTY
Kubuk Investment SAC owns all of the real property used in the operation of
the Bruce Hotel and Casino. The real property consists of two parcels:
300 square meter parcel: Edificio Bolognesi 171, according to the Public
Record in presence of the Notary Public, Oscar Leyton Zarate, dated
November 26, 1996, registered in File number 1646871 (Ficha numero 164871,
Asiento 1-c) of the Public Buildings Registry of Lima.
900 square meter parcel: Edificio Bolognesi 191, according to the Public
Record in the presence of Notary Public, Fidel D'jalma Torres Zevallos,
dated August 7, 1996, registered in File numbers 1119538 to 1119540;
1119553 to 1119563;1119546 to 1119552; 1119882, 1119542, 1119564 to
1119566, 1119595 to 111602, 1119591 to 1119594; 1119543, 1119544 and
1119603 of the Public Buildings Registry of Lima.
The Bruce Hotel and Casino is housed in two buildings: one seven-story
building with approximately 1950 square meters and one fourteen-story building
with approximately 7,250 square meters that are physically connected
43
and have been configured for use as a hotel, casino and office space. The
property also includes a parking garage for 20 cars. There is plenty of
off-street parking.
Kubuk owns all of the fixtures, improvements, systems, furniture, gaming
machines and gaming tables and the other contents currently used in the business
of the Bruce Hotel and Casino.
We do not own any real property for investment purposes.
MANAGEMENT'S DISCUSSION AND ANALYSIS
You should read the following discussion and analysis of our financial
condition and results of operations together with our financial statements and
related notes appearing elsewhere in this prospectus. This discussion and
analysis contains forward-looking statements that involve risks, uncertainties
and assumptions. Our actual results may differ materially from those anticipated
in these forward-looking statements as a result of many factors, including, but
not limited to, those set forth under "Risk Factors" and elsewhere in this
prospectus.
SELECTED FINANCIAL DATA
Following the share exchange transaction on July 15, 2005, Kubuk
International, Inc. became a wholly-owned subsidiary of Chilco River Holdings,
Inc. Prior to the share exchange, we had no substantial assets and only nominal
operations. Accordingly, the transaction is treated as a reverse acquisition of
Chilco River Holdings, Inc. and has been accounted for as a recapitalization
rather than a business combination. The historical financial statements of Kubuk
International, Inc. and its predecessor Bruce Grupo Diversion S.A.C. are deemed
to be the historical statements of Chilco River Holdings, Inc.
The selected financial information presented below as of and for the
periods indicated is derived from our financial statements contained elsewhere
in this report and should be read in conjunction with those financial
statements.
Chilco River Holdings, Inc.
Year Ended Three Months Ended
INCOME STATEMENT DATA December 31 March 31,
2005 2004 2006 2005
-------------- ---------------- -------------- --------------
Revenue $ 4,507,552 $ 10,694,694 $ 351,959 $ 1,408,116
Operating Expenses $ 3,499,396 $ 4,221,246 $ 693,189 $ 739,212
Net Income (Loss) $ 581,383 $ 4,595,393 $ (348,034) $ 398,424
Income (Loss) per Common
share* $ 0.03 $ 0.24 $ (0.02) $ 0.01
Weighted Average Number
of Common Shares Outstanding 20,252,611 19,250,000 22,843,140 19,250,000
BALANCE SHEET DATA: At December 31, 2005 At March 31, 2006
Working Capital (Deficiency) $ 1,515,351 $ 1,893,671
Total Assets $ 18,069,490 $ 18,340,450
Retained Earnings $ (279,446) $ (627,481)
Shareholders' Equity $ 17,742,641 $ 18,319,537
* Basic and diluted.
Due to the Share Exchange Agreement and the significance of the Company's
operations, the "development stage" status of Chilco is no longer in effect. The
development stage disclosures are no longer required in the Company's current
status. Historical results of operations for Chilco River Holdings, Inc. may
differ materially from future results.
44
MANAGEMENT'S DISCUSSION AND ANALYSIS
This discussion and analysis should be read in conjunction with the
accompanying Consolidated Financial Statements and related notes. The discussion
and analysis of the financial condition and results of operations are based upon
the consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of any contingent liabilities at the financial statement
date and reported amounts of revenue and expenses during the reporting period.
On an on-going basis the company reviews its estimates and assumptions. The
estimates were based on historical experience and other assumptions that the
company believes to be reasonable under the circumstances. Actual results are
likely to differ from those estimates under different assumptions or conditions,
but the company does not believe such differences will materially affect our
financial position or results of operations. Critical accounting policies, the
policies the company believes are most important to the presentation of its
financial statements and require the most difficult, subjective and complex
judgments, are outlined below in "Critical Accounting Policies," and have not
changed significantly.
EXPLANATORY NOTE ON FINANCIAL STATEMENTS
The audited consolidated financial statements included in this report have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission.
The condensed consolidated inteirm financial statements for the quarter
ended March 31, 2006, have been prepared without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted. In
the opinion of management, the accompanying interim financial statements contain
all adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of our financial position as of March 31, 2006, and our results of
operations and cash flows for the three-month periods ended March 31, 2006. The
results of operations for the three-month periods ended March 31, 2006 are not
necessarily indicative of the results for a full-year period.
Following the Share Exchange, Kubuk International, Inc. became a
wholly-owned subsidiary of Chilco. Prior to the Share Exchange, Chilco had no
substantial assets and only nominal operations. Accordingly, the transaction is
treated as a reverse acquisition of Chilco and has been accounted for as a
recapitalization rather than a business combination. The historical financial
statements of Kubuk International, Inc. and its predecessor Bruce Grupo
Diversion S.A.C. are deemed to be the historical statements of the Chilco River
Holdings, Inc.
Due to the effect of the Share Exchange Agreement and the significance of
our operations, the "development stage" status of Chilco is no longer in effect.
With our current status, the development stage disclosures are no longer
required. Historical results of operations for our company may differ materially
from future results.
PLAN OF OPERATION
We intend to continue the operations of the Bruce Hotel over the next
twelve months and reopen the Bruce Casino in the last half of 2006, assuming
adequate financing is available. The Bruce Hotel and Casino is located at Jiron
Francisco Bolognesi # 171-191 in the Miraflores District, Province and
Department of Lima, approximately 30 minutes from Jorge Charvez International
Airport in the heart of Miraflores. The Bruce Hotel and Casino is a
"destination" hotel and casino location for visitors traveling to the Republic
of Peru. Prior to year 2005, it catered specifically to visitors from the
People's Republic of China.
The Bruce Hotel and Casino is a full-service hospitality facility with
standard and premium lodging accommodations (rooms and suites). In addition, the
hotel encompasses several dining facilities and a full-featured gambling casino
with traditional gaming tables and slot machines. Except for the hotel, all of
the gaming, slot machine and restaurant facilities are closed for renovation.
According to our renovation plan, the new Bruce Casino will feature 300 new slot
machines in the slot room in the ground floor, and a second floor with new
gaming tables and roulettes. In addition to the restaurant which serves Chinese
and western cuisines, we will also operate a new lounge/discoteque. The
renovation plan also includes replacement of certain hotel furniture and
appliances. Our plan is to target more traveling business executives from all
over the world after the renovation. The renovation for the Casino and dining
floors is currently underway and is expected to be completed in the last half of
2006, assuming adequate financing is available.
Before the closure of the slot room for renovation, we operated 220 slot
machines. We have started to lease these machines to other local slot machines
parlors in Peru under various lease terms or profit-sharing agreements.
45
Average net rental income from the lease of these slot machines range from $5 to
$10 per machine per day. We believe the slot machine rental income should
continue at least through the end of year 2007.
We hold two gaming licenses for the operation of our casino and slot room,
which were granted in 2005. These gaming licenses are valid for five years. We
also hold a license to operate a five-star hotel that expires in September,
2009. There is no limitation on the number of gaming or hotel licenses that can
be issued in Peru or location in which licenses can be granted. We may face
intense competition if multiple licenses are granted for hotels and casinos in
close proximity to the Bruce Hotel & Casino.
Satisfaction of cash obligations for the next twelve months. We believe
that the cash flow from our hotel is sufficient to meet our minimum cash
requirements to continue as a going concern. We intend to use a combination of
available cash and additional financing to meet obligations over the next twelve
months, including the cost of renovation of the casino and restaurant at an
estimated amount of $4,500,000. We intend to secure financing in the amount of
$5,000,000 in one or more transactions as soon as practicable on terms
acceptable to us. These financing transaction may involve collateralized
borrowing, equity securities offerings, or a combination of both. We intend to
use the proceeds from these transactions, if any, to expand, renovate and
modernize the current facilities of the Bruce Hotel and Casino. As of January
31, 2006, we raised approximately $2,000,000, we have allocated $1,000,000 of
the proceeds of the offering to renovate our casino floor and $1,000,000 toward
marketing efforts to promote our business. We expect to fund the remaining cash
requirement of the renovation and acquisition of new equipment through
additional capital infusions, including the proceeds from the exercise of the
Class A warrants, if any, and future offerings. If we are unable to raise the
funds to complete the renovations in debt or equity transactions, we intend to
fund completion of the renovations through cash flow from operations. We
currently have no firm commitments with respect to additional financing, and
cannot assure you that such financing will be available.
SUMMARY OF ANY PRODUCT RESEARCH AND DEVELOPMENT THAT WE WILL PERFORM FOR THE
TERM OF THE PLAN.
In April 2006 we started a software development project in Shenzhen, China
by contracting several programmers to develop an internet based computer gaming
application for the potential future licensing to interested third parties. We
anticipate that we will spend approximately $115,000 on software development
during the next 12 months, assuming adequate financing is available. The success
of this software development project depends heavily on our ability to raise
sufficient capital or borrowing from debt to fund the project through its
feasibility test stage. If, for any reason, we have difficulties raising
financial resources to complete the casino and hotel renovation, we will have to
delay or suspend the software development project.
EXPECTED PURCHASE OR SALE OF PLANT AND SIGNIFICANT EQUIPMENT.
Prior to the completion of renovation and reopening of the gaming room, we
will have to acquire additional gaming equipment and hotel furniture. Estimated
costs of acquisition of these equipment and furniture are as follows:
Slot machines $2,750,000
Other casino equipments $850,000
Building improvement and furniture $300,000
Restaurant and lounge $300,000
We are in preliminary negotiation with a slot machine manufacturer based in
Hong Kong for a proposed transaction under which the Company may acquire
exclusive rights to manufacture low price slot machines and distribute them in
central and south American markets. We are only in preliminary discussions with
the manufacturer and do not have any definitive agreement with respect to these
rights.
Significant changes in number of employees. We anticipate that we will hire
approximately 50 to 70 employees prior to reopening our casino, slot room and
restaurant in the second half of 2006, assuming adequate financing is available.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005.
We had revenues of $351,959 during the three months ended March 31, 2006,
compared to revenues of $1,408,116 during the same period in 2005. Overall
revenues were down 75% for the three-month comparative periods. The lower
revenues during the three-month period in 2006 compared to 2005 are a direct
result of the closure of our casino floor for renovation in March 2005 and
subsequent closure of the slot room in November 2005. The restaurant in the
third floor of Bruce Hotel was also closed to the public shortly after the
closure of the slot room.
Operating expenses during the three-months ended March 31, 2006 were
$693,189, compared to $739,212 for the same period in 2005. Despite substantial
reduction in labor and other variable costs associated with the closure of the
casino and slot room since 2005, operating expenses for the first quarter of
2006 decreased by only $46,024 due to increased marketing expenses, including
legal and accounting costs, $100,000 in expenses under our marketing program,
and $115,000 amortization of consulting service expense, prepaid by issuance of
our stock to a service provider during the first quarter of 2006. We had no
legal and other SEC compliance costs in the three-month period in 2005 at Kubuk,
or its predecessor Bruce Grupo Diversion SAC. Consequently, loss from operation
for the three-month period ended March 31, 2006 was $(341,230), compared to
income from operation in the amount of $668,904 for the same period in 2005.
Income (loss) from operation as a percentage of revenue for the three-month
periods ended March 31, 2006 and 2005 was (97)% and 48%, respectively. The lower
income from operation during the three-month period in 2006 compared to 2005,
was a direct result of the closure of our casino floor and slot room in 2005 for
renovation and the increased public company compliance costs following the
reverse merger transaction in July 2005.
Net loss, after other income and expenses and provision for income taxes,
was $(348,034) (a net loss of $0.02 per share) for the three-month period ended
March 31, 2006, compared to net income of $398,424 ($0.01 per share) for the
three months ended March 31, 2005. We paid income taxes of $12,662 and $307,048
for the three-month periods ended March 31, 2006 and 2005, respectively.
We had a loss on foreign currency translation of $(7,219) during the
three-month period ended March 31, 2006, compared to a $(208,752) loss during
the same period in 2005.
Our revenues during the periods after the closure of our slot room and
restaurant in November 2005 was principally derived from hotel revenue and
revenue from rental of old slot machines. We do not anticipate that revenues
will return to historical levels until the renovation of our casino floor is
completed. We have several fixed costs related to our operations, which resulted
in higher operating expenses and lower operating revenue as a percentage of
sales. We anticipate that our expenses as a percentage of sales will remain at
approximately the same level until our casino floor is fully operational. We are
currently seeking to raise $5 million to renovate and modernize the current
facilities of the Bruce Hotel & Casino. We have no firm commitments to raise
such capital to complete such renovations. If we are successful in raising the
capital required for the renovations, we may temporarily close our entire
operations for up to two months to complete the renovation. Such a closure is
expected to have a material impact on the results of operations during the
periods in which the operations are suspended. However, we anticipate that
renovation will improve our revenues and profitability when complete.
RESULTS OF OPERATIONS FOR THE YEARS AND THREE MONTHS ENDED DECEMBER 31, 2005 AND
2004.
We had revenues of $4,507,552 during the year ended December 31, 2005,
compared to revenues of $10,694,694 during the same period in 2004. Overall
revenues were down 57.8% in 2005 from the previous year The lower revenues
during the year ended December 31, 2005 was a direct result of the closure of
the casino floor of the Bruce Casino in February 2005 and the slot room in
November 2005 for renovation. 2005 revenue from our casino, hotel, and
restaurant represented 58%, 25%, and 11% of the total revenue, respectively, for
the year ended December 31, 2005. 2004 revenue from casino, hotel, and
restaurant accounted for 82%, 9% and 5% of the total revenue, respectively, for
the year ended December 31, 2004. We operated at full capacity in 2004, when
revenues from the casino and slot room accounted for over 82% of the annual
revenue for the year. We expect our revenues to continue to decrease on a
period-to-period basis until these areas of the Bruce Hotel and Casino are
reopened for business. We began
46
renovations to our casino floor, slot room and restaurants and expect to reopen
these facilities in the last half of 2006, assuming adequate funding is
available.
Operating expenses for the years ending December 31, 2005 and 2004 were
$3,499,396 and $4,221,246, respectively. Total operating expenses were down
17.10% in 2005 from the previous year. We reduced our staff by 66% after closing
our casino, slot room and restaurants and reduced non-essential expenses. We
expect operating expenses to be lower than in historical periods as a result of
these reductions. Consequently, income from operations for the years end
December 31, 2005 and 2004 were $1,008,156 and $6,473,448, respectively. Income
from operations as a percentage of revenue for the years ended December 31,
2005, and 2004 were 22.4% and 61%, respectively. The lower income from
operations during the year of 2005 compared to 2004 was a direct result of the
closure of the casino floor of the Bruce Hotel and Casino in February 2005 and
the slot room in November 2005 for renovation. We expect our revenues and income
to decrease on a period-to-period basis until the casino floor, slot room and
restaurant of the Bruce Hotel and Casino are reopened for business, and we
anticipate we may incur losses during the first half of 2006.
Net income, after other income and expenses, was $581,383 and $4,595,393
for the year ended December 31, 2005 and 2004, respectively. Our provisions for
income taxes were $448,048 and $2,225,147 for the years ended December 31, 2005
and 2004, respectively.
We had a gain on foreign currency translation of $176,172 during the year
ended December 31, 2005, compared to a $518,944 gain during the same period in
2004.
Our revenues during the periods after the closure of the casino floor in
March 2005 were principally derived from hotel, restaurant and slot machine
revenues. We do not anticipate that revenues will return to historical levels
until the renovation of the casino floor is completed. We have several fixed
costs related to operations, which resulted in higher operating expenses and
lower operating revenue as a percentage of sales. We anticipate that expenses as
a percentage of sales will remain at approximately the same level until the
casino floor is fully operational. We are currently seeking to raise
approximately $5 million in capital or loans to expand, renovate and modernize
the current facilities of the Bruce Hotel and Casino. We have no firm
commitments to raise such capital to complete such renovations and cannot assure
you that such financing will be available on acceptable terms, if at all. During
the temporarily closure of the gaming and restaurant operations, we will rely
heavily on the revenue from the hotel operations of the Bruce Hotel and Casino's
to fund our working capital requirements and certain costs related to the
renovation. Prior to the closure of our gaming and restaurant operations, our
hotel operations constituted approximately 10% of our revenues. The closure of
our gaming and restaurant operations is expected to have a material impact on
the results of operations. However, we anticipate that the renovation will
improve historical revenues and profitability when complete.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the acquisition of the Bruce Hotel and Casino, our company, as a
development company, relied upon outside funding to support our continued
operations. After completing the acquisition, we believe we have sufficient cash
flows from operations to fund our working capital requirements. However, we plan
on completing a comprehensive renovation of the Bruce Hotel and Casino to
improve our results of operations and will require additional capital or
financing to complete the remodel of the casino and resume operations of the
casino floor. We raised $2,000,000 as of January 31, 2006, and we are currently
seeking to raise approximately $5 million in additional capital. We have no firm
commitments for such financing and cannot assure you that such financing will be
available on acceptable terms, if at all.
As of December 31, 2005, we had no major indebtedness except for loans from
a major shareholder David Liu and a California corporation solely owned by Mr.
Liu. These loans were created as Mr. Liu made advance payments for our web
design fees, legal and accounting expenses, travel expenses, and casino
renovation costs during the year and are evidenced by loan agreements and
promissory notes bearing zero interest. The unpaid loan balances owed to Mr. Liu
and his California corporation as of December 31, 2005 were $97,289 and $96,742,
respectively. We fully repaid these balances in January 2006.
47
Cash flow from operations during the three months ended March 31, 2006,
were significantly lower than cash flow from operations during the same period
in 2005. Our revenues during the periods after the closure of our slot room and
restaurant in November 2005 was principally derived from hotel and rental of old
slot machines. We do not anticipate that revenues will return to historical
levels until the renovation of our casino floor is completed. We have several
fixed costs related to our operations, which resulted in higher operating
expenses and lower operating revenue as a percentage of sales. We anticipate
that our cash flow from operations will remain at approximately the same level
until its casino floor is fully operational.
Cash flow from operations during the year ended December 31, 2005, was
significantly lower than cash flow from operations in 2004. Our revenues during
the periods after the closure of the casino floor in February 2005 were
principally derived from hotel, restaurant and slot machine revenues. In
November 2005, we closed our slot room and restaurant for renovation and reduced
our staff levels and operating expenses significantly. During the temporarily
closure of the gaming and restaurant operations, we will rely heavily on the
revenue from the hotel operations of the Bruce Hotel and to fund our working
capital requirements and certain costs related to the renovation. Prior to the
closure of our gaming and restaurant operations, our hotel operations
constituted approximately 10% of our revenues.
As of December 31, 2005, we had current assets of $1,842,200, including
cash and cash equivalents of $1,435,683, and current liabilities of $326,849. We
had working capital of $1,515,351. As of March 31, 2006, we had current assets
of $1,914,584, including cash and cash equivalents of $1,448,385, and current
liabilities of $20,913. We had working capital of $1,893,617. We have
commitments and contractual obligations during the next 12 months of
approximately $665,000. We did not have any long-term debt as of March 31, 2006.
Aside from cash requirement for the renovation of the casino and hotel, we
believe that our cash flow from operations and its working capital will be
sufficient to fund our operating cash requirements for the next twelve months
and beyond, assuming revenues from our hotel operations remain consistent with
historical levels.
During the quarter ended March 31, 2006, we made a $60,000 short-term loan
to Szchuan Enterprises, Ltd. Yong Yang is an affiliate of Szchuan Enterprises,
Ltd. and a director of CRH.
We currently have no alternative sources of funding, and we currently rely
on cash flow from our hotel to meet our working capital requirements. Our
current plan is to reopen our entire gaming and restaurant operations once we
have completed all of the renovations; however, if funds are not available to
complete all of the renovations, we may reopen portions of our gaming operation
in stages as renovations are completed beginning with our casino floor then our
slot room.
We anticipate that the current $1 million funding allocated towards
renovations will only be sufficient to fund renovation of our casino floor and
purchase of gaming equipment, which is estimated to cost approximately $900,000.
We do not expect to reopen our slot room until we raise $2.7 million in
additional financing to purchase slot machines for our slot room. Total costs to
renovate our slot room and purchase slot machines is approximately $2.8 million.
We estimate the costs to complete renovation of our restaurant and lounge will
be approximately $300,000. See, "Plan of Operation" above. While we have
sufficient cash flow and working capital to reopen our casino floor in the
second half of 2006, we do not believe we have sufficient cash flow and working
capital to completely renovate our slot room or restaurants if the required
funding is not obtained through additional financing or equity sources. In which
case we will reopen the restaurant, which facilities have been kept intact
during the temporary closure and are still used to serve meals to hotel guests,
to the public and casino patrons. We will not begin renovating the restaurant
and creating the new lounge area until the renovation of slot room is complete
or until sufficient funding for all renovation projects is secured.
Historically, in 2004, casino and slot machine revenue accounted for 82%
(approximately $8.75 million) of our total revenue. We estimate that slot
machine revenue accounted for 45% ($3.96 million) of total casino and slot
machine revenue. We project that our future annual revenue would exceed 2004
historical revenue of $10.7 million if are able to complete our renovations. If
we are able to complete renovations of our casino floor, we estimate that annual
casino revenues should increase to approximately $6.4 million. If we completed
renovations of our slot room, we estimate that annual slot machine revenues
should increase to approximately $6.5 million. Restaurant revenue has
historically, based on 2004 revenue, accounted for approximately 4.67%
($500,000) of our total revenue.
We believe that we have sufficient cash flow from the operation of our
hotel to continue as a going concern even without our casino, slot room and
restaurant operations, assuming hotel revenues remain consistent with historical
levels.
We anticipate that we will be able to complete the renovation of our
casino, slot room and restaurant in the second half of 2006, assuming we are
able to raise adequate financing prior to the end of July 2006. We are currently
negotiating with potential investors to raise such funds; however, we currently
do not have any firm commitments for such financing. If we are unable to raise
sufficient capital through equity financing, we may seek to mortgage our real
property and assets. We estimate that we can complete the renovations in 3-5
months after we receive sufficient funding.
OFF-BALANCE SHEET ARRANGEMENTS
We had no off-balance sheet transactions.
48
Material Commitments
--------------------
On December 29, 2005, we entered into a Marketing Services Agreement with
Parker Communication Corporation, a Delaware corporation, under which we
retained Parker to provide marketing services related to developing and
implementing a marketing campaign. We agreed to pay Parker service fees of up to
$765,000. Parker will prepare marketing materials and direct mail marketing
pieces and assist us in developing a marketing program to develop our business.
We anticipate this program will be launched in connection with the reopening of
our casino.
INFLATION
We do not believe that inflation has had a significant impact on our
consolidated results of operations or financial condition. There has been no
statutory inflation adjustment in Peru during 2005.
CRITICAL ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ significantly from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates discussed herein are based upon certain market
assumptions and pertinent information available to management as of December 31,
2005. The respective carrying value of certain on-balance sheet financial
instruments approximated their fair values. These financial instruments include
cash, accounts payable and notes payable. Fair values were assumed to
approximate carrying values for cash, payables and notes payable because they
are short term in nature and their carrying amounts approximate fair values as
they are payable on demand.
IMPAIRMENT OF LONG LIVED ASSETS
Long lived assets held and used by us are reviewed for possible impairment
whenever events or circumstances indicate the carrying amount of an asset may
not be recoverable or is impaired.
49
INCOME TAXES
We follow Statement of Financial Accounting Standard No. 109, "Accounting
for Income Taxes" ("SFAS No. 109") for recording the provision for income taxes.
Deferred tax assets and liabilities are computed based upon the difference
between the financial statement and income tax basis of assets and liabilities
using the enacted marginal tax rate applicable when the related asset or
liability is expected to be realized or settled. Deferred income tax expenses or
benefits are based on the changes in the asset or liability each period. If
available evidence suggests that it is more likely than not that some portion or
all of the deferred tax assets will not be realized, a valuation allowance is
required to reduce the deferred tax assets to the amount that is more likely
than not to be realized. Future changes in such valuation allowance are included
in the provision for deferred income taxes in the period of change. Deferred
income taxes may arise from temporary differences resulting from income and
expense items reported for financial accounting and tax purposes in different
periods. Deferred taxes are classified as current or non-current, depending on
the classification of assets and liabilities to which they relate. Deferred
taxes arising from temporary differences that are not related to an asset or
liability are classified as current or non-current depending on the periods in
which the temporary differences are expected to reverse.
RECENT PRONOUNCEMENTS
In December, 2004, the FASB issued SFAS No. 123 (revised 2004) Share-Based
Payment, which is a revision of SFAS No.123, Accounting for Stock-Based
Compensation. SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees and amends SFAS No. 95, Statement of Cash flows.
Generally, the approach in SFAS No. 123(R) is similar to the approach described
in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values. Pro forma disclosure is no longer
an alternative. The new standard will be effective for us in the first interim
or annual reporting period beginning after December 15, 2005.
GOING CONCERN
The accompanying financial statements have been prepared assuming that we
will continue as a going concern which contemplates the recoverability of assets
and the satisfaction of liabilities in the normal course of business.
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common stock is quoted on the Over-the-Counter Bulletin Board (OTCBB)
of the National Association of Securities Dealers, Inc. under the symbol "CRVH."
The OTC Bulletin Board is a network of security dealers who buy and sell stock.
The dealers are connected by a computer network which provides information on
current "bids" and "asks" as well as volume information. The OTC Bulletin Board
is not considered a "national exchange."
Quotation of our common stock on the OTCBB began March 16, 2005. The market
for shares in our common stock is limited because only a small number of our
outstanding shares are available for trading in the public market. Our trading
price has ranged from $0.05 to $3.25 from March 16, 2005 through March 31, 2005.
The high and low bid quotations of our common stock on the OTC Bulletin
Board as reported by the NASD were as follows:
Period Low High Volume
- --------------------------------------------------------------------------------
2005
March 16, 2005 through June 30 $0.125 $1.00 1,249,000
Third Quarter $ 1.00 $2.75 456,092
Fourth Quarter $ 2.25 $2.50 652,000
- --------------------------------------------------------------------------------
2006
First Quarter $ 2.05 $2.80 237,315
50
The above quotations reflect inter-dealer prices, without retail mark-up,
markdown or commission and may not necessarily represent actual transactions.
As of March 31, 2006 and May 17, 2006, the last sale prices for our common
stock were $2.40 and $2.30, respectively, per share as quoted by the NASD OTCBB.
As of March 31, 2006, we had 21,815,667 shares of common stock issued and
outstanding, held by 67 registered shareholders.
DIVIDENDS
We have not declared or paid any cash dividend on our common stock. We
currently intend to retain any future earnings to fund the development and
growth of our business. Therefore, we do not currently anticipate paying cash
dividends.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We have not submitted any matters to a vote of our shareholders during the
years ended December 31, 2004 or 2005.
TRANSFER AGENT AND REGISTRAR
Our registrar and transfer agent for our common shares is Pacific Stock
Transfer Company located at 500 East Warm Spring Road, Suite 240, Las Vegas,
Nevada 89119.
USE OF PROCEEDS
We will not receive any of the proceeds of the sale of shares offered by
the selling shareholders. We intend to use the proceeds from the exercise of
Class A Warrants, if any, for general working capital purposes.
LEGAL MATTERS
The law firm of Woodburn and Wedge, Reno, Nevada has acted as our counsel
by providing an opinion on the validity of the securities.
EXPERTS AND CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Effective on or about July 15, 2005, we terminated the services of our
principal independent auditor, Manning Elliott, Chartered Accountants of
Vancouver, British Columbia.
No adverse opinion or disclaimer of opinion was issued by Manning Elliott,
and no opinion of Manning Elliott was qualified or modified as to uncertainty,
audit scope or accounting principles.
The change in auditor was recommended and approved by our Board of
Directors.
During the fiscal year ended December 30, 2004 and any interim period
preceding such dismissal, we were not aware of any disagreements with Manning
Elliott on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreement(s), if not
resolved to the satisfaction of Manning Elliott, would have caused it to make
references to the subject matter of the disagreement(s) in connection with its
report.
51
We are not aware of any reportable events (as defined in Item 304 (a) (1)
(B) of Regulation S-B) that have occurred during the two most recent fiscal
years and the interim period preceding the dismissal of Manning Elliott.
We engaged Mantyla McReynolds, LLC, Salt Lake City, Utah as our new
principle independent accountant effective on or about July 15, 2005, to audit
our financial records. During the two most recent fiscal years and the interim
period preceding the appointment of Mantyla McReynolds, we have not consulted
Mantyla McReynolds regarding the application of accounting principles to a
specified transaction, either completed or proposed; or the type of audit
opinion that might be rendered on our financial statements, and neither a
written report nor oral advice was provided to us that we considered an
important factor in reaching a decision as to the accounting or financial
reporting issue; or any matter that was either the subject of a disagreement or
event (as defined in Regulation S-B, Item 304(a)(1)(B)).
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Exchange Act and,
accordingly, file current and periodic reports, proxy statements and other
information with the SEC. We have also filed a registration statement on Form
SB-2 under the Securities Act, as amended, in connection with this offering.
This prospectus, which is part of the registration statement, does not contain
all of the information contained in the registration statement. For further
information with respect to us and the shares of common stock offered hereby,
reference is made to such registration statement, including the exhibits
thereto, which may be read, without charge, and copied at the public reference
facilities maintained by the SEC at Judiciary Plaza, 100 F Street, NE,
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 a site on the World Wide Web at http://www.sec.gov that contains
current and periodic reports, proxy statements and other information regarding
registrants that filed electronically with the SEC. Statements contained in this
prospectus as to the intent of any contract or other document referred to are
not necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to this registration
statement, each such statement being qualified in all respects by such
reference.
52
CHILCO RIVER HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
Page
----
Report of Independent Registered Public Accounting Firm ..................F-3
Consolidated Balance Sheet - December 31, 2005 ...........................F-4
Consolidated Statements of Operations and Comprehensive Income
for the Years Ended December 31, 2005 and 2004 .........................F-5
Consolidated Statement of Stockholders' Equity for the Years
Ended December 31, 2005 and 2004 .......................................F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2005 and 2004 .............................................F-7
Notes to the Consolidated Financial Statements .....................F-8 - F-21
F-1
CHILCO RIVER HOLDINGS, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
AND FINANCIAL STATEMENTS
December 31, 2005
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Chilco River Holdings, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Chilco River
Holdings, Inc. and Subsidiaries as of December 31, 2005, and the related
consolidated statements of operations and comprehensive income, stockholders'
equity, and cash flows for the years ended December 31, 2005 and 2004. 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 audit.
We conducted our audit 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 has determined that it
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit 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 also
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, as well as evaluating the
overall financial statement presentation. We believe that our audit provides 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 Chilco River Holdings, Inc. and
Subsidiaries as of December 31, 2005, and the results of operations and cash
flows for the years ended December 31, 2005 and 2004, in conformity with
accounting principles generally accepted in the UnitFed States of America.
/s/ Mantyla McReynolds LLC
- -------------------------------
Mantyla McReynolds LLC
Salt Lake City, Utah
February 28, 2006,
(except as to Note 2(i), which
is as of May 19, 2006)
F-3
CHILCO RIVER HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2005
ASSETS
Current Assets
Cash $ 1,435,683
Accounts receivable, net of allowance for doubtful accounts
of $ 0 - Note 4 23,712
Related Party receivables - Note 7 3,144
Inventory 197,804
Prepaid expense & other current assets 13,858
Value added tax recoverable 167,999
-----------------
Total Current Assets 1,842,200
-----------------
Property, furniture & equipment, net of accumulated depreciation
of $6,590,904 as of December 31, 2005 - Note 5 16,110,624
Non Current Deferred Tax Asset, Net - Note 6 116,666
-----------------
TOTAL ASSETS $18,069,490
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 63,802
Due to affiliates 194,031
Accrued expenses and other payables 7,021
Income tax payable 61,995
-----------------
Total Current Liabilities 326,849
-----------------
TOTAL LIABILITIES 326,849
-----------------
Stockholders' Equity
Common stock: $.001 par value, 100,000,000 authorized,
23,815,667 shares issued and outstanding 23,816
Additional Paid-In Capital 20,040,873
Retained earnings (279,446)
Subscription receivable (779,650)
Prepaid expenses via stock issuance (1,380,000)
Accumulated Foreign Currency Adjustment 117,048
-----------------
Total Stockholders' Equity 17,742,641
-----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $18,069,490
=================
F-4
CHILCO RIVER HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED
DECEMBER 31, 2005 AND 2004
For the Year For the Year
Ended Ended
12/31/05 12/31/04
---------------------- ---------------------
Revenues
Casino $ 2,618,132 $ 8,772,925
Rooms 1,150,224 901,351
Food and Beverage 507,823 499,556
Entertainment -- 10,224
Other 274,260 529,169
Less: Promotional Allowances (42,887) (18,531)
---------------------- ---------------------
Total Revenues 4,507,552 10,694,694
---------------------- ---------------------
Operating Expenses
Operating departments 1,153,316 1,491,522
General and administrative 1,161,716 1,414,070
Bad debt -- 309,016
Depreciation 956,350 1,006,638
Loss on disposition of assets 228,014 --
---------------------- ---------------------
Total Operating Expenses 3,499,396 4,221,246
---------------------- ---------------------
Income from Operations 1,008,156 6,473,448
---------------------- ---------------------
Other Income and Expenses
Interest income -- 286,186
Other income/gains 21,275 196,584
Other expenses/losses -- (135,678)
---------------------- ---------------------
Total Other Income and Expenses 21,275 347,092
---------------------- ---------------------
Income before income tax 1,029,431 6,820,540
Provision for income tax - Note 6 (448,048) (2,225,147)
---------------------- ---------------------
Net Income $ 581,383 $ 4,595,393
Other Comprehensive Income
Unrealized gain (loss) on
Foreign Currency Translation, net of tax - Note 3 176,172 518,944
---------------------- ---------------------
Total Comprehensive Income $ 757,555 $ 5,114,337
---------------------- ---------------------
Basic Earnings Per Share $ 0.03 $ 0.24
Diluted Earnings Per Share $ 0.03 $ 0.24
Weighted Average Shares Outstanding 20,252,611 19,250,000
Weighted Average Shares Outstanding - Assuming Dilution 20,336,866 19,250,000
See accompanying notes to consolidated financial statements
F-5
CHILCO RIVER HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED
DECEMBER 31, 2005 AND 2004
Accumulated
Additional Stock Issued Foreign Total
Common Common Paid in Retained Subscription for Future Currency Stockholders'
Shares Stock Capital Earnings Receivable Services Transaction Equity
- -----------------------------=------------------------------------------------------------------------------------------------------
Balance as of
12/31/2003 19,250,000 $19,250 $12,702,378 $6,943,707 $ -- $ -- $(578,068) $19,087,267
Net Income for
the Year Ended
December 31, 2004 4,595,393 518,944 5,114,337
Divdend Declared (5,167,136) -- (5,167,136)
- -----------------------------=------------------------------------------------------------------------------------------------------
Balance as of
12/31/2004 19,250,000 19,250 12,702,378 6,371,964 -- -- (59,124) 19,034,468
Net income for
the year ended
December 31, 2005 581,383 176,172 757,555
Recapitalization
with the
original Chilco
River
Shareholders 2,200,000 2,200 (2,200) --
Undistributed
earnings of
Bruce Grupo 3,944,561 (3,944,561) --
Distribution to
Bruce Grupo
shareholders (3,288,232) (3,288,232)
Sale of units at
$1.50 per unit
for subscription
receivable, each
unit consisting
of one common
share and one
warrant, net of
issuance costs of
$30,000 1,365,667 1,366 2,017,134 (2,048,500) (30,000)
Cash received
for subscriptions 1,268,850 1,268,850
Issued 1,000,000
shares for
future
consulting
services, valued
at $1.38 per
share 1,000,000 1,000 1,379,000 (1,380,000) --
- -----------------------------=------------------------------------------------------------------------------------------------------
Balance as of
12/31/2005 23,815,667 $23,816 $20,040,873 $ (279,446) $(779,650) $(1,380,000) $ 117,048 $17,742,641
====================================================================================================================================
See accompanying notes to consolidated financial statements
F-6
CHILCO RIVER HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 2005 AND 2004
For the Year For the Year
Ended Ended
12/31/2005 12/31/2004
-------------------- -------------------
Cash Flows from Operating Activities
Net Income $ 581,383 $ 4,595,393
Adjustments to reconcile net income to cash flows
from operating activities
Depreciation 956,350 1,006,638
Loss on disposition of casino assets 228,014 --
(Increase)/Decrease
in account balances of:
Accounts Receivable (139,159) 365,369
Inventory (17,186) (27,463)
Prepaid expense & other current assets (81,410) 8,304
Deferred tax assets (127,231) (79,470)
Increase/(Decrease) in account balances of:
Accounts payable (42,512) 141,150
Accrued expenses and other payables (160,707) 46,199
Foreign Taxes Payable (27,306) (71,348)
-------------------- -------------------
Cash Flows from Operating Activities 1,170,236 5,984,772
-------------------- -------------------
Cash Flows Used by Investing Activities
Cash paid for acquisition of fixed assets (1,412,214) (791,847)
-------------------- -------------------
Cash Used by Investing Activities (1,412,214) (791,847)
-------------------- -------------------
Cash Flows from Financing Activities
Cash proceeds from shareholder loans 60,316 29,582
Cash repayment for shareholder loans - --
Loans Payable (57,752) 45,099
Cash distributed to Bruce Grupo shareholders (1,143,967) (5,167,136)
Cash proceeds from subscribed capital 1,268,850 --
Stock issuance costs (30,000) --
-------------------- -------------------
Cash Used in Financing Activities 97,447 (5,092,455)
-------------------- -------------------
Other comprehensive income from current year 176,172 518,944
-------------------- -------------------
Net Change in cash and cash equivalents 31,641 619,414
Cash and cash equivalents at the beginning of year 1,404,042 784,628
-------------------- -------------------
Cash and cash equivalents at the end of year $ 1,435,683 1,404,042
==================== ===================
Supplemental Disclosure Information:
Cash paid during the year for interest -- --
-------------------- -------------------
Cash paid during the year for income taxes $ 601,785 2,145,677
-------------------- -------------------
Non-cash transactions
Accounts receivable distributed to Bruce Grupo shareholders $ 1,200,874 $ --
Other receivables distributed to Bruce Grupo shareholders 320,419 --
Prepaid expenses distributed to Bruce Grupo shareholders 337,590 --
Deferred tax asset distributed to Bruce Grupo shareholders 620,416 --
Accounts payable assumed by Bruce Grupo shareholders (181,447) --
Accrued expenses assumed by Bruce Grupo shareholders (153,587) --
Shares issued for prepaid expenses (1,380,000) --
See accompanying notes to consolidated financial statements
F-7
CHILCO RIVER HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
1. Business Organization and Reorganization
Chilco River Holdings, Inc. (CRH, or the Company) was incorporated in the
State of Nevada on May 8, 2003. The Company acquired a 100% interest in 16
mineral claim units located in British Columbia, Canada in November 2003.
After the completion of a preliminary exploration report on the claim, the
Company has suspended any mineral exploration effort.
Bruce Grupo Diversion SAC (BGD) was formed on March 1, 1996 and registered
at the Registry for Legal Persons of Lima, Peru on April 28, 1996. BGD
owned a fourteen-story building and a four-story adjacent structure that
are operated as a casino and a hotel (the Bruce Hotel/Casino). Bruce
Hotel/Casino is licensed to operate slot machines, a night club,
discotheques, and a restaurant. As of February 2005, the casino consisted
of traditional gaming tables (blackjack, roulette, craps and poker) in the
second floor (the gaming floor) of the main building and of about 220 slot
machines in the ground floor (the slot room).
Kubuk International, Inc. (KII) is a California corporation and was
incorporated on January 7, 2002. The majority shareholders of KII also
control 99% of total voting stock of BGD.
Kubuk Investment S.A.C. (KISAC) was formed in year 2001 by the majority
shareholders of KII in Peru. KII's majority shareholders also formed Kubuk
Gaming S.A.C. (KGSAC) in year 2005 in Peru.
Starting on August 4, 2001, BGD and KISAC entered into a series of sale and
purchase agreements (Sale and Purchase Agreements) of the hotel assets and
certain casino properties owned and operated by BGD for purpose of
transferring these properties to KISAC. Total consideration for all Sale
and Purchase Agreements was in the amount of S/. 62,970,744 (US$19,357,745
using spot rate of 3.253:1 on May 21, 2005). On May 21, 2005, all assets
subject to the scope of the sale and purchase agreements were transferred
to and received by KISAC, which then commenced to carry on the hotel
lodging businesses of Bruce Hotel/Casino. The only assets that were
transferred to KISAC are the assets as listed under "Property, Furniture,
and Equipment" on the balance sheet. All other assets and liabilities
continue to belong to BGD and will subsequently be distributed to its
current shareholder. The accounting treatment used by KISAC to record the
transfer of the assets followed the guidance for transactions between
entities under common control as described in FAS 141, Business
Combinations. This standard requires that the receiving entity use the
carrying amount of the assets of the transferring entity. Therefore, no
fair market value adjustments were made to the transferred assets.
Furthermore, in accordance with Article 11-01(d)
F-8
CHILCO RIVER HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
1. Business Organization and Reorganization (continued)
of Regulation S-X, this transaction was treated as a business acquisition
since the revenue-producing activity remained generally the same as before
the transaction. Specifically, KISAC retained the following: physical
facilities, employee base, customer base, operating rights, operation
techniques, and trade name.
The gaming floor of Bruce Hotel/Casino has been temporarily closed for
renovation since March 2005. During the renovation, BGD continued to
operate slot machines in the casino until July 1, 2005, when MINCETUR, the
gaming authority of Peru, issued gaming licenses to KGSAC. KGSAC then took
over the slot machine operations and conducts all other gaming activities
of Bruce Hotel/Casino until the renovation project is completed. In
anticipation of the start of the planned renovation, the Company suspended
the slot room operation and closed the restaurant to the general public in
November 2005. As of December 31, 2005, the Company carried out only the
hotel lodging operations.
On June 15, 2005, KII and the shareholders of KISAC and KGSAC entered into
an Agreement and Plan of Reorganization (the Reorganization Agreement),
under which KII issued 50,920,000 shares of common stock to the
shareholders of KISAC and KGSAC in exchange for their entire ownership
holdings of KISAC and KGSAC. As of June 30, 2005, both KISAC and KGSAC were
100% owned by KII.
On July 15, 2005, CRH entered into a Share Exchange Agreement with KII and
certain representatives of its shareholders. Under the terms of the Share
Exchange Agreement, CRH agreed to acquire all of the issued and outstanding
capital stock of KII from KII's shareholders. On August 3, 2005, CRH
completed the acquisition of KII in accordance with the terms of the Share
Exchange Agreement by issuing 19,250,000 Exchange Shares to shareholders of
KII as consideration. KII had 51,000,400 shares of common stock issued and
outstanding at the time of acquisition. Its shareholders received
0.3749970588 Exchange Shares for each share of KII common stock tendered.
In connection with the closing of the Share Exchange, the founding
shareholder and two former officers and directors of CRH agreed to
contribute an aggregate of 3,964,000 shares of the CRH common stock to the
Company as an additional capital contribution. The shares were cancelled
effective as of August 3, 2005. See Note 11 for information regarding the
related escrow agreements and share contribution agreement.
F-9
CHILCO RIVER HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
2. Significant Accounting Policies
(a) Principles of Consolidation
The financial statements include the accounts of CRH and KII, as well as
the accounts of the latter's wholly-owned Peruvian subsidiaries, KISAC and
KGSAC, formerly Bruce Grupo Diversion SAC. All significant inter-company
balances and transactions have been eliminated in consolidation.
(b) Use of Estimates
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles in the United States requires
management of the Company to make certain estimates and assumptions. These
estimates and assumptions affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the consolidated financial statements, as well as the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
(c) Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less when purchased to be cash equivalents.
(d) Accounts Receivable
Trade receivables, including casino and hotel receivables, are typically
non-interest bearing and are initially recorded at cost. Accounts are
written off when management deems the account to be uncollectible.
Recoveries of accounts previously written off are recorded when received.
An estimated allowance for doubtful accounts is maintained to reduce the
Company's receivables to their carrying amount, which approximates fair
value. The allowance is estimated based on specific review of customer
accounts as well as historical collection experience and current economic
and business conditions.
(e) Revenue Recognition and Promotional Allowances
Casino revenue is the aggregate net difference between gaming wins and
losses, with liabilities recognized for funds deposited by customers before
gaming play occurs ("casino front money") and for chips in the customers'
possession ("outstanding chip liability"). Hotel, food and beverage,
entertainment and other operating revenues are recognized as services are
performed.
F-10
CHILCO RIVER HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
In accordance with industry practice, the retail value of accommodations,
food and beverage, and other services furnished to guests without charge is
included in gross revenue and then deducted as promotional allowances. The
estimated retail value of such promotional allowances is included in
operating revenues as $42,887 and $18,531 in the years ended December 31,
2005 and 2004, respectively.
(f) Income Taxes
Provisions for income taxes are based on taxes payable or refundable for
the current year and deferred taxes on temporary differences between the
amount of taxable income and pretax financial income and between the tax
basis of assets and liabilities and their reported amounts in the financial
statements. Deferred tax assets and liabilities are included in the
financial statements at currently enacted income tax rates applicable to
the period in which the deferred tax assets and liabilities are expected to
be realized or settled as prescribed in Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." As changes in tax
laws or rate are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes. A valuation allowance is recognized
if it is more likely than not that some portion or all of the deferred tax
asset will not be realized. Deferred income tax asset and liability
balances are netted, as applicable, when they represent deferred amounts
within the same taxing jurisdiction.
(g) Basic and Diluted Earnings per Share
Basic earnings per share of common stock were computed by dividing income
available to common stockholders, by the weighted average number of common
shares outstanding, net of common stock held in the treasury for the year.
Diluted earnings per share were computed using the "treasury stock method"
under SFAS No. 128 "Earnings per Share."
(h) Inventories
Inventories are presented at adjusted cost or market value, whichever is
lower. Cost is established based on either the first-in, first out
assumption or, in certain cases, specific identification method.
(i) Property, Plant and Equipment
Property, plant and equipment are stated at the historical cost.
Depreciation is calculated based on straight-line method over the
properties' estimated useful lives, which range from 5 to 7 years for
machinery and equipment and 39 years
F-11
CHILCO RIVER HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
for building and building improvements. Betterment or improvements to
properties are capitalized to properties, plant and equipment accounts.
Repairs and maintenance costs are charged to expense accounts.
Certain long-lived assets of the Company are reviewed at least annually as
to whether their carrying values have become impaired in accordance with
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." Management considers assets to be impaired if the carrying value
exceeds the undiscounted projected cash flows from operations. If
impairment exists, the assets are written down to their fair value or the
projected discounted cash flows from related operations. No impairment loss
was recognized during the years ended December 31, 2005 and 2004.
Certain assets were disposed of during 2005 as part of the casino
renovation, amounting to $228,014.
(j) Concentration of Credit Risk
The Company maintains substantially all of its day-to-day operating cash
balances with Peruvian commercial banks and a California bank. Deposits
with the California bank are insured by Federal Deposit Insurance
Corporation (FDIC) up to $100,000. As of December 31, 2005, the Company had
an exposure in the amount of $920,500 that exceeded the FDIC insurance
coverage. The banks or financial institutions in Peru may not provide
sufficient deposit insurance coverage on the Company's cash positions.
(k) Shares-Based Compensation
In December 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123R, "Share Based Payment." SFAS 123R is a revision of SFAS No.
123 "Accounting for Stock-Based Compensation," and supersedes APB Opinion
No. 25, "Accounting for Stock Issued to Employees" and its related
implementation guidance. SFAS 123R establishes standards for the accounting
for transactions in which an entity exchanges its equity instruments for
goods or services. It also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair
value of the entity's equity instruments or that may be settled by the
issuance of those equity instruments. SFAS 123R focuses primarily on
accounting for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS 123R does not change the accounting
guidance for share-based payment transactions with parties other than
employees provided in SFAS 123 as originally issued and Emerging Issues
Task Force Issue No. 96-18, "Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services." SFAS 123R does not address the accounting for
employee share ownership plans, which are subject to AICPA Statement of
Position 93-6, "Employers' Accounting for Employee Stock
F-12
CHILCO RIVER HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
Ownership Plans". SFAS 123R requires a public entity to measure the cost of
employee services received in exchange for an award of equity instruments
based on the grant-date fair value of the award (with limited exceptions).
That cost will be recognized over the period during which an employee is
required to provide service in exchange for the award - the requisite
service period (usually the vesting period). SFAS 123R requires that the
compensation cost relating to share- based payment transactions be
recognized in the financial statements. That cost will be measured based on
the fair value of the equity or liability instruments issued. The scope of
SFAS 123R includes a wide range of share-based compensation arrangements
including share options, restricted share plans, performance-based awards,
share appreciation rights, and employee share purchase plans. The Company
has adopted the provisions under SFAS 123R as of December 31, 2005. The
adoption of this standard is not expected to have a material effect on the
Company's results of operations or financial position.
(l) Impact of New Accounting Standards
In June 2003, the Securities and Exchange Commission ("SEC") adopted final
rules under Section 404 of the Sarbanes-Oxley Act of 2002 ("Section 404").
Commencing with the Company's Annual Report for the year ending December
31, 2007, the Company is required to include a report of management on the
Company's internal control over financial reporting. The internal control
report must include a statement of management's responsibility for
establishing and maintaining adequate internal control over financial
reporting for the Company; of management's assessment of the effectiveness
of the Company's internal control over financial reporting as of year end;
of the framework used by management to evaluate the effectiveness of the
Company's internal control over financial reporting; and that the Company's
independent accounting firm has issued an attestation report on
management's assessment of the Company's internal control over financial
reporting, which report is also required to be filed as part of the Annual
Report on Form 10-KSB.
In December 2005 the SEC's advisory committee on small business recommended
that the SEC allow most companies with market values of less than $700
million to avoid having their internal controls certified by auditors. The
advisory committee recommended that most companies with market
capitalizations under $100 million be exempted totally. It further
recommended that companies with market capitalizations of $100 million to
$700 million not face audits of internal controls. Some companies with
large revenues but low market values would still be required to comply with
the act. There can be no assurances that these proposals or similar
proposals will be adopted.
F-13
CHILCO RIVER HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
The FASB issued FASB Statement No. 154 (SFAS 154) which replaces APB
Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting
Accounting Changes in Interim Financial Statements, and changes the
requirements for the accounting for and reporting of a change in accounting
principle. It is not believed that this will have an impact on the Company
in the foreseeable future as no accounting changes are anticipated.
(m) Reclassifications
Certain amounts have been reclassified in the prior year's financial
statements to conform to the current year's presentation.
(n) Value Added Tax Recoverable
According to sales tax laws in Peru, the Peruvian Subsidiaries are allowed
to offset sales tax paid to vendors with sales tax received from their
customers, prior to remitting the sales tax received to the local
jurisdiction. The asset balance represents sales tax paid to vendors that
is expected to be offset against future sales tax received during the one
year period following the balance sheet date.
(o) Dividends
The Company accrues for declared dividends which are not yet paid. As of
the balance sheet date, there were no dividends which were declared and
unpaid. Dividends per common share for the years 2005 and 2004 are $.06 and
$.27, respectively. All dividends occurred prior to the date of the Share
Exchange Agreement.
3. Foreign Currency Transactions
The Company conducts its gaming business at Bruce Casino in US Dollars and
the Peruvian Nuevo Soles. The hotel and other business activities are
operated using both US Dollars and the Nuevo Soles. The functional currency
of the Peruvian subsidiaries' is the Nuevo Soles, whereas the functional
currency of the US parent is the US dollar. Account balances on the balance
sheet are translated into US Dollars equivalents using the spot rate of
3.421:1 on December 31, 2005, while the results of operations are
translated into US Dollars equivalents using the weighted average exchange
rates for each year presented.
4. Accounts Receivable
As discussed in Note 1, none of the accounts receivable of BGD as of May
21, 2005 were transferred to KISAC and the Company as a result of the
reorganization in 2005. As of December 31, 2005, essentially all of the
accounts
F-14
CHILCO RIVER HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
receivable are created during the normal course of business after May 21,
2005 and consist of the following balances:
Account 2005
------- ----
Open invoices $ 23,712
Allowance for doubtful accounts -
--------------
Total $ 23,712
--------------
5. Property, Furniture & Equipment
As of December 31, 2005, Property, Furniture and Equipment, including
prepaid casino equipment and renovation costs, which will not be
depreciated until placed in service, consisted of the following balances:
Account 2005
- ------- ----
Land $ 862,918
Buildings and improvements 15,972,404
Vehicles 329,317
Furniture 607,453
Casino equipment 3,362,073
Computers 265,963
Work in-progress and prepaid equipment 1,301,400
Accumulated depreciation (6,590,904)
---------------------
Total $ 16,110,624
=====================
6. Income Taxes
Deferred income tax assets and liabilities at December 31, 2005 consist of
the following temporary differences:
Current Long-term
-------------- --------------
Deferred tax asset:
Net Operating Loss carryforward (expiring
through 2025) -- $105,205
Property and Equipment -- 101,258
Foreign tax on expatriation of dividends -- (10,565)
Undistributed Peruvian earnings and profit -- (79,232)
-------------- --------------
Net deferred tax asset $ -- $116,666
============== ==============
The components of the provision for income tax are as follows:
F-15
CHILCO RIVER HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
2005 2004
-------------- --------------
Current Expense:
Foreign Taxes $ 564,715 $ 2,145,677
Deferred Expense (Benefit):
Foreign Taxes (90,694) 79,470
Domestic Taxes (25,973) -
-------------- --------------
Total $ 448,048 $ 2,225,147
============== ==============
Reported income tax expense is reconciled to the amount computed on the
basis of income before income taxes at the statutory rate as follows:
2005 2004
-------------- --------------
Statutory Expense 34.00% 34.00%
Effects of:
Foreign and U.S. tax rate differential (4.00%) (4.00%)
Net Deferred Tax Assets 11.33% 0.00%
Other 2.19% 2.62%
-------------- --------------
Reported Provision for Income Taxes 43.52% 32.62%
============== ==============
7. Related Party Transactions
The Company made advances to its employees. The advances are receivable on
demand and bear zero interest. Total related party advances as of December
31, 2005 were in the amount of $3,144.
The Company also incurred short-term borrowings from one of its major
shareholders and a corporation controlled by this shareholder. Unpaid
principal balances of short-term loans from the individual shareholder and
his controlled corporation as of December 31, 2005 were $97,289 and
$96,742, respectively. The short-term loans are unsecured, payable on
demand, and bear zero interest until January 1, 2006. After that date,
interest will be calculated at approximately 4% per annum. Should the loans
remain outstanding after the Company receives a notice of demand for
payment, 8% interest will apply to outstanding principal and interest
balances.
8. Contingencies and Commitments
On October 19, 2005 the Company entered into a lease agreement for an
office space where its corporate headquarters are located in the city of
Walnut, California. The lease has a two-year term from the commencement of
the lease and carries a two-year renewal option upon the expiration of the
original term.
F-16
CHILCO RIVER HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
Monthly rent under the lease is $2,011 per month for the first year and
$2,072 for the second plus allocation of certain common area maintenance
costs. The five year payout of the lease agreement is as follows:
Period Annual
------ ------
From Through Rent
---- ------- ----
12/1/2005 11/30/2006 $ 24,132
12/1/2006 11/30/2006 $ 24,864
On December 28, 2005 the Company entered into a marketing agreement with
Parker Communication Corporation ("Parker") under which Parker is to
provide consulting services to the Company and to develop and distribute
certain marketing materials to promote the business of the Company in a
period of twelve months starting from the execution of the agreement.
Pursuant to the agreement the Company agreed to pay Parker certain service
fees based on the number of marketing materials distributed but no more
than $765,000 in aggregate. No payment was made to Parker until January
2006.
9. Share-Based Consulting Payment
The Company entered into a Consulting Agreement with Clear Channel Inc.
(the "Clear Channel Agreement") on December 29, 2005. Under the Clear
Channel Agreement, the Company retained Clear Channel Inc. to provide the
Company with strategic marketing and business planning consulting services
and to assist the Company in developing corporate governance policies,
recruiting qualified officers and director candidates and developing a
corporate finance strategy during the period of three years from the date
of the agreement. Pursuant to the terms of the Clear Channel Agreement, the
Company paid Clear Channel Inc. a consulting fee of one million shares of
common stock, which were issued on February 14, 2006. The shares are
non-forfeitable. The fair value of the shares issued in connection with the
Clear Channel Agreement, which is recognized as a separate component of
stockholders' equity as of December 31, 2005, is determined to be
$1,380,000 and will be amortized as consulting expense from January 1, 2006
through December 31, 2008 as services are provided. Fair value of the
shares was based on the unit price (see Note 10), less the fair value of
the warrants.
10. Issuance of Common Stock and Warrants
On December 17, 2005, the Board of Directors authorized an initial direct
private placement offering of Units at $1.50 per Unit under the terms of a
Unit Purchase Agreement. Each Unit consists of one share of common stock,
and a Class A Warrant exercisable at $2.00 per share for one year from the
date of closing.
F-17
CHILCO RIVER HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
Under the terms of the Unit Purchase Agreement, the Company is required to
use $1,000,000 from proceeds from the offering to renovate the casino floor
of the Bruce Hotel and Casino and $1,000,000 for marketing and business
development. The Company agreed not to offer and sell shares of common
stock or common stock equivalents for a period of 120 days following the
effectiveness of the registration for such Units, except for certain
specified transactions, including an offer and sale of up to 2,000,000
shares of common stock at $1.50 per share. The private placement was made
to non-U.S. persons in off-shore transactions in reliance upon the
exemption from registration available under Rule 903 of Regulation S of the
Securities Act and one accredited investor in the United States pursuant to
an exemption available under Section 4(2) of the Securities Act. The
private placement was closed in January 2006. The Company issued 1,365,667
Units as a result of the private placement and raised aggregate gross
proceeds in the amount of $2,048,500. 1,365,667 shares of common stock were
issued on February 14, 2006 by the Company.
11. Escrow Agreements and Share Contribution Agreement
Under the terms of the Share Exchange Agreement, our Company along with
KII, the KII Shareholders, Tom Liu and David Liu, as the Principal
Shareholders of KII, and an escrow agent were required to enter into an
escrow agreement under which the Shareholders were required to place shares
of common stock issued in the Share Exchange into escrow to satisfy certain
obligations under the Share Exchange Agreement.
In connection with the closing of the Share Exchange, Chilco, the
Shareholders, the Shareholder Representative and Wasserman, Comden,
Casselman & Pearson, LLP, as the Escrow Agent, entered into an escrow
agreement dated August 3, 2005. The parties agreed that the Shareholders
would place a total of 8,250,000 of the shares issued in connection with
the Share Exchange into three separate escrows under one escrow agreement.
The Company and the Shareholders entered into the escrow arrangements to
ensure that a portion of our stock would only become available to the other
parties to the escrow agreement upon the occurrence of certain events, such
as the Company's ability to raise additional capital and the receipt of
corporate documents and materials from KII. The shares are subject to
release from each of the escrows on the following terms and conditions:
Escrow Number One - The Financing Transaction Escrow
----------------------------------------------------
In order to provide some assurance that the new management would be able to
raise sufficient financing to fund the renovation of the Bruce Hotel and
Casino
F-18
CHILCO RIVER HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
without significant dilution to the existing shareholders of Chilco, the
Shareholders placed an aggregate of 5,000,000 Exchange Shares into Escrow,
which is referred to as the Shareholder Escrow Shares. The Shareholders and
Chilco agreed that Chilco and its management would take all reasonable
actions to obtain the highest price per share in raising $5,000,000 for
renovating the Bruce Hotel and Casino and to provide capital for the
on-going operations of Chilco. The management of KII, who became the
management of Chilco, agreed that the minimum price per share of common
stock (or any rights, options or warrants to purchase, or securities of any
type whatsoever) issued by Chilco in connection with the financing would be
$1.00 per share. This undertaking is referred to as the Minimum Price
Covenant. The minimum price was determined after arms' length negotiations
between the Board of Directors of KII and Chilco based on the estimated
value of the combined company; however, no formal valuation was conducted.
The Shareholder Escrow Shares will be released from the Financing
Transaction Escrow as liquidated damages for breach of the Minimum Price
Covenant if Minimum Price Covenant is breached, then the number of
Shareholder Escrow Shares to be cancelled as liquidated damages shall be
calculated as follows:
X = (A/B)- A
where: X = Number of Shareholder Escrow Shares Cancelled
A = 5,000,000
B = Purchase Price Per Share
For the purposes of the Financing Transaction Escrow, the Purchase Price
Per Share is to be determined based on completing a financing transaction
to raise a minimum of $5,000,000 and is defined as cash consideration
received or to be received by Chilco or the fair market value of any
property received or to be received by Chilco (as shall be verified by
Chilco's independent accounting firm) for each Chilco Common Share issued
or to be issued pursuant to exercise or conversion of any convertible or
exchangeable security. As of December 31, 2005, Chilco has raised
approximately $2 million at a price in excess of $1.00 per share.
In addition, the KII Shareholders and KII, jointly and severally, agreed
that KII would deliver audited financial statements of KII to Chilco no
later than the earlier of (i) 60 days after the Closing Date or (ii) the
date that permits the filing of any registration statement required to be
filed under the terms of the Financing Transaction. If KII failed to
deliver the KII financial statements in a timely manner, then 360,000
Shareholder Escrow Shares were to be released and cancelled as liquidated
damages and not a penalty for the breach of the covenant.
F-19
CHILCO RIVER HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
The financial statements were delivered in accordance with the terms of the
Financing Transaction Escrow.
Escrow Number Two - The Rightholder Escrow
------------------------------------------
The KII Shareholders also placed an aggregate of 2,000,000 shares issued in
connection with the Share Exchanges into escrow for the purposes of
satisfying certain obligations of KII to Nefilim Associates, LLC, a
Massachusetts limited liability company, T Morgan LLC, a Delaware limited
liability company, and Sean Sullivan. KII had an existing obligation to
Nefilim, T Morgan and Mr. Sullivan to issue capital stock of KII or an
entity acquired by or acquiring KII upon satisfaction of certain conditions
under the terms of Consulting Agreements dated May 9, 2005 with respect to
Sean Sullivan, May 19, 2005 with respect to Nefilim Associates, LLC and
June 1, 2005 with respect to T Morgan LLC.
Under the terms of the Rightholder Escrow shares were to be released from
escrow to Nefilim, T Morgan and Mr. Sullivan, if Chilco was able to raise a
total of $5,000,000 within thirty (30) days of KII delivering the audited
financial statements of KII to Chilco. The shares issued to Nefilim, T
Morgan and Mr. Sullivan were subject to a redemption and cancellation right
by Chilco with respect to sixty percent (60%) of the shares, if Chilco has
not raised a total of $5,000,000, $10,000,000, $15,000,000 and $20,000,000
in subsequent financing transactions for Chilco within six (6) or twelve
(12) months from the Closing Date. However, the Escrow Agent was required
to release one hundred percent (100%) of the shares to Chilco for
cancellation if Chilco did not raise a total of $5,000,000 within thirty
(30) days of KII delivering the audited financial statements of KII to
Chilco.
The Company failed to raise $5,000,000 within thirty days of the delivery
of the audited financial statements to Chilco and the 2,000,000 shares held
in the Rightholder Escrow were returned and cancelled subsequent to
December 31, 2005. The Company's failure to raise capital as needed may
delay our efforts to complete the renovation and opening of the casino,
gaming room and restaurant during the second half of 2006. The Company
currently intends to raise the required capital through debt or equity
financing. If the Company is unable to finance the current or future
expansion projects, we will have to adopt one or more alternatives, such as
reducing or delaying planned expansion, development and renovation projects
or capital expenditures; selling assets; mortgaging our real property;
selling and leasing back the property or entering into joint venture
partnership arrangements. These sources of funds may not be sufficient to
finance our expansion, and other financing may not be available on
acceptable terms, in a timely manner or at all. If the Company is unable to
secure additional financing, we could be forced to limit or suspend
expansion, development and renovation
F-20
CHILCO RIVER HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
projects, which may adversely affect our business, financial condition and
results of operations.
Escrow Number Three - The Co-Sale Escrow
----------------------------------------
Tom Liu and David Liu, as the Principal Shareholders of KII, placed
1,250,000 shares issued in the Share Exchange into a Co-Sale Escrow. The
Company agreed to use commercially reasonable efforts to permit Tom Liu and
David Liu to offer and sell up to 1,250,000 Exchange Shares to investors on
a co-sale basis, in one or more private transactions, subject to us raising
at least $20,000,000. After the Company raises at least $20,000,000, the
Company agreed not to raise additional capital until Tom Liu and David Liu
have sold shares from the Co-Sale Escrow for proceeds of $5,000,000 or all
of the shares are released from Escrow. The Shareholder Representatives
shall receive all of proceeds from the sale of the shares from the Co-Sale
Escrow. The Escrow Agent shall release the shares from the Co-Sale Escrow
to Tom Liu and David Liu if the Company has not raised at least $20,000,000
prior to the third anniversary of the Closing Date of the Share Exchange.
All shares in escrow as of December 31, 2005 have been included in the
basic and diluted earnings per share computations as of December 31, 2005
and 2004.
Share Contribution Agreement
----------------------------
Under the terms of the Share Exchange Agreement, Chilco, KII and the KII
Shareholders agreed that Chilco shall have 2,200,000 shares of common stock
issued and outstanding immediately prior to the closing of the Share
Exchange.
In connection with the Share Exchange, Chilco and Mr. Roy, a shareholder of
Chilco prior to the Share Exchange, entered into a Share Contribution
Agreement dated effective as of August 3, 2005, under which Mr. Roy
contributed an aggregate of 3,564,000 shares of Chilco's common stock to
Chilco as a Capital Contribution. Former officers and directors,
contributed a total of 400,000 shares of common stock: Robert Krause
contributed 200,000 shares and Thomas Brady contributed 200,000 shares.
Chilco accepted Mr. Roy's capital contribution and the cancellation of
shares by Mr. Krause and Mr. Brady and cancelled 3,964,000 shares of common
stock. No consideration was paid to Mr. Roy in connection with the
contribution and cancellation of the shares.
F-21
CHILCO RIVER HOLDINGS, INC. & SUBSIDIARIES
INDEX TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
MARCH 31, 2006
Page
----
Condensed Consolidated Balance Sheet - March 31, 2006 ......................F-23
Condensed Consolidated Statements of Operations and Other
Comprehensive Income for the Quarters Ended March 31, 2006 and 2005 .....F-24
Condensed Consolidated Statements of Cash Flows for the Quarters
Ended March 31, 2006 and 2005 ...........................................F-25
Notes to the Condensed Consolidated Financial Statements ............F-26 - F-32
F-22
CHILCO RIVER HOLDINGS INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Expressed in US$)
As of
March 31, 2006
------------------
ASSETS
Current Assets
Cash $ 1,448,385
Accounts receivable, net of allowance for doubtful accounts
of $ 0 as of March 31, 2006 31,263
Notes receivable 60,000
Inventory 218,332
Prepaid expense & other current assets 20,439
VAT tax recoverable 136,165
------------------
Total Current Assets 1,914,584
------------------
Property, furniture & equipment,
net of accumulated depreciation of $6,775,957
as of March 31, 2006 16,309,200
------------------
Non Current Deferred Tax Asset 116,666
------------------
Total Other Assets 116,666
------------------
TOTAL ASSETS $ 18,340,450
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 15,670
Accrued expenses and other payables 5,243
------------------
Total Current Liabilities 20,913
------------------
TOTAL LAIBILITIES 20,913
------------------
Shareholders' Equity
Common stock: $.001 par value, 100,000,000 authorized
shares, 21,840,667 shares issued and outstanding 21,841
Additional Paid-in Capital 20,080,348
Prepaid Stock Compensation (1,265,000)
Accumulated Deficits (627,481)
Accumulated Foreign Currency Adjustment 109,829
------------------
Total Shareholders' Equity 18,319,537
------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 18,340,450
==================
(UNAUDITED - SEE ACCOMPANYING NOTES)
F-23
CHILCO RIVER HOLDINGS INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS &
OTHER COMPREHENSIVE INCOME
(Expressed in US$)
For the Quarter For the Quarter
Ended Ended
March 31, 2006 March 31, 2005
-------------- --------------
Revenues
Casino $ 55,268 $ 971,303
Rooms 271,025 269,120
Food and Beverage 25,666 138,412
Entertainment --
Other -- 29,281
-------------- --------------
351,959 1,408,116
-------------- --------------
Less:Promotional Allowances -- --
-------------- --------------
Total Revenues 351,959 1,408,116
-------------- --------------
Operating Expenses
Operating departments 104,698 345,024
General and administrative 403,433 156,478
Depreciation 185,058 237,710
-------------- --------------
Total Operating Expenses 693,189 739,212
-------------- --------------
Income (Loss) from Operations (341,230) 668,904
-------------- --------------
Other Income and Expenses
Interest income 5,760 --
Other income/gains 98 37,756
Other expenses/losses -- (1,188)
-------------- --------------
5,858 36,568
-------------- --------------
Income (Loss) before income tax (335,372) 705,472
Provision for income tax - Note 9 (12,662) (307,048)
-------------- --------------
Net Income (Loss) (348,034) 398,424
-------------- --------------
Other Comprehensive Income
Unrealized gain (loss) on
Foreign Currency Translation, net of tax (7,219) (208,752)
-------------- --------------
Total Comprehensive Income (Loss) $ (355,253) $ 189,672
-------------- --------------
Basic Earnings Per Share $ (0.02) $ 0.01
Diluted Earnings Per Share $ (0.02) $ 0.01
Weighted Average Shares Outstanding 22,843,140 19,250,000
(UNAUDITED - SEE ACCOMPANYING NOTES)
F-24
CHILCO RIVER HOLDINGS INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Expressed in US$)
For the Quarter For the Quarter
Ended Ended
March 31, 2006 March 31, 2005
-------------- --------------
Cash Flows from Operating Activities
Net Income (Loss) $ (348,034) $ 398,424
Adjustments to reconcile net income to cash flows
from operating activites
Depreciation 185,053 237,710
Prepaid expense via stock issuance 115,000 --
(Increase)/Decrease in account balances of:
Accounts Receivable (7,552) 460,411
Inventory (20,528) (54,978)
Prepaid expense & other current assets (6,581) 376,936
Deferred tax assets 31,834 (4,757)
Accounts payable (48,132) 17,925
Accrued expenses and other payables (1,777) 201,964
Foreign Taxes Payable (61,995) (1,205)
-------------- --------------
Cash Flows from Operating Activities (162,712) 1,632,430
Cash Flows Used by Investing Activities
Cash paid for construction in progress (383,629) --
-------------- --------------
Cash Used by Investing Activites (383,629) --
-------------- --------------
Cash Flows from Financing Activities
Cash proceeds from shareholder loans -- 118,542
Cash repayment for shareholder loans (190,888) --
Cash paid for dividend -- (1,340,789)
Cash proceeds from subscribed capital 817,150 --
Cash lent to affiliate company (60,000) --
-------------- --------------
Cash Used in Financing Activities 566,262 (1,222,247)
-------------- --------------
Other comprehensive income from current year (7,219) (208,752)
-------------- --------------
Net Change in cash and cash equivalents 12,702 201,431
-------------- --------------
Cash and cash equivalents at the beginning of year 1,435,683 1,404,042
-------------- --------------
Cash and cash equivalents at the end of year $ 1,448,385 $ 1,605,473
============== ==============
Supplemental Disclosure Information:
Cash paid during the year for interest -- --
-------------- --------------
Cash paid during the year for income taxes $ 74,728 $ 145,500
-------------- --------------
(UNAUDITED - SEE ACCOMPANYING NOTES)
F-25
Chilco River Holdings, Inc.
Notes To The Condensed Consolidated Financial Statements
March 31, 2006
Preliminary Note
The accompanying condensed consolidated financial statements have been
prepared without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. In the opinion of the
management, the accompanying interim financial statements contain all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation have been included. The results of operations for the three-month
period ended March, 31, 2006, are not necessarily indicative of the results for
a full-year period. It is suggested that these condensed financial statements be
read in conjunction with the financial statements and notes thereto included in
the Company's Annual Audit for the year ended December 31, 2005.
1. Business Organization and Reorganization
Chilco River Holdings, Inc. (CRH, or the Company) was incorporated in the
State of Nevada on May 8, 2003. The Company acquired a 100% interest in 16
mineral claim units located in British Columbia, Canada in November 2003.
After the completion of a preliminary exploration report on the claim, the
Company has suspended any mineral exploration effort. The properties were
returned to the transferor in April, 2006 and the Company no longer holds
any interest in mineral claims or properties.
Bruce Grupo Diversion SAC (BGD) was formed on March 1, 1996 and registered
at the Registry for Legal Persons of Lima, Peru on April 28, 1996. BGD
owned a fourteen-story building and a four-story adjacent structure that
are operated as a casino and a hotel (the Bruce Hotel/Casino). Bruce
Hotel/Casino is licensed to operate slot machines, a night club,
discotheques, and a restaurant. As of February 2005, the casino consisted
of traditional gaming tables (blackjack, roulette, craps and poker) in the
second floor (the gaming floor) of the main building and of about 220 slot
machines in the ground floor (the slot room).
Kubuk International, Inc. (KII) is a California corporation and was
incorporated on January 7, 2002. The majority shareholders of KII also
control 99% of total voting stock of BGD.
Kubuk Investment S.A.C. (KISAC) was formed in year 2001 by the majority
shareholders of KII in Peru. KII's majority shareholders also formed Kubuk
Gaming S.A.C. (KGSAC) in year 2005 in Peru.
Starting on August 4, 2001, BGD and KISAC entered into a series of sale and
purchase agreements (Sale and Purchase Agreements) of the hotel assets and
certain casino properties owned and operated by BGD for purpose of
transferring these properties to KISAC. Total consideration for all Sale
and Purchase Agreements was in the amount of S/. 62,970,744 (US$19,357,745
using spot rate of 3.253:1 on May 21, 2005). On May 21, 2005, all assets
subject to the scope of the sale and purchase agreements were transferred
to and received by KISAC, which then commenced to carry on the hotel
lodging businesses of Bruce Hotel/Casino. The only assets that were
transferred to KISAC are the assets as listed under "Property, Furniture,
and Equipment" on the balance sheet. All other assets and liabilities
continue to belong to BGD and will subsequently be distributed to its
current shareholder. The accounting treatment used by KISAC to record the
transfer of the assets followed the guidance for transactions between
entities under common control as described in FAS 141, Business
Combinations. This standard requires that the receiving entity use the
carrying amount of the assets of the transferring entity. Therefore, no
fair market value adjustments were made to the transferred assets.
Furthermore, in accordance with Article 11-01(d)
Chilco River Holdings, Inc.
Notes To The Condensed Consolidated Financial Statements
March 31, 2006
of Regulation S-X, this transaction was treated as a business acquisition
since the revenue-producing activity remained generally the same as before
the transaction. Specifically, KISAC retained the following: physical
facilities, employee base, customer base, operating rights, operation
techniques, and trade name.
The gaming floor of Bruce Hotel/Casino has been temporarily closed for
renovation since March 2005. During the renovation, BGD continued to
operate slot machines in the casino until July 1, 2005, when MINCETUR, the
gaming authority of Peru, issued gaming licenses to KGSAC. KGSAC then took
over the slot machine operations and conducted all other gaming activities
of Bruce Hotel/Casino until November 2005. In anticipation of the start of
the planned renovation, the Company suspended the slot room operation and
closed the restaurant to the general public in November 2005. As of
December 31, 2005, the Company carried out only the hotel lodging
operations.
On June 15, 2005, KII and the shareholders of KISAC and KGSAC entered into
an Agreement and Plan of Reorganization (the Reorganization Agreement),
under which KII issued 50,920,000 shares of common stock to the
shareholders of KISAC and KGSAC in exchange for their entire ownership
holdings of KISAC and KGSAC. After completion of the transactions under the
reorganization agreement, both KISAC and KGSAC were 100% owned by KII.
On July 15, 2005, CRH entered into a Share Exchange Agreement with KII and
certain representatives of its shareholders. Under the terms of the Share
Exchange Agreement, CRH agreed to acquire all of the issued and outstanding
capital stock of KII from KII's shareholders. On August 3, 2005, CRH
completed the acquisition of KII in accordance with the terms of the Share
Exchange Agreement by issuing 19,250,000 Exchange Shares to shareholders of
KII as consideration. KII had 51,000,400 shares of common stock issued and
outstanding at the time of acquisition. Its shareholders received
0.3749970588 Exchange Shares for each share of KII common stock tendered.
In connection with the closing of the Share Exchange, the founding
shareholder and two former officers and directors of CRH agreed to
contribute an aggregate of 3,964,000 shares of the CRH common stock to the
Company as an additional capital contribution. The shares were cancelled
effective as of August 3, 2005.
F-26
Chilco River Holdings, Inc.
Notes To The Condensed Consolidated Financial Statements
March 31, 2006
2. Accounting Policies
(a) Principles of Consolidation
The financial statements include the accounts of CRH and KII, as well
as the accounts of the latter's wholly-owned Peruvian subsidiaries,
KISAC and KGSAC, formerly Bruce Grupo Diversion SAC. All significant
inter-company balances and transactions have been eliminated in
consolidation.
(b) Use of Estimates
The preparation of the Company's financial statements in conformity
with generally accepted accounting principles in the United States
requires management of the Company to make certain estimates and
assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the consolidated financial statements,
as well as the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
(c) Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased
with a maturity of three months or less when purchased to be cash
equivalents.
(d) Accounts Receivable
Trade receivables, including casino and hotel receivables, are
typically non-interest bearing and are initially recorded at cost.
Accounts are written off when management deems the account to be
uncollectible. Recoveries of accounts previously written off are
recorded when received. An estimated allowance for doubtful accounts
is maintained to reduce the Company's receivables to their carrying
amount, which approximates fair value. The allowance is estimated
based on specific review of customer accounts as well as historical
collection experience and current economic and business conditions.
(e) Revenue Recognition and Promotional Allowances
Casino revenue is the aggregate net difference between gaming wins and
losses, with liabilities recognized for funds deposited by customers
before gaming play occurs ("casino front money") and for chips in the
customers' possession ("outstanding chip liability"). Hotel, food and
beverage, entertainment and other operating revenues are recognized as
services are performed.
F-27
Chilco River Holdings, Inc.
Notes To The Condensed Consolidated Financial Statements
March 31, 2006
In accordance with industry practice, the retail value of
accommodations, food and beverage, and other services furnished to
guests without charge is included in gross revenue and then deducted
as promotional allowances. There was no promotional allowance for the
three months ended March 31, 2006 as all casino and slot machine
operations are temporarily suspended for renovation.
(f) Income Taxes
Provisions for income taxes are based on taxes payable or refundable
for the current year and deferred taxes on temporary differences
between the amount of taxable income and pretax financial income and
between the tax basis of assets and liabilities and their reported
amounts in the financial statements. Deferred tax assets and
liabilities are included in the financial statements at currently
enacted income tax rates applicable to the period in which the
deferred tax assets and liabilities are expected to be realized or
settled as prescribed in Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes." As changes in tax laws
or rate are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes. A valuation allowance is
recognized if it is more likely than not that some portion or all of
the deferred tax asset will not be realized. Deferred income tax asset
and liability balances are netted, as applicable, when they represent
deferred amounts within the same taxing jurisdiction.
(g) Basic and Diluted Earnings per Share
Basic earnings per share of common stock were computed by dividing
income available to common stockholders, by the weighted average
number of common shares outstanding, net of common stock held in the
treasury for the year. Diluted earnings per share were computed using
the "treasury stock method" under SFAS No. 128 "Earnings per Share."
(h) Inventories
Inventories are presented at adjusted cost or market value, whichever
is lower. Cost is established based on either the first-in, first out
assumption or, in certain cases, specific identification method.
(i) Property, Plant and Equipment
Property, plant and equipment are stated at the historical cost.
Depreciation is calculated based on straight-line method over the
properties' estimated useful lives, which range from 5 to 7 years for
machinery and equipment and 39 years for building and building
improvements. Betterment or improvements to properties are capitalized
to properties, plant and equipment accounts. Repairs and maintenance
costs are charged to expense accounts.
F-28
Chilco River Holdings, Inc.
Notes To The Condensed Consolidated Financial Statements
March 31, 2006
Certain long-lived assets of the Company are reviewed at least
annually as to whether their carrying values have become impaired in
accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." Management considers assets to be
impaired if the carrying value exceeds the undiscounted projected cash
flows from operations. If impairment exists, the assets are written
down to their fair value or the projected discounted cash flows from
related operations.
(j) Concentration of Credit Risk
The Company maintains substantially all of its day-to-day operating
cash balances with Peruvian commercial banks and a California bank.
Deposits with the California bank are insured by Federal Deposit
Insurance Corporation (FDIC) up to $100,000. As of March 31, 2006, the
Company had an exposure in the amount of $68,624 that exceeded the
FDIC insurance coverage. The banks or financial institutions in Peru
may not provide sufficient deposit insurance coverage on the Company's
cash positions.
(k) Shares-Based Compensation
In December 2004, the Financial Accounting Standards Board (FASB)
issued SFAS No. 123R, "Share Based Payment." SFAS 123R is a revision
of SFAS No. 123 "Accounting for Stock-Based Compensation," and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and its related implementation guidance. SFAS 123R
establishes standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods or services. It also
addresses transactions in which an entity incurs liabilities in
exchange for goods or services that are based on the fair value of the
entity's equity instruments or that may be settled by the issuance of
those equity instruments. SFAS 123R focuses primarily on accounting
for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS 123R does not change the
accounting guidance for share-based payment transactions with parties
other than employees provided in SFAS 123 as originally issued and
Emerging Issues Task Force Issue No. 96-18, "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services." SFAS 123R does not
address the accounting for employee share ownership plans, which are
subject to AICPA Statement of Position 93-6, "Employers' Accounting
for Employee Stock Ownership Plans". SFAS 123R requires a public
entity to measure the cost of employee services received in exchange
for an award of equity instruments based
F-29
Chilco River Holdings, Inc.
Notes To The Condensed Consolidated Financial Statements
March 31, 2006
on the grant-date fair value of the award (with limited exceptions).
That cost will be recognized over the period during which an employee
is required to provide service in exchange for the award - the
requisite service period (usually the vesting period). SFAS 123R
requires that the compensation cost relating to share-based payment
transactions be recognized in the financial statements. That cost will
be measured based on the fair value of the equity or liability
instruments issued. The scope of SFAS 123R includes a wide range of
share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation
rights, and employee share purchase plans. The Company has adopted the
provisions under SFAS 123R as of March 31, 2006. The adoption of this
standard is not expected to have a material effect on the Company's
results of operations or financial position.
(l) Impact of New Accounting Standards
In June 2003, the Securities and Exchange Commission ("SEC") adopted
final rules under Section 404 of the Sarbanes-Oxley Act of 2002
("Section 404"). Commencing with the Company's Annual Report for the
year ending December 31, 2007, the Company is required to include a
report of management on the Company's internal control over financial
reporting. The internal control report must include a statement of
management's responsibility for establishing and maintaining adequate
internal control over financial reporting for the Company; of
management's assessment of the effectiveness of the Company's internal
control over financial reporting as of year end; of the framework used
by management to evaluate the effectiveness of the Company's internal
control over financial reporting; and that the Company's independent
accounting firm has issued an attestation report on management's
assessment of the Company's internal control over financial reporting,
which report is also required to be filed as part of the Annual Report
on Form 10-KSB.
In December 2005 the SEC's advisory committee on small business
recommended that the SEC allow most companies with market values of
less than $700 million to avoid having their internal controls
certified by auditors. The advisory committee recommended that most
companies with market capitalizations under $100 million be exempted
totally. It further recommended that companies with market
capitalizations of $100 million to $700 million not face audits of
internal controls. Some companies with large revenues but low market
values would still be required to comply with the act. There can be no
assurances that these proposals or similar proposals will be adopted.
The FASB issued FASB Statement No. 154 (SFAS 154) which replaces APB
Opinion No. 20, Accounting Changes, and FASB Statement No. 3,
Reporting Accounting Changes in Interim Financial Statements, and
changes the
F-30
Chilco River Holdings, Inc.
Notes To The Condensed Consolidated Financial Statements
March 31, 2006
requirements for the accounting for and reporting of a change in
accounting principle. It is not believed that this will have an impact
on the Company in the foreseeable future as no accounting changes are
anticipated.
(m) Reclassifications
Certain amounts have been reclassified in the prior year's financial
statements to conform to the current year's presentation.
(n) Value Added Tax Recoverable
According to sales tax laws in Peru, the Peruvian Subsidiaries are
allowed to offset sales tax paid to vendors with sales tax received
from their customers, prior to remitting the sales tax received to the
local jurisdiction. The asset balance represents sales tax paid to
vendors that is expected to be offset against future sales tax
received during the one year period following the balance sheet date.
(o) Dividends
The Company accrues for declared dividends which are not yet paid. As
of the balance sheet date, there were no dividends which were declared
and unpaid. All dividends occurred prior to the date of the Share
Exchange Agreement.
3. Foreign Currency Transactions
The Company conducts its gaming business at Bruce Casino in US Dollars
and the Peruvian Nuevo Soles. The hotel and other business activities
are operated using both US Dollars and the Nuevo Soles. The functional
currency of the Peruvian subsidiaries' is the Nuevo Soles, whereas the
functional currency of the US parent is the US dollar. Account
balances on the balance sheet are translated into US Dollars
equivalents using the spot rate of 3.382:1 and 3.261:1 on March 31,
2006 and 2005, respectively, while the results of operations are
translated into US Dollars equivalents using the weighted average
exchange rates for each quarter presented.
4. Related Party Transactions
As of March 31, 2006, the Company made a short-term business loan in
the amount of $60,000 to Szchuan Enterprises, Ltd., a Canadian
Corporation. The loan is secured by a promissory note for a term of
six-months. The loan bears an interest rate of 4.39% per annum and is
mature on August 9, 2006. Yong Yang is an affiliate of Szchuan
Enterprises, Ltd. and a director of CRH.
F-31
Chilco River Holdings, Inc.
Notes To The Condensed Consolidated Financial Statements
March 31, 2006
5. Issuance of Common Stock and Warrants
On December 17, 2005, the Board of Directors authorized an initial
direct private placement offering of Units at $1.50 per Unit under the
terms of a Unit Purchase Agreement. Each Unit consists of one share of
common stock, and a Class A Warrant exercisable at $2.00 per share for
one year from the date of closing.
Under the terms of the Unit Purchase Agreement, the Company is
required to use $1,000,000 from proceeds from the offering to renovate
the casino floor of the Bruce Hotel and Casino and $1,000,000 for
marketing and business development. The Company agreed not to offer
and sell shares of common stock or common stock equivalents for a
period of 120 days following the effectiveness of the registration for
such Units, except for certain specified transactions, including an
offer and sale of up to 2,000,000 shares of common stock at $1.50 per
share. The private placement was made to non-U.S. persons in off-shore
transactions in reliance upon the exemption from registration
available under Rule 903 of Regulation S of the Securities Act and one
accredited investor in the United States pursuant to an exemption
available under Section 4(2) of the Securities Act. The private
placement was closed in January 2006. The Company issued 1,390,667
Units as a result of the private placement and raised aggregate gross
proceeds in the amount of $2,086,000. The shares of common stock have
been issued as of April 13, 2006 by the Company.
6. Cancellation of Shares
During the third quarter ended December 31, 2005, we issued a notice
of default under the terms of the Escrow Agreement related to an
aggregate of 2,000,000 shares of common stock placed into escrow in
connection with the Share Exchange. Kubuk International, Inc. had
obligations to Nefilim Associates, LLC, a Massachusetts limited
liability company, T Morgan LLC, a Delaware limited liability company,
and Sean Sullivan to issue capital stock of Kubuk or an entity
acquired by or acquiring Kubuk upon satisfaction of certain conditions
under the terms of Consulting Agreements dated May 9, 2005 with
respect to Sean Sullivan, May 19, 2005 with respect to Nefilim
Associates, LLC and June 1, 2005 with respect to T Morgan LLC. Under
the terms of the Share Exchange, the shareholders of Kubuk agreed to
place the shares into escrow to satisfy the obligations of Kubuk under
the Consultant Agreements.
We failed to raise a total of $5,000,000 in financing within thirty
days of receiving the Kubuk audited financial statements, which
resulted in a the release of the escrowed shares. The 2,000,000 shares
were tendered to our company for cancellation and cancelled during the
quarter ended March 31, 2006.
F-32
CHILCO RIVER HOLDINGS, INC.
6,481,334 Shares of Common Stock
PROSPECTUS
______________________, 2006
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Other Expenses of Issuance and Distribution.
Amount
------------
Securities and Exchange Commission Registration Fee $ 1,836.90
Legal Fees and Expenses 25,000.00
Accounting Fees and Expenses 15,000.00
Printing and Engraving Expenses 1,000.00
Miscellaneous Expenses 1,000.00
------------
Total $43,836.90
Item 14. Indemnification of Directors and Officers
Pursuant to our bylaws, we are required to indemnify all of our officers
and directors for such expenses and liabilities, in such manner, under such
circumstances to such extent as permitted by the Nevada Business Corporations
Act, as now enacted or hereafter amended. Unless otherwise approved by our board
of directors, we shall not indemnify any of our employees who are not otherwise
entitled to indemnification pursuant to our bylaws.
Nevada law permits a corporation, under specified circumstances, to
indemnify its directors, officers, employees or agents against expenses
(including attorney's fees), judgments, fines and amounts paid in settlements
actually and reasonably incurred by them in connection with any action, suit or
proceeding brought by third parties by reason of the fact that they were or are
directors, officers, employees or agents of the corporation, if such directors,
officers, employees or agents acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reason to believe their conduct was unlawful. In a derivative action, that is,
one by or in the right of the corporation, indemnification may be made only for
expenses actually and reasonably incurred by directors, officers, employees or
agents in connection with the defense or settlement of an action or suit, and
only with respect to a matter as to which they shall have acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made if
such person shall have been adjudged liable to the corporation, unless and only
to the extent that the court in which the action or suit was brought shall
determine upon application that the defendant directors, officers, employees or
agents are fairly and reasonably entitled to indemnity for such expenses despite
such adjudication of liability.
Our Articles of Incorporation and Bylaws also contain provisions stating
that no director shall be liable to our company or any of our shareholders for
monetary damages for breach of fiduciary duty as a director, except with respect
to (1) a breach of the director's duty of loyalty to the corporation or its
shareholders, (2) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (3) liability under Nevada
law (for unlawful payment of dividends, or unlawful stock purchases or
redemptions) or (4) a transaction from which the director derived an improper
personal benefit. The intention of the foregoing provisions is to eliminate the
liability of our directors to our shareholders to the fullest extent permitted
by Nevada law.
Item 15. Recent Sales of Unregistered Securities
Since our inception we have offered and sold the following securities in
unregistered transactions pursuant to exemptions under the Securities Act of
1933, as amended.
We did not issue any unregistered equity securities during the year ended
December 31, 2004.
II-1
During the fiscal year ended December 31, 2005, we issued unregistered
equity securities the following transactions:
On May 18, 2005, we issued 50,000 shares of common stock at $0.465 per
share in a private transaction not involving a public offering to one
non-U.S. person in an off-shore transaction pursuant to an exemption from
registration available under Regulation S of the United States Securities
Act of 1933, as amended.
On July 11, 2005 at 5:00 p.m. (Eastern Standard Time)(Record Date), we
effected a 2 for 1 forward stock split of our issued and outstanding shares
of common stock, par value $0.001, by way of share dividend payable upon
surrender of certificates pursuant to Section 78.215 of the Nevada General
Registrant Law. The share dividend is payable upon surrender of the
outstanding share certificates. Shareholders were required to surrender
their existing share certificates representing shares of common stock
issued before the Record Date by tendering the such share certificates to
our transfer agent. Upon surrender of the outstanding share certificates
representing the issued and outstanding shares of common stock held by
shareholders on the Record Date, our transfer agent issued new share
certificates giving effect to the share dividend so that each one share of
common stock of Chilco issued and outstanding prior to the Record Date
shall represent two post-split shares of our common stock. No sale
requiring registration under the Securities Act of 1933, as amended, was
made in connection with the stock dividend.
On August 3, 2005, we completed the acquisition of Kubuk International Inc.
in accordance with the terms of the Share Exchange Agreement. Pursuant to
the Share Exchange Agreement, we acquired all of the outstanding capital
stock and other equity interests of Kubuk from the Kubuk Shareholders by
issuing 19,250,000 shares of common stock, $0.001 par value, as
consideration on the terms and subject to the conditions set forth in the
Share Exchange Agreement. The shares of common stock were issued to Tom
Liu, David Liu, Lee Kuen Cheung, Wai Yung Lau, Zheng Liu, Yizhi Zeng, Luisa
Wong, Jack Xu, Yong Yang and Guoxiu Yan in a private transaction not
involving a public offering pursuant to an exemption from registration
available under Section 4(2) of the Securities Act of 1933, as amended.
On August 3, 2005, we issued 50,000 shares of common stock, $0.001 par
value, to one non-U.S. person outside the United States. The shares were
issued in satisfaction of certain bridge loans in the principal amount of
$100,000 at a price of $2.00 per share. The shares were issued in an
off-shore transaction pursuant to an exemption from registration available
under Regulation S of the Securities Act of 1933, as amended.
On January 20, 2006, we completed a private placement offering of 1,390,667
Units at $1.50 per Unit under the terms of a Unit Purchase Agreement. Each
Unit consists of one share of common stock, and a Class A Warrant
exercisable at $2.00 per share for one year from the date of Closing. Under
the terms of the Unit Purchase Agreement, we are required to use $1 million
from proceeds from the offering to renovate the casino floor of the Bruce
Hotel and Casino and $1 million for marketing and business development. The
private placement was made to non-U.S. persons in off-shore transactions in
reliance upon the exemption from registration available under Rule 903 of
Regulation S of the Securities Act of 1933, as amended, and one accredited
investor in the United States pursuant to an exemption from registration
available under Rule 506 of Regulation D.
On December 29, 2005, we issued 1,000,000 shares of common stock to Clear
Channel Inc. under the terms of a Consulting Agreement. Clear Channel is a
non-U.S. person and the shares were issued in an off-shore transactions in
reliance upon the exemption from registration available under Rule 903 of
Regulation S of the Securities Act of 1933, as amended. No general
solicitation or directed selling efforts took place during the offer and
sale of the securities.
Effective on December 29, 2005, we entered into a Consulting Agreement with
Clear Channel Inc. under which we retained Clear Channel to provide us with
strategic marketing and business planning consulting services and to assist
us in developing corporate governance policies, recruiting qualified
officers and director candidates and developing a corporate finance
strategy. We paid Clear Channel a consulting fee of one million (1,000,000)
shares of our common stock. The Consulting Agreement was for an initial
term of one year, which was subsequently extended to three years. Clear
Channel is a non-U.S. person and the
II-2
offer and sale was made in a private placement in reliance upon Section
4(2) of the Securities Act. We filed a Registration Statement on Form SB-2
to register the resale of the shares of common stock on February 17, 2006.
The fair value of the one million shares issued to Clear Channel is
determined as roughly $1,300,000 and will be expensed as consulting fees
over the next three years starting January 2006.
Item 16. Exhibits
Other than contracts made in the ordinary course of business, the following
are the material contracts that we have entered into within the two years
preceding the date of this Registration Statement:
II-3
EXHIBITS
(a) Exhibits
Exhibit
Number Description
------ -----------
3.1(1) Articles of Incorporation
3.2(1) Bylaws
5.1 Opinion of United States Counsel
10.1(2) Share Exchange Agreement dated July 15, 2005 (previously filed
as Exhibit 99.1)
10.2(2) Escrow Agreement dated August 3, 2005 (previously filed as
Exhibit 99.2)
10.3(2) Contribution Agreement dated July 26, 2005 (previously filed as
Exhibit 99.3)
10.4(2) Stock Purchase Agreement dated July 26, 2005 (previously filed
as Exhibit 99.4)
10.5(3) Marketing Services Agreement with Parker Communication
Corporation
10.6(4) Consulting Agreement with Clear Channel Inc., as amended
10.7(3) Form of Unit Purchase Agreement
10.8(3) Form of Warrant Certificate
10.9(4) Loan Agreement between Chilco River Holdings Inc. and David Liu
dated December 31, 2005
10.10(4) Loan Agreement between Chilco River Holdings Inc. and Lottery
Online U.S.A., Inc. dated December 31, 2005
23.1 Consent of United States Counsel (included in Exhibit 5.1)
23.2 Consent of Mantyla McReynolds
- -----------------
(1) Previously filed on Form SB-2 dated March 8, 2004
(2) Previously filed on Form 8-K dated August 9, 2005
(3) Previously filed on Form SB-2 on February 17, 2006.
(4) Previously filed on Form 10-KSB on March 31, 2006.
Item 17. Undertakings.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales of securities
are being made, a post-effective amendment to this registration statement to:
(i) include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
II-4
(ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement; and notwithstanding the forgoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectuses filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in the volume and price represent no
more than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement;
(iii) include any additional or changed material information on
the plan of distribution;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions described herein, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(c) that, for the purpose of determining liability under the Securities Act
to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of this
registration statement relating to the offering, shall be deemed to be part of
and included in the registration statement as of the date it is first used after
effectiveness. Provided, however, that no statement made in the registration
statement or prospectus that is part of the registration statement or made in a
document incorporated or deemed incorporated by reference into the registration
statement or prospectus that is part of the registration statement will, as to a
purchaser with a time of contract of sale prior to such first use, supersede or
modify any statement that was made in the registration statement or prospectus
that was part of the registration statement or made in any such document
immediately prior to such date of first use.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Walnut,
California, on May 19, 2006.
Chilco River Holdings, Inc.
By: /s/ Tom Liu
------------------------------------
Tom Liu
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Walnut,
California, on May 19, 2006.
By: /s/ Winston Yen
------------------------------------
Winston Yen
Chief Financial Officer
(Principal Financial and Accounting
Officer)
In accordance with the Securities Act of 1933, as amended, this
registration statement has been signed below by the following persons on behalf
of the Company and in the capacities and on the dates indicated.
Date: May 19, 2006 /s/ Tom Liu
-------------------------------------
Tom Liu, Chief Executive Officer and
Director
Date: May 19, 2006 /s/ Winston Yen
-------------------------------------
Winston Yen, Chief Financial Officer
and Principal Accounting Officer
Date: May 19, 2006 /s/ Gavin Roy
-------------------------------------
Gavin Roy, Director
Date: May 19, 2006 /s/ Wai Yung Lau
-------------------------------------
Wai Yung Lau, Director
Date: May 19, 2006 /s/ Yong Yang
-------------------------------------
Yong Yang, Director
Date: May 19, 2006 /s/ Jack Xu
-------------------------------------
Jack Xu, Director
II-6