UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For Quarter Ended: September 30, 2005
Commission File Number: 000-28027
GLOBAL BEVERAGE SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
PACIFIC PEAK INVESTMENTS
(Former name of registrant as specified in its charter)
Nevada 90-0093439
------ ----------
(State or Jurisdiction of (IRS Employer ID No)
Incorporation or Organization)
7633 East 63rd Place, Suite 220, Tulsa, OK 74133
(Address of principal executive office) (zip code)
4020 Birch Street, Suite 103, Newport Beach, CA 92660
(Former address of principal executive office) (zip code)
(918) 459-8469
(Issuer's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods as the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X
--- ---
The number of shares outstanding of registrant's common stock, par value $.001
per share, as of September 30, 2005 was 31,975,969 shares.
Global Beverage Solutions, Inc.
INDEX
Page
No.
----
Part I Financial Information (unaudited)
Item 1. Financial Statements
Balance Sheets as of September 30, 2005 and December 31, 2004 3
Statements of Operations - For the Three Months Ended
September 30, 2005 and 2004 4
Statements of Operations - For the Nine Months Ended September
30, 2005 and 2004 5
Statements of Cash Flows - For the Nine Months Ended September
30, 2005 and 2004 6
Statements of Changes in Net Assets - For the Nine Months Ended
September 30, 2005 and 2004 7
Financial Highlights for the Nine Months Ended September 30,
2005 and 2004 8
Schedule of Investments as of September 30, 2005 and
December 31, 2004 9-10
Notes to Financial Statements 11-21
Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations 22-25
Item 3. Quantitative and Qualitative Disclosure about Market Risk 26-27
Item 4. Controls and Procedures 28
Part II Other Information 29-34
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
Signatures
Exhibits
2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GLOBAL BEVERAGE SOLUTIONS, INC.
Consolidated Balance Sheets
As of September 30, 2005 and December 31, 2004
2005 2004
----------- -----------
(Unaudited)
ASSETS
Investments in portfolio companies (cost $1,005,177 at September 30,
2005 and $377,478 at December 31, 2004) $ 600,000 $ 377,478
Cash and cash equivalents 79,405 43,466
Deferred financing costs -- 28,125
Deposits and prepaid expenses 1,940 49,006
Property and equipment, net -- 25,720
----------- -----------
TOTAL ASSETS 681,345 523,795
----------- -----------
LIABILITIES
Accounts payable 145,363 118,970
Accrued expenses 41,017 --
Advances from related parties 11,500 --
Convertible debentures, net of discount -- 8,824
----------- -----------
TOTAL LIABILITIES 197,880 127,794
----------- -----------
NET ASSETS $ 483,465 $ 396,001
=========== ===========
Commitments and contingencies Composition of net assets:
Convertible preferred Series A, $.001 par value; 400,000 shares
authorized; no shares issued and outstanding $ -- $ --
Convertible preferred Series B, $.001 par value; 610,000 shares
authorized; 132,500 and 190,000 shares issued and outstanding at
September 30, 2005 and December 31, 2004, respectively 133 190
Convertible preferred Series C, $.001 par value; 10,000,000 shares
authorized; none and 10,000,000 shares issued and outstanding at
September 30, 2005 and December 31, 2004, respectively -- 10,000
Common stock, $.0001 par value, authorized 950,000,000 shares;
31,975,969 and 185,896 shares issued and outstanding at September 30,
2005 and December 31, 2004, respectively 31,976 186
Common stock held in escrow -- (69,643)
Common stock subscriptions receivable (9,600) (9,600)
Additional paid in capital 9,814,806 8,416,412
Accumulated deficit:
Accumulated net operating loss (7,467,036) (6,539,732)
Net realized loss on investments (1,481,637) (1,411,812)
Net unrealized appreciation (depreciation) of investments (405,177) --
----------- -----------
Net assets $ 483,465 $ 396,001
=========== ===========
Net asset value per share $ 0.0151 $ 2.1302
=========== ===========
See accompanying notes to financial statements.
3
GLOBAL BEVERAGE SOLUTIONS, INC.
Statements of Operations
Three Months Ended September 30, 2005 and 2004
(Unaudited)
2005 2004
------------ ------------
Income from operations:
Investment income $ -- $ --
------------ ------------
-- --
Expenses:
Selling, general and administrative expense 110,082 170,958
Loss on sale of furniture and fixtures 12,874 --
------------ ------------
122,956 170,958
------------ ------------
Loss before income taxes (122,956) (170,958)
Income taxes -- --
------------ ------------
Net loss from operations (122,956) (170,958)
------------ ------------
Net unrealized losses:
Change in unrealized depreciation of non-controlled affiliate
investments, net of deferred tax expense of $0 in 2005 and
2004, respectively (405,177) (300,000)
------------ ------------
Net decrease in net assets from operations $ (528,133) $ (470,958)
============ ============
Net decrease in net assets from operations per share,
basic and diluted $ (0.0188) $ (4.2993)
============ ============
Weighted average shares outstanding 28,074,230 109,542
============ ============
See accompanying notes to financial statements.
4
GLOBAL BEVERAGE SOLUTIONS, INC.
Statements of Operations
Nine Months Ended September 30, 2005 and 2004
(Unaudited)
2005 2004
------------ ------------
Income from operations:
Investment income $ -- $ --
------------ ------------
-- --
Expenses:
Selling, general and administrative expense 607,930 673,052
Interest expense 306,500 --
Loss on sale of furniture and fixtures 12,874 --
------------ ------------
927,304 673,052
------------ ------------
Loss before income taxes (927,304) (673,052)
Income taxes -- --
------------ ------------
Net loss from operations (927,304) (673,052)
------------ ------------
Net realized and unrealized losses:
Net realized loss on investments, net of income tax benefit of $0 (69,825) --
Change in unrealized depreciation of non-controlled affiliate
investments, net of deferred tax expense of $0 in 2005 and
2004, respectively (405,177) (300,000)
------------ ------------
Net decrease in net assets from operations $ (1,402,306) $ (973,052)
============ ============
Net decrease in net assets from operations per share,
basic and diluted $ (0.1184) $ (10.0467)
============ ============
Weighted average shares outstanding 11,848,650 96,853
============ ============
See accompanying notes to financial statements.
5
GLOBAL BEVERAGE SOLUTIONS, INC.
Statements of Cash Flows
Nine Months Ended September 30, 2005 and 2004
(Unaudited)
2005 2004
----------- -----------
Cash flows from operating activities:
Net decrease in net assets from operations $(1,402,306) $ (973,052)
Adjustments to reconcile net decrease in net assets from
operations to net cash used in operating activities:
Change in unrealized depreciation of investments 405,177 300,000
Depreciation 12,546 9,131
Amortization of deferred financing costs 28,125 --
Amortization of beneficial conversion feature on convertible
debentures 234,926 --
Loss on sale of furniture and fixtures 12,874 --
Forgiveness of notes payable -- (14,000)
Changes in operating assets and liabilities:
Other assets 47,368 (5,557)
Bank overdraft -- 15,702
Accounts payable 84,760 20,946
Accrued expenses (17,351) --
Loans payable -- (12,000)
----------- -----------
Net cash used in operating activities (593,881) (658,830)
----------- -----------
Cash flows from investing activities:
Purchase of equipment -- (39,033)
Investments in and advances to portfolio investment companies (627,699) (731,848)
----------- -----------
Net cash used in investing activities (627,699) (770,881)
----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock 1,105,000 1,403,849
Proceeds from convertible debenture 50,000 --
Additional proceeds from sale of common stock in prior year 91,019 --
Loan proceeds from related parties 11,500 --
Purchase of Series B preferred stock -- (30,000)
Stock issued for redemption of Series B preferred stock -- 50,000
Legal and other expense associated with stock issuances -- 5,345
----------- -----------
Net cash provided by financing activities
1,257,519 1,429,194
----------- -----------
Net increase (decrease) in cash and cash equivalents 35,939 (517)
Cash and cash equivalents, beginning of period 43,466 517
----------- -----------
Cash and cash equivalents, end of period 79,405 --
=========== ===========
See accompanying notes to financial statements.
6
GLOBAL BEVERAGE SOLUTIONS, INC.
Statements of Changes in Net Assets
Nine Months Ended September 30, 2005 and 2004
(Unaudited)
2005 2004
----------- -----------
Changes in net assets from operations:
Net loss from operations $ (927,304) $ (673,052)
Net realized loss on sale of investments, net (69,825) --
Change in net unrealized depreciation of investments, net (405,177) (300,000)
----------- -----------
Net decrease in net assets from operations (1,402,306) (973,052)
----------- -----------
Capital stock transactions:
Common stock issued for cash 1,105,000 1,403,849
Conversion of convertible debentures 293,751 --
Additional proceeds from sale of common stock in prior year 91,019 --
Common stock issued in acquisition of investments -- 372,000
Series B preferred stock transactions -- 20,000
Legal and other expense associated with stock issuances -- 5,345
----------- -----------
Net increase in net assets from stock transactions 1,489,770 1,801,194
----------- -----------
Net increase in net assets 87,464 828,142
Net assets, beginning of period 396,001 427,766
----------- -----------
Net assets, end of period $ 483,465 $ 1,255,908
=========== ===========
See accompanying notes to financial statements.
7
GLOBAL BEVERAGE SOLUTIONS, INC.
Financial Highlights
Nine Months Ended September 30, 2005 and 2004
(Unaudited)
2005 2004
----------- -----------
PER SHARE INFORMATION
Net asset value, beginning of period $ 2.1302 $ 19.70
Net decrease from operations (0.0783 (6.95)
Net change in realized losses and unrealized
appreciation (depreciation) of investments, net (0.0401 (3.09)
Net increase (decrease) from stock transactions (1.9967 (0.19)
----------- -----------
Net asset value, end of period $ 0.0151 $ 9.47
=========== ===========
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period $ 483,465 $ 396,001
Average net assets 367,783 939,961
Ratio of expenses to average net assets 252% 72%
Ratio of net loss to average net assets 381% 104%
See accompanying notes to financial statements.
8
GLOBAL BEVERAGE SOLUTIONS, INC.
Schedule of Investments
September 30,
2005
(Unaudited)
Date of Original Fair
Shares Acquisition Cost Value
COMMON STOCK IN PORTFOLIO COMPANIES
8% Jun-05 Titanium Design Studio, Inc., privately held;
41% of net assets; a titanium jewelry manufacturer $ 200,000 $ 200,000
9% Jul-05 EON Beverage Group, Inc., privately held;
83% of net assets; manufactures structured water
pursuant to proprietary process 400,000 400,000
Investments with $0 value - see schedule below 405,177 --
----------- -----------
Total investments at September 30, 2005 $ 1,005,177 600,000
===========
Cash and other assets, less liabilities (116,535)
-----------
Net assets at September 30, 2005 $ 483,465
===========
SCHEDULE OF INVESTMENTS WITH $0 VALUE
51% Aug-04 Island Tribe, Inc., privately held; 0% of net
assets; distributor of extreme sports apparel $ 405,177 $ --
100% Unboxed Distribution, Inc., a wholly owned
subsidiary; 0% of our net assets; inactive
distributor of extreme sports apparel 927,154 --
100% Total Sports Distribution, Inc., a wholly owned
subsidiary; 0% of our net assets; inactive
distributor of extreme sports apparel 484,658 --
Discontinued investments
(1,411,812) --
----------- -----------
$ 405,177 $ --
=========== ===========
See accompanying notes to financial statements.
9
GLOBAL BEVERAGE SOLUTIONS, INC.
Schedule of Investments
December 31,
2004
Date of Original Fair
Shares Acquisition Cost Value
COMMON STOCK IN PORTFOLIO COMPANIES
51% Aug-04 Island Tribe, Inc., privately held; 95% of net
assets; distributor of extreme sports apparel $ 377,478 $ 377,478
Investments with $0 value - see schedule below -- --
----------- -----------
Total investments at December 31, 2004 $ 377,478 377,478
===========
Cash and other assets, less liabilities 18,523
-----------
Net assets at December 31, 2004 $ 396,001
===========
SCHEDULE OF INVESTMENTS WITH $0 VALUE
100% Unboxed Distribution, Inc., a wholly owned
subsidiary; 0% of our net assets; inactive
distributor of extreme sports apparel $ 927,154 $ --
100% Total Sports Distribution, Inc., a wholly owned -- --
subsidiary; 0% of our net assets; inactive
distributor of extreme sports apparel 484,658 --
Discontinued investments (1,411,812)
----------- -----------
$ -- $ --
=========== ===========
See accompanying notes to financial statements.
10
GLOBAL BEVERAGE SOLUTIONS, INC.
Notes to Financial Statements
(Unaudited)
(1) DESCRIPTION OF BUSINESS
(A) ORGANIZATION AND BUSINESS
- ----------------------------------
Mercury Software, a Nevada corporation, was incorporated on January 29, 1997 and
its name was changed to MedEx Corp. on June 24, 2002. Aussie Apparel Group Ltd.
("Aussie Apparel" or the "Company"), a Nevada corporation, was incorporated on
August 26, 2002. In October 2002, MedEx Corp. issued an aggregate of 2,600
shares (6,500,000 pre reverse stock split) of its common stock to the
shareholders of the Company in connection with the merger of the Company with
MedEx Corp., whose name was then changed to "Aussie Apparel Group Ltd" on
October 21, 2002. Since the shareholders of the Company became the controlling
shareholders of MedEx Corp. after the exchange, the Company was treated as the
acquirer for accounting purposes. Accordingly, the financial statements, as
presented herein, are the historical financial statements of the Company and
include the transactions of MedEx Corp. only from the date of acquisition, using
reverse merger accounting.
On June 19, 2003, the Company became a "Business Development Company" ("BDC")
pursuant to applicable provisions of the Investment Company Act of 1940 (the
"Investment Company Act").
The Company's name was changed to Bluetorch Inc. (hereinafter "Bluetorch" or the
"Company"), effective November 3, 2003.
On March 12, 2005, the Company and one of its wholly-owned portfolio investment
companies, Unboxed Distribution, Inc. ("Unboxed"), signed a Mutual Settlement
and Release Agreement with Gotcha Brands Inc., the Bluetorch licensor. This
agreement required Unboxed to cease the selling and marketing of Bluetorch
apparel and the Company also agreed to change its corporate name by April 20,
2005.
On March 22, 2005, the Company and one of its wholly-owned portfolio investment
companies, Total Sports Distribution, Inc., ("Total Sports") signed a Mutual
Settlement and Release Agreement with Collective Licensing International, LLC,
the licensor of the Airwalk apparel brand. This agreement required Total Sports
to cease selling and marketing Airwalk apparel.
Effective April 18, 2005, the Company implemented a 2500-to-1 reverse split of
its common stock. Immediately following this reverse stock split, there were
218,500 common shares of the Company issued and outstanding.
On April 19, 2005 in accordance with the above Mutual Settlement and Release
Agreement, the Company amended its articles of incorporation to implement a name
change of the Company. Effective April 25, 2005 the Company's new name became
"Pacific Crest Investments" (the "Company") and its common stock began trading
under this new name with a new exchange symbol.
11
Following the public announcement of the Company's new name, the Company
received notice that another corporation had a name similar to Pacific Crest
Investments. In order to avoid potentially prolonged and expensive litigation,
the Company agreed to change its name from Pacific Crest Investments. Effective
May 5, 2005, the Company's new name is Pacific Peak Investments (hereinafter the
"Company").
On June 6, 2005, the Company signed a Share Purchase Agreement with Titanium
Design Studio, Inc. ("TDS"), a Nevada corporation, whereby the Company invested
$200,000 in cash in exchange for 8% of the issued and outstanding common stock
of TDS. TDS has a proprietary manufacturing process which allows it to cast
precision titanium jewelry resulting in a level of detail not obtainable by
milling titanium. TDS can economically produce and supply jewelry in shapes and
patterns which were previously considered to be impossible or uneconomical to
manufacture. TDS believes its technology has applications in other industries,
including aerospace, dentistry, sporting goods (fishing rods) and commemorative
coins.
On July 1, 2005, the Company and one of its wholly-owned portfolio investment
companies, Total Sports, signed a Mutual Settlement and Release Agreement with
Krash Distribution Inc., the licensor of TSABrand apparel. This agreement
required Total Sports to cease selling and marketing of TSABrand apparel.
On July 8, 2005, the Company consummated the transactions contemplated by the
Share Purchase Agreement (dated June 28, 2005) with EON Beverage Group, Inc.
("EON") and, as a result, the Company has invested $400,000 in exchange for 9%
of the issued and outstanding common stock of EON. EON manufactures structured
water through a proprietary process (patent pending) which alters the molecular
structure of purified water. Structured water is a relatively new concept which
is generally defined as water molecules organized through hydrogen bonding into
distinct molecular structures. This allows the users of EON water to achieve
enhanced intra-cellular hydration through significant absorption capability that
is crucial for maximum biological activity and improved athletic performance.
On October 10, 2005, the Company changed its name to Global Beverage Solutions,
Inc. and began trading on the OTC Bulletin Board under the symbol GBVS.OB.
Pursuant to Regulation S-X Rule 6, the Company will operate on a
non-consolidated basis. Operations of the portfolio companies will be reported
at the subsidiary level and only the appreciation or impairment of these
investments in portfolio companies will be included in the Company's financial
statements.
(B) CONDENSED FINANCIAL STATEMENTS
- ---------------------------------------
The accompanying condensed financial statements have been prepared by the
Company without audit. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position as of September 30, 2005 and the results of operations and
cash flows for all periods presented have been made.
12
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted. It is suggested
that these condensed financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's December 31,
2004 audited financial statements on Form 10-K. The results of operations for
the interim periods presented are not necessarily indicative of the operating
results for the full years.
(C) RECLASSIFICATIONS
- --------------------------
Certain reclassifications have been made to the prior period financial
statements to conform to the current period presentation.
(D) GOING CONCERN
- ----------------------
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern, which contemplates, among other things, the
realization of assets and satisfaction of liabilities in the normal course of
business. As of September 30, 2005, the Company has an accumulated deficit of
$9,353,850 and had net losses totaling $1,402,306 for the nine months ended
September 30, 2005. Additionally, as of September 30, 2005, the Company had
negative working capital of $116,535. These factors, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
The Company intends to fund operations through debt and equity financing
arrangements which management believes may be insufficient to fund its capital
expenditures, working capital and other cash requirements for the next twelve
months. Therefore, the Company will be required to seek additional funds to
finance its long-term operations. The successful outcome of future activities
cannot be determined at this time and there is no assurance that, if achieved,
the Company will have sufficient funds to execute its intended business plan or
generate positive operating results.
Management plans to take the following steps in response to these issues:
(i) Revenue
It has been determined that, as an investment company, the Company will
only invest in/acquire cash flow positive and profitable businesses or
businesses most likely to generate positive cash flow in the
foreseeable future. It is intended that these entities will have good
growth potential as a result of access to capital and/or additional
management acumen.
As part of this strategic process, the Company will look beyond action
sports apparel for acquisition opportunities so as to include all
consumer product categories that have the potential for a positive
return on investment. It is believed that this new direction will both
reduce the risk for the Company and its shareholders as well as provide
the best opportunity for long-term shareholder value.
13
Regarding two of the Company's portfolio investment companies, Unboxed
and Total Sports, it had become clear that profitability in both
entities was not possible in the near future. As noted above, the
Company has signed Mutual Settlement and Release Agreements to cease
the licensing agreements with the licensors for the Airwalk, Bluetorch
and TSABrand labels. There were significant future guaranteed royalty
amounts payable by these portfolio investment companies in accordance
with the existing licensing agreements and so it was in the best
interests of the Company and the portfolio investment companies to
mitigate the substantial potential losses. Accordingly, it has been
determined that it is not in the best interests of the Company's
shareholders to continue the flow of capital to these two portfolio
investment companies.
In addition, it was determined that future prospects for Island Tribe,
Inc. ("Island Tribe") were unlikely to provide profitability in the
foreseeable future sufficient to provide a return on the Company's
investment. Accordingly, the Company fully reserved its investment in
Island Tribe and is pursuing a transaction which would result in the
return of 12,000 shares of the Company's common stock in exchange for
the Company returning its investment in Island Tribe.
The Company will, however, continue to fund and invest in Titanium
Design Studio, Inc. and EON Beverage Group, Inc. (see Note 2).
(ii) Financing
On June 19, 2003, an Offering Circular was filed authorizing the
Company to raise up to $3,000,000 via sale of its common stock. Through
June 30, 2005, the Company has raised $2,267,057 against this limit.
This sum includes both cash proceeds and conversion of debt.
On June 24, 2004, another Offering Circular was filed authorizing the
Company to raise up to $5,000,000 via sale of its common stock.
On May 18, 2005, the Company signed a non-binding Term Sheet ("TS")
with Interim Capital Corp. ("Interim"), representing certain investors.
This TS summarized the basic terms and conditions for the sale of a
total of 20,800,000 common shares of the Company for a total of
$1,040,000. As of September 30, 2005, the Company had sold 20,700,000
shares for a total of $1,035,000, leaving a balance of 100,000 shares
on this TS.
On June 25, 2005, the Company filed a new Offering Circular to raise an
additional $5,000,000 via sale of its common stock.
On July 5, 2005, in an additional transaction to the TS, the Company
and Interim Capital Corp., an agent for certain investors, signed a
funding agreement for the sale of a total of 14,200,000 common shares
of the Company for a total of $994,000. As of September 30, 2005, the
Company had collected $70,000 for 1,000,000 common shares.
14
Whereas the Company believes it will be successful with its plans, due to Market
factors and economic conditions, no assurance can be given that additional
financing will be available on favorable terms or at all.
The financial statements do not include any adjustments related to
recoverability and classification of the carrying amounts of assets or the
amounts and classification of liabilities that might result should the Company
be unable to continue as a going concern.
(2) INVESTMENTS
TITANIUM DESIGN STUDIO, INC. ("TDS")
- ------------------------------------
On June 6, 2005, the Company signed a Share Purchase Agreement with TDS, a
Nevada corporation, whereby the Company invested $200,000 in cash in exchange
for 8% of the issued and outstanding common stock of TDS.
TDS has a proprietary manufacturing process which allows it to cast precision
titanium jewelry resulting in a level of detail not obtainable by milling
titanium. TDS can economically produce and supply jewelry in shapes and patterns
which were previously considered to be impossible or uneconomical to
manufacture. TDS believes its technology has applications in other industries,
including aerospace, dentistry, sporting goods (fishing rods) and commemorative
coins.
EON BEVERAGE GROUP, INC. ("EON")
- ---------------------------------
On July 8, 2005, the Company consummated the transactions contemplated by the
Share Purchase Agreement (dated June 28, 2005) with EON and, as a result, the
Company has invested $400,000 in exchange for 9% of the issued and outstanding
common stock of EON.
EON manufactures structured water through a proprietary process (patent pending)
which alters the molecular structure of purified water. Structured water is a
relatively new concept which is generally defined as water molecules organized
through hydrogen bonding into distinct molecular structures. This allows the
users of EON water to achieve enhanced intra-cellular hydration through
significant absorption capability that is crucial for maximum biological
activity and improved athletic performance.
ISLAND TRIBE, INC. ("ISLAND TRIBE")
- -----------------------------------
As noted above, the Company purchased a 51% interest in Island Tribe, a surf
apparel company. The consideration for this investment was $372,000, consisting
of 12,000 restricted common shares (30,000,000 pre reverse stock split) in the
Company being issued at a pre-split per-share price of $0.0124. The effective
date of this transaction was August 1, 2004. Over the next 4 years, this
purchase agreement provided for the Company to receive an additional 24%
ownership of Island Tribe. The Company was obligated to pay certain royalty
commissions on future sales of Island Tribe product for the duration of the
agreement, which commenced in 2004 and would conclude in 2016. These royalty
commissions range from 8% in 2004 to 2% in 2016 and would only become due and
payable each year when annual sales of $372,000 were achieved.
15
VALUATION OF INVESTMENTS
- ------------------------
As required by the SEC's Accounting Series Release ("ASR") 118, the investment
committee of the Company is required to assign a fair value to all investments.
To comply with Section 2(a) (41) of the Investment Company Act and Rule 2a-4
under the Investment Company Act, it is incumbent upon the board of directors to
satisfy themselves that all appropriate factors relevant to the value of
securities for which market quotations are not readily available have been
considered and to determine the method of arriving at the fair value of each
such security. To the extent considered necessary, the board may appoint persons
to assist them in the determination of such value and to make the actual
calculations pursuant to the board's direction. The board must also, consistent
with this responsibility, continuously review the appropriateness of the method
used in valuing each issue of security in the Company's portfolio. The directors
must recognize their responsibilities in this matter and, whenever technical
assistance is requested from individuals who are not directors, the findings of
such individuals must be carefully reviewed by the directors in order to satisfy
themselves that the resulting valuations are fair.
No single standard for determining "fair value in good faith" can be laid down,
since fair value depends upon the circumstances of each individual case. As a
general principle, the current "fair value" of an issue of securities being
valued by the board of directors would appear to be the amount that the owner
might reasonably expect to receive for them upon their current sale. Methods
that are in accord with this principle may, for example, be based on a multiple
of earnings, or a discount from market of a similar freely traded security, or
yield to maturity with respect to debt issues, or a combination of these and
other methods. Some of the general factors that the directors should consider in
determining a valuation method for an individual issue of securities include: 1)
the fundamental analytical data relating to the investment, 2) the nature and
duration of restrictions on disposition of the securities, and 3) an evaluation
of the forces which influence the market in which these securities are purchased
and sold. Among the more specific factors which are to be considered are: type
of security, financial statements, cost at date of purchase, size of holding,
discount from market value of unrestricted securities of the same class at time
of purchase, special reports prepared by analysis, information as to any
transactions or offers with respect to the security, existence of merger
proposals or tender offers affecting the securities, price and extent of public
trading in similar securities of the issuer or comparable companies and other
relevant matters.
The Board of Directors has arrived at the following valuation method for its
investments. Where there is not a readily available source for determining the
market value of any investment, either because the investment is not publicly
traded or is thinly traded, and in the absence of a recent appraisal, the value
of the investments shall be based on the following criteria:
1. Total amount of the Company's actual investment ("AI"). This
amount shall include all loans, purchase price of securities
and fair value of securities given at the time of exchange.
16
2. Total revenues for the preceding twelve months ("R").
3. Earnings before interest, taxes and depreciation ("EBITD")
4. Estimate of likely sale price of investment ("ESP")
5. Net assets of investment ("NA")
6. Likelihood of investment generating positive returns (going
concern).
The estimated value of each investment shall be determined as follows:
- Where no or limited revenues or earnings are present, then the
value shall be the greater of the investment's a) net assets,
b) estimated sales price, or c) total amount of actual
investment.
- Where revenues and/or earnings are present, then the value
shall be the greater of one-time (1x) revenues or three times
(3x) earnings, plus the greater of the net assets of the
investment or the total amount of the actual investment.
- Under both scenarios, the value of the investment shall be
adjusted down if there is a reasonable expectation that the
Company will not be able to recoup the investment or if there
is reasonable doubt about the investment's ability to continue
as a going concern.
Based on the previous methodology, the Company determined that its investments
in its portfolio companies should be valued at September 30, 2005 as follows:
- UNBOXED DISTRIBUTION, INC. ("UNBOXED")
--------------------------------------
Unboxed has been valued at $0 due to the Company's decision to
discontinue the flow of capital to this entity. The sales for Unboxed
were progressing slowly and not fast enough to justify the minimum
royalties due in 2005 ($130,000) and 2006 ($300,000). As previously
noted, on March 12, 2005, Unboxed and Bluetorch signed a Mutual
Settlement and Release Agreement with the licensor of the Bluetorch
label. The write down in the investment in Unboxed for the year ended
December 31, 2004 totaled $927,154.
- TOTAL SPORTS DISTRIBUTION, INC. ("TOTAL SPORTS")
---------------------------------------------
Total Sports has been valued at $0, due to the Company's decision to
discontinue the flow of capital to this entity. It had become apparent
that the anticipated revenue flow for 2005 was not progressing at the
rate the board of directors and management anticipated and would fall
well short of expectations. As the board of directors and management
looked at the Company's contractual royalty minimums for the Airwalk
label for 2005 and beyond, it became clear that the Company was not
going to be able to meet the revenue objectives from which the royalty
minimums were based. These minimums were $920,000 in 2005 with an
additional $3,960,000 due between 2006 and 2008. In addition, this
situation was going to negatively impact Total Sport's ability to
market and sell the TSABrand label. As previously noted, on March 22,
2005, Total Sports and Bluetorch signed a Mutual Settlement and Release
Agreement with the licensor of the Airwalk label. The write down in the
investment in Total Sports for the year ended December 31, 2004 totaled
$484,658.
17
- ISLAND TRIBE, INC. ("ISLAND TRIBE")
----------------------------------
Island Tribe has been valued at $0, due to the Company's decision to
discontinue the flow of capital to this entity. It was determined that
future prospects for Island Tribe were unlikely to provide
profitability in the foreseeable future sufficient to provide a return
on the Company's investment. Accordingly, the Company fully reserved
its investment in Island Tribe and is pursuing a transaction which
would result in the return of 12,000 shares of the Company's common
stock in exchange for the Company returning its investment in Island
Tribe.
- TITANIUM DESIGN STUDIO, INC. ("TDS")
------------------------------------
Titanium Design Studio, Inc. has been valued at $200,000, being the
price paid by the Company on June 6, 2005 for an 8% ownership of TDS.
The fair value of $200,000 represents the Company's actual investment,
in accordance with the valuation model described above.
- EON BEVERAGE GROUP, INC. ("EON")
--------------------------------
On July 8, 2005, the Company consummated the transactions contemplated
by the Share Purchase Agreement (dated June 28, 2005) with EON and, as
a result, the Company has invested $400,000 in exchange for 9% of the
issued and outstanding common stock of EON.
(3) DEBT
As of December 31, 2004, the Company had convertible debentures of $8,824, net
of discount of $234,926. The debenture holder converted these debentures into
common stock during the first six months of 2005.
The convertible feature of the above convertible debentures provides for a rate
of conversion that is below market value. Such feature is normally characterized
as a "beneficial conversion feature" ("BCF"). Pursuant to Emerging Issues Task
Force ("EITF") Issue No. 98-5, "Accounting For Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratio" and
EITF Issue No. 00-27, "Application of EITF Issue No. 98-5 To Certain Convertible
Instruments," the Company has estimated the fair value of such BCF to be
approximately $375,000 related to these debentures and recorded such amount as a
debt discount. Such discount is being amortized to interest expense over the
term of the notes. Amortization expense during the nine months ended September
30, 2005 was $306,500 (all fully amortized by June 30, 2005).
18
(4) EQUITY
COMMON STOCK:
- -------------
Effective April 18, 2005, the Company implemented a 2500-to-1 reverse split of
its common stock. Immediately following this reverse stock split, there were
218,500 issued and outstanding common shares of the Company.
During the three months ended September 30, 2005, the Company issued 21,700,000
shares of common stock, all issued after the 2500-to-1 reverse stock split which
became effective on April 18, 2005, resulting in cash received by the Company of
$1,105,000. The stock subscription receivable at June 30, 2005, was collected
during the quarter ended September 30, 2005.
On March 17, 2005, the Company issued a convertible debenture in a principal
amount of $50,000, convertible into 20,000 common shares (50,000,000 pre reverse
split). During the three months ended March 31, 2005, the debenture holder
converted $30,000 of the debenture into 12,000 shares of common stock
(30,000,000 pre reverse split). During the three months ended June 30, 2005, the
debenture holder had converted the remaining $20,000 of the debenture into 8,000
common shares (20,000,000 pre reverse split), which were previously issued and
held in escrow.
On May 18, 2005, the board of directors of the Company adopted a resolution
instructing the management of the Company to discuss, with the holders of shares
of preferred series C stock ("Series CPS"), a recommendation of the Company's
board of directors that the holders of Series CPS agree to convert Series CPS to
restricted common shares, which would be issued with the restrictive legend
under Rule 144, and so could not be sold for at least twelve (12) months.
The purpose of the above resolution was to provide the Company the opportunity
to secure capital financing to allow the Company to survive and move forward for
the benefit of all shareholders.
Further to the subsequent discussions by Company management with the holders of
Series CPS, all 10,000,000 Series CPS were converted to 10,000,000 common
shares, the substantial majority of which were restricted common shares.
PREFERRED STOCK:
- ---------------
The Company is authorized to issue up to 50,000,000 shares of preferred stock at
$0.001 par value.
Convertible preferred series A stock ("Series APS")
---------------------------------------------------
o 400,000 shares originally authorized.
o None issued or outstanding at September 30, 2005.
19
Convertible preferred series B stock ("Series BPS")
---------------------------------------------------
o 610,000 shares authorized.
o 132,500 issued and outstanding at June 30, 2005.
o During the nine months ended September 30, 2005, 57,500 BPS
shares were converted into 68,757 shares of common stock.
o The holders of the Series BPS are entitled to receive
dividends on the number of shares of Series BPS, which are
converted into shares of Company common stock, at the dividend
rate of 6% of the conversion price for the number of shares
converted, payable in cash or in common stock. The dividend
rate is based upon the ten (10) day average of the lowest
closing bid price prior to the date of conversion ("Market
Price").
o The Series BPS are convertible into common stock based upon a
conversion price equal to the number of shares being converted
divided by 80% of the Market Price described in the preceding
paragraph. All shares of Series BPS outstanding three (3)
years from the date of issuance shall automatically be
converted into common stock based upon the foregoing formula.
o Series BPS have preferred treatment upon liquidation of the
Company. The holders of Series BPS are entitled, upon
liquidation, dissolution or winding up of the Company, to
receive 120% of the outstanding unconverted principal amount
of the Series BPS before the holders of common shares and any
other class or series of preferred stock.
o Series BPS holders are entitled to one vote per share of
Series BPS.
o Series BPS, voting together as a class, have the right to
elect one (1) director.
Convertible preferred series C stock ("Series CPS")
---------------------------------------------------
o 10,000,000 shares authorized.
o None issued or outstanding at June 30, 2005.
o As noted above, during the three months ended June 30, 2005,
all 10,000,000 Series CPS were converted to 10,000,000 common
shares, the substantial majority of which were restricted
common shares.
o The holders of the Series CPS were not entitled to receive
dividends and were convertible into common stock of the
Company in an amount equal to the number of Series CPS being
converted. In connection with any reorganizations, merger,
consolidation or sale of assets involving the Company, the
number of Series CPS shares outstanding and the number of
shares of common stock into which the Series CPS are
convertible will not be affected by any such capital
reorganization.
o There is no liquidation preference for Series CPS holders.
o Series CPS, voting together as a class, had the right to elect
two (2) directors but had no other voting rights.
20
(5) COMMITMENTS AND CONTINGENCIES
General
- -------
The Company's commitments and contingencies include the usual obligations of a
BDC in the normal course of business. In the opinion of management, these
matters are not expected to have a material adverse effect on the Company's
financial position and results of operations. In addition, whereas the Company
may be indirectly impacted by claims and other obligations that arise at its
portfolio companies, management is not aware of any such claims.
Regulatory Compliance
- ---------------------
As a BDC, the Company operates in a highly regulated environment and must comply
with the requirements of the 1940 Act. The Company endeavors to be in compliance
with the requirements of the Act as part of its investment strategy and
oversight functions. Whereas compliance with such laws and regulations requires
interpretation, the Company believes it is in compliance with such requirements
at September 30, 2005. However, no assurances can be given that such
requirements will not change or that differing interpretations could result in
non-compliance or that such matters, if they arise, will be insignificant to the
Company's financial position or results of operations.
Legal
- -----
The Company was served on October 20, 2005, with a complaint which had been
filed in San Diego County Court, San Diego, California by Golden Gate Investors.
In the complaint, Golden Gate has alleged that the Company owes under a
promissory note which also entitles the plaintiff to enter into similar future
transactions. The Company has undertaken discussions with the plaintiff
regarding settlement. The Company has taken the position that the terms of the
transaction were not approved by its board of directors nor terms under which it
could accept, in part because of restrictions on debt issuances and issuances of
stock without consideration. The Company believes its prospects for settlement
of this action are good and have included discussions regarding reformation of
the terms of the original transaction as well as terms for possible new
transactions with the plaintiff.
21
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This information statement contains forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. These statements relate to
future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may", "will",
"should", "expects", "plans", "anticipates", "believes", "estimates",
"predicts", "potential", "continue" or the negative of such terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. There are a number of factors that could cause
our actual results to differ materially from those indicated by such
forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, we do not assume responsibility
for the accuracy and completeness of such forward-looking statements. We are
under no duty to update any of the forward-looking statements after the date of
this information statement to conform such statements to actual results.
Management's discussion and analysis should be read in conjunction with our
financial statements and the notes herein.
Critical Accounting Policies and Estimates
- ------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations section discusses our financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. On an on-going basis, we
will evaluate our estimates and judgments, including those related to revenue
recognition, valuation of investments in portfolio companies, accrued expenses,
financing operations, contingencies and litigation. We will base our estimates
and judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. The most significant
accounting estimates inherent in the preparation of our financial statements
include estimates as to the appropriate carrying value of certain assets and
liabilities which are not readily apparent from other sources, such as the
investments in portfolio companies. These accounting policies are described at
relevant sections in this discussion and analysis and in the "Notes to Financial
Statements" included in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2004.
Results of Operations
- ---------------------
Three months ended September 30, 2005 as compared to the three months ended
September 30, 2004 -
22
o During the three months ended September 30, 2005, selling,
general and administrative expense declined $60,876 (36%) to
$110,082 from $170,958 in the prior year period. For the 2005
period, professional services, including accounting, legal,
investment and other declined $57,169, which accounts for the
majority of the decrease.
o During the 2005 period, we recognized a loss of $12,874 from
sale of our surplus furniture and fixtures.
o During the 2005 period, we recorded an unrealized loss in the
amount of $405,177, as compared to an unrealized loss of
$300,000 in the prior year period. The loss in 2005 is the
result of our decision to fully reserve our investment and
advances to Island Tribe. The loss in 2004 was based on an
inventory valuation for Unboxed and Total Sports.
Nine months ended September 30, 2005 as compared to the nine months ended
September 30, 2004 -
o During the 2005 period, selling general and administrative
expense declined $65,122 (10%) to $607,930 from $673,052 in
the year earlier period. During 2005, professional fees
declined $49,478, miscellaneous charges declined $80,722 and
professional fees incurred for due diligence were $75,000 with
none in the prior year period. These items represent the
primary changes in 2005 as compared to 2004.
o During the 2005 period, we recorded amortization expense of
$306,500 from the beneficial conversion feature on convertible
debentures. There was no amortization during the 2004 period.
o During the 2005 period, we recognized a loss of $12,874 from
sale of our surplus furniture and fixtures.
o During the 2005 period, we recognized a realized loss of
$69,825 from net expenses paid relating to the two portfolio
companies we discontinued at the end of 2004 (Unboxed and
Total Sports).
o During the 2005 period, we recognized an unrealized loss of
$405,177 as compared to $300,000 in the 2004 period. The loss
in 2005 is the result of our decision to fully reserve our
investment and advances to Island Tribe. The loss in 2004 was
based on an inventory valuation for Unboxed and Total Sports.
Liquidity and Capital Resources
- -------------------------------
o At September 30, 2005, we had net assets of $483,465 as
compared to net assets of $396,001 at December 31, 2004.
During the 2005 period, cash increased $35,939 to $79,405 and
our investments in portfolio companies increased $222,522,
net, from $377,478 to $600,000. Other assets, consisting of
prepaid expenses, deferred financing costs and property and
equipment decreased $100,914 primarily as a result of
converting the convertible debentures to common stock and the
sale of surplus furniture and fixtures. Liabilities have
increased $70,086 during 2005. Accordingly, the total asset
increase of $157,550, when reduced by the liability increase
of $70,086 resulted in a increase in net assets of $87,464.
23
o As of September 30, 2005, the Company had no revenues and had
an accumulated deficit totaling $9,353,850 for the period from
August 26, 2002 (inception) through September 30, 2005.
Additionally, as of September 30, 2005, the Company had
negative working capital of $116,535. These factors, among
others, raise substantial doubt about the Company's ability to
continue as a going concern. The Company intends to fund
operations through debt and equity financing arrangements
which management believes may be insufficient to fund its
capital expenditures, working capital and other cash
requirements for the next twelve months. Therefore, the
Company will be required to seek additional funds to finance
its long-term operations. The successful outcome of future
activities cannot be determined at this time and there is no
assurance that, if achieved, the Company will have sufficient
funds to execute its intended business plan or generate
positive operating results.
Our Plan of Operation for the Next Twelve Months
- ------------------------------------------------
o As stated above, it has been determined that, as an investment
company, we will only invest in/acquire cash flow positive and
profitable businesses or businesses most likely to generate
positive cash flows in the foreseeable future. These entities
will have good growth potential as a result of access to
capital and/or additional management acumen.
o As part of this strategic process, we will look beyond action
sports apparel for acquisition opportunities so as to include
all consumer product categories that have the potential for a
positive return on investment. The board of directors and
management believe that this new direction will both reduce
the risk for the Company and its shareholders as well as
provide the best opportunity for long-term shareholder value.
o Regarding two of our portfolio investment companies, Unboxed
and Total Sports, it was clear that profitability in both
entities was not possible in the near future. As noted above,
it was determined that it is not in the best interests of our
shareholders to continue the flow of capital to these two
portfolio investment companies and these investments were
written-off as of December 31, 2004.
o In addition, it was determined that future prospects for
Island Tribe were unlikely to provide profitability in the
foreseeable future sufficient to provide a return on our
investment. Accordingly, we fully reserved our investment in
Island Tribe and we are pursuing a transaction which would
result in the return of 12,000 shares of our common stock in
exchange for the return of our investment in Island Tribe.
o The Company will, however, continue to fund and invest in
Titanium Design Studio, Inc. and EON Beverage Group, Inc.
24
Off Balance Sheet Arrangements
- ------------------------------
o None.
Contractual Obligations
- -----------------------
o None.
25
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's business activities contain elements of risk. Company management
considers the principal types of risk to be valuations of investments in
portfolio companies and fluctuations in interest rates. We consider the
management of risk essential to conducting our business. Accordingly, our risk
management systems and procedures are designed to identify and analyze our
risks, to set appropriate policies and limits and to continually monitor these
risks and limits by means of reliable administrative and information systems and
other policies and programs.
As a BDC, we plan to invest in liquid securities including debt and equity
securities of primarily private companies. Our investments are generally subject
to restrictions on resale and generally have no established trading market. Our
policy is to value our investments at fair value. There is no single standard
for determining fair value in good faith. As a result, determining fair value
requires that judgment be applied to the specific facts and circumstances of
each portfolio investment while employing a consistently applied valuation
process for each type of investment.
The board of directors determine fair value to be the amount for which an
investment could be exchanged in an orderly disposition over a reasonable period
of time between willing parties other than in a forced or liquidation sale. The
Company's valuation policy considers the fact that no ready market exists for
substantially all of the securities in which the Company invests. The Company's
valuation policy is intended to provide a consistent basis for determining the
fair value of the portfolio. The Company will record unrealized depreciation on
investments when the Company believes that an equity security is doubtful or
when the enterprise value of the company does not currently support the cost of
the Company's debt or equity investment. Conversely, the Company will record
unrealized appreciation if it determines that the underlying portfolio company
has appreciated in value and, therefore, the Company's equity security has also
appreciated in value. The values of any investments in public securities are
determined using quoted market prices discounted for restrictions on resale.
Without a readily ascertainable market value and because of the inherent
uncertainty of valuation, the fair value of the Company's investments in its
portfolio companies, determined in good faith by the board of directors, may
differ significantly from the values that would have been used had a ready
market existed for the investments and the differences could be material.
In addition, the illiquidity of the Company's existing investments may adversely
affect its ability to dispose of debt and equity securities at times when it may
be otherwise advantageous for the Company to liquidate such investments. In
addition, if the Company was forced to immediately liquidate some or all of the
investments in the portfolio companies, the proceeds of such liquidation may be
significantly less than the current value of such investments.
Because the Company may borrow money to make investments, the Company's net
investment income before net realized and unrealized gains or losses, or net
investment income, is dependent upon the difference between the rates at which
the Company borrows funds and the rate at which the Company invests these funds.
26
As a result, there can be no assurance that a significant change in market
interest rates will not have a material adverse effect on the Company's net
investment income. In periods of rising interest rates, the Company's cost of
funds would increase, which would reduce the Company's net investment income.
The Company may use a combination of long-term and short-term borrowings and
equity capital to finance its investing activities.
27
ITEM 4: CONTROLS AND PROCEDURES
Evaluation of Controls and Procedures
- -------------------------------------
The Company's board of directors and management, including the Chief Executive
Officer ("CEO") and Chief Financial Officer ("CFO"), evaluated the effectiveness
of the design and operation of the Company's disclosure controls and procedures,
as defined in Rule 13(a)-15(e) and 15(d)-15(e) of the Exchange Act. Based upon
that evaluation, the Company's board of directors and management, including the
CEO and CFO, concluded that, as of September 30, 2005, the Company's disclosure
controls and procedures were effective in alerting management on a timely basis
to material Company information that would be required to be included in our
periodic filings with the SEC.
Based on their most recent evaluation as of the Evaluation Date, the CEO and the
CFO have also concluded that the other controls and procedures, that are
designed to ensure that information required to be disclosed in our periodic
filings with the SEC, are adequate.
Changes in Internal Control
- ---------------------------
There were no significant changes made in the Company's internal controls over
financial reporting, during the three months ended September 30, 2005, that have
materially affected, or are reasonably likely to materially affect, these
internal controls. Thus, no corrective actions, with regard to significant
deficiencies or material weaknesses, were necessary.
On September 14, 2005, both the CEO and CFO resigned. Mr. Richard T. Clark has
been appointed to serve as President, Chief Executive Officer and Director. Mr.
Bryce Knight has been appointed to serve as Vice-President, Chief Financial
Officer, Treasurer and Secretary.
At the time of its election as a business development company, the Company
adopted what it considered to be adequate controls and procedures (the "Old
Controls"). These Old Controls lacked time constraints that would force timely
posting of transactions and, as a result, the Company has been late with the
preparation of its financial disclosures on numerous occasions. The Company has
undertaken a review of its controls to determine what additional controls should
be implemented to insure timely filings in the future. The Company has
determined that it will retain outside `bookkeeping services' under a
contractual relationship that includes timeliness as a contractual obligation
and may adopt additional controls in the future. In the preliminary review of
the Old Controls, the Company determined that both assets of the Company and the
quality of its financial information are safeguarded but the issue of timeliness
has been problematic and requires being addressed. The Company has also
determined that it should employ a Chief Compliance Officer as quickly as
practical and intends to designate an individual with this responsibility.
28
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
The Company was served on October 20, 2005, with a complaint which had been
filed in San Diego County Court, San Diego, California by Golden Gate Investors.
In the complaint, Golden Gate has alleged that the Company owes under a
promissory note which also entitles the plaintiff to enter into similar future
transactions. The Company has undertaken discussions with the plaintiff
regarding settlement. The Company has taken the position that the terms of the
transaction were not approved by its board of directors nor terms under which it
could accept, in part because of restrictions on debt issuances and issuances of
stock without consideration. The Company believes its prospects for settlement
of this action are good and have included discussions regarding reformation of
the terms of the original transaction as well as terms for possible new
transactions with the plaintiff.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
The following exhibits are filed with this report on Form 10-Q.
Exhibit 31 Certifications pursuant to 18 U.S.C. Section
1350 Section 302 of the Sarbanes-Oxley Act
of 2002
Exhibit 32 Certifications pursuant to 18 U.S.C. Section
1350 Section 906 of the Sarbanes-Oxley Act
of 2002
29
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GLOBAL BEVERAGE SOLUTIONS, INC.
Date: November 11, 2005 By: /s/ Richard T. Clark
----------------------------
Richard T. Clark,
Chief Executive Officer