SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended December 31, 2005
000-1084133
(Commission File Number)
Global Beverage Solutions, Inc.
(Exact Name of Registrant as Specified in Charter)
90-0093439
(IRS Employer Identification No.)
Nevada
(State or Other Jurisdiction of Incorporation)
7633 E 63rd Place, Suite 220, Tulsa, OK 74133
(Address of Principal Executive Offices) (Zip Code)
918-459-8469
(Registrant's Telephone Number, Including Area Code)
Securities Registered under Section 12 (B)
of the Exchange Act:
NONE
Securities Registered under Section 12 (G) of the Exchange Act:
Common Stock, $0.001 Par Value
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [X] No [ ]
Check whether the issuer (1) filed all reports to be filed by Section 13 or 15
(d) of the Exchange Act during the past 12 months (or for such shorter period
that 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ 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 issuer's revenues for the Fiscal Year ended December 31, 2005 were $13,889.
The aggregate market value of the voting stock (which consists solely of shares
of common stock) held by non-affiliates of the issuer as of March 1, 2006,
computed by reference to the market value (closing price) of the registrant's
common stock, as reported by the over-the-counter bulletin board, and was
approximately $39,903,000.
As of March 1, 2006, there were 41,312,391 shares of the issuer's common stock
issued and outstanding.
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TABLE OF CONTENTS
PAGE
PART I
ITEM 1 Business 4
ITEM 1A Risk Factors 10
ITEM 2 Properties 36
ITEM 3 Legal Proceedings 36
ITEM 4 Submission of Matters to a Vote of Security Holders 36
PART II
ITEM 5 Market for Registrant's Common Equity and Related
Stockholder Matters 36
ITEM 6 Selected Financial Data 37
ITEM 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 38
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk 42
ITEM 8 Financial Statements and Supplementary Data 43
ITEM 9 Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 72
ITEM 9A Controls and Procedures 72
ITEM 9B Other Information 73
PART III
ITEM 10 Directors and Executive Officers of the Registrant 74
ITEM 11 Executive Compensation 76
ITEM 12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 78
ITEM 13 Certain Relationships and Related Transactions 79
ITEM 14 Principal Accountant Fees and Services 80
PART IV
ITEM 15 Exhibits and Financial Statement Schedules 81
SIGNATURES 82
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PART I
FORWARD LOOKING STATEMENTS
This Annual Report contains forward-looking statements within the meaning of the
federal securities laws that involve a number of risks and uncertainties. Our
future results may differ materially from our historical results and actual
results could differ materially from those projected in the forward-looking
statements as a result of certain risk factors. These factors are described in
the "Risk Factors" section below. Among the factors that could cause actual
results to differ materially from those expected are the following: business
conditions and general economic conditions; competitive factors, such as pricing
and marketing efforts; and the pace and success of product research and
development. These and other factors may cause expectations to differ.
ITEM 1: BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Global Beverage Solutions, Inc. ("Global" or the "Company"), a Nevada
corporation, was incorporated on January 29, 1997, with the name Mercury
Software.
On June 19, 2003, we became a "Business Development Company" ("BDC") pursuant to
applicable provisions of the Investment Company Act of 1940 (the "1940 Act").
Global provides equity and debt investment capital to fund growth, acquisitions
and recapitalizations of small market companies primarily located in the United
States. We are looking to invest in companies that are cash-flow positive or are
likely to become cash-flow positive in the foreseeable future based on sound
economic fundamentals. These entities will have the prospect for expansion as a
result of access to capital and/or additional management acumen provided by
Global. As part of this strategic process, we are looking for investment
opportunities in the beverage product categories and/or services that have the
potential for a positive return on investment, both in terms of current income
and capital appreciation. Our investments can take the form of common and
preferred stock and warrants or rights to acquire equity interests, senior and
subordinated loans, or convertible securities. Our common stock is traded in the
over-the-counter market and is quoted on the NASD Over The Counter Bulletin
Board ("OTCBB") under the symbol "GBVS."
Effective April 18, 2005, we implemented a 2500-to-1 reverse split of our common
stock. Immediately following this reverse stock split, there were 218,500 of our
common shares issued and outstanding. All share references are restated to give
effect to the reverse stock split.
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.
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NAME CHANGES
Mercury Software changed its name to MedEx Corp. on June 24, 2002. Aussie
Apparel Group Ltd. ("Aussie Apparel"), a Nevada corporation, was incorporated on
August 26, 2002. In October 2002, MedEx Corp. issued an aggregate of 2,600
shares of its common stock to the shareholders of Aussie Apparel in connection
with the merger of Aussie Apparel with MedEx Corp., whose name was then changed
to "Aussie Apparel Group Ltd" on October 21, 2002. Since the shareholders of
Aussie Apparel became the controlling shareholders of MedEx Corp. after the
exchange, Aussie Apparel was treated as the acquirer for accounting purposes.
Accordingly, the financial statements, as presented herein, are the historical
financial statements of Aussie Apparel and include the transactions of MedEx
Corp. only from the date of acquisition, using reverse merger accounting.
We changed our name to Bluetorch Inc. ("Bluetorch"), effective November 3, 2003.
On April 19, 2005 in accordance with a 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. Following the public announcement of our new name, we
received notice that another corporation had a name similar to Pacific Crest
Investments. In order to avoid potentially prolonged and expensive litigation,
we agreed to change our name again, and effective May 5, 2005, our new name
became Pacific Peak Investments.
On October 10, 2005, we changed our name to Global Beverage Solutions, Inc. to
emphasize our concentration in the beverage industry.
(b) FINANCIAL INFORMATION ABOUT SEGMENTS
We operate in one business segment, as a BDC.
(c) NARRATIVE DESCRIPTION OF BUSINESS
CURRENT PORTFOLIO COMPANIES
---------------------------
On November 17, 2005, we executed a Stock Purchase Agreement with the
shareholders ("Sellers") of Rudy Beverage, Inc. ("Rudy"), a Nevada corporation,
whereby we exchanged 6,000,000 shares of our common stock for 80% of the issued
and outstanding common stock of Rudy. The Sellers can receive up to 10,000,000
additional shares of our common stock if Rudy achieves certain sales and net
revenue goals by the twelve month periods ended June 30, 2007 and 2008. Rudy was
founded by Rudy Ruettiger and Drew Carver to create a unique line of beverages
higher in nutritional value but lower in sugar than existing brands. Rudy
currently has developed two distinct products: Rudy Flying Colors, catering to
children K1 through 8; and Rudy Revolution, a sport drink aimed at athletes
across the board. The goal of the Rudy line of beverages is to create flavorful
juice blends, some of which will incorporate the hydration capabilities of EON
Structured Water.
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On July 8, 2005, we consummated the transactions contemplated by the Share
Purchase Agreement (dated June 28, 2005) with EON Beverage Group, Inc. ("EON")
and, as a result, we 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, based
on EON's representations. On January 23, 2006, we executed a letter of intent
with certain shareholders of EON which would increase our ownership of EON to
53%, subject to due diligence and a definitive contract. The agreement has been
delayed, pending completion of additional due diligence.
On June 6, 2005, we signed a Share Purchase Agreement with Titanium Design
Studio, Inc. ("TDS"), a Nevada corporation, whereby we 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.
Early in 2006, TDS relocated its operations to Thailand in order to access
cheaper labor. As a result of our reduced influence on operations, our Board of
Directors fully reserved our investment of $200,000.
FORMER PORTFOLIO COMPANIES
--------------------------
Global has two wholly owned subsidiary companies, Unboxed Distribution, Inc.
("Unboxed") and Total Sports Distribution, Inc. ("Total Sports"). The operations
of Unboxed and Total Sports were discontinued early in 2005 when it became
evident that they would not be able to attain profitability within a reasonable
period of time. During 2005, we also exchanged our 51% investment in Island
Tribe, Inc. ("Island Tribe") for the 12,000 shares of our common stock which we
had initially issued to acquire Island Tribe.
We signed an acquisition agreement in December 2002 with Australian-based
Federation Group for the Hot Tuna, Xisle and Piranha Boy brands. We then spent
most of 2003 and the early part of 2004 restructuring our portfolio of apparel
brands.
We rescinded our acquisition agreement for Hot Tuna, Xisle and Piranha Boy in
November 2003 and assigned the rights for the three brands to Frontier
International Holdings Pty Ltd. In addition, we changed our name from Aussie
Apparel Group Ltd. to Bluetorch Inc. in recognition of this brand restructuring
and our move away from the original portfolio of Australian brands. We replaced
the intended Australian portfolio of brands with other brands including
Bluetorch, True Skate Apparel (TSABrand), Airwalk and Island Tribe.
UNBOXED
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In September 2003, Unboxed signed a licensing agreement (with option to acquire)
with Gotcha Brands, Inc. for the Bluetorch label.
On March 12, 2005, Global and 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 we
also agreed to change our corporate name by April 20, 2005.
TOTAL SPORTS
On January 10, 2004, Total Sports entered into a license agreement (with an
option to purchase) with Krash Distribution Inc. to license the True Skate
Apparel (TSABrand) name for apparel and accessories.
On February 19, 2004, Total Sports signed a definitive agreement with Collective
Licensing International, LLC to license the Airwalk brand for apparel in the
United States market.
On March 22, 2005, Global and 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.
On July 1, 2005, Global and 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.
ISLAND TRIBE
In accordance with a Stock Purchase Agreement dated August 20, 2004, we
purchased for 12,000 restricted shares of our common stock, a 51% interest in
Island Tribe, a surf apparel company. This transaction was effective August 1,
2004 and the investment was valued at $372,000, based upon the trading price of
our common stock at the time of the transaction. Over the next 4 years, the
purchase agreement provided for us to receive an additional 24% ownership of
Island Tribe. On November 20, 2005, we returned our 51% interest in Island Tribe
in exchange for the 12,000 restricted shares we had originally issued for the
acquisition.
VALUATION METHODOLOGY - We determine the value of each investment in our
portfolio on a quarterly basis, and changes in value result in unrealized gains
or losses being recognized. At December 31, 2005, approximately 95% of our total
assets represented portfolio investments recorded at fair value. Value, as
defined in Section 2(a)(41) of the Investment Company Act of 1940, is (i) the
market price for those securities for which a market quotation is readily
available and (ii) for all other securities and assets, fair value is as
determined in good faith by the board of directors. Since there is typically no
readily ascertainable market value for the investments in our portfolio, we
value substantially all of our portfolio investments at fair value as determined
in good faith by the board of directors pursuant to a valuation policy and a
consistently applied valuation process. Because of the inherent uncertainty of
determining the fair value of investments that do not have a readily
ascertainable market value, the fair value of our investments 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.
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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 the types of investments we make.
Unlike banks, we are not permitted to provide a general reserve for anticipated
loan losses. Instead, we are required to specifically value each individual
investment on a quarterly basis. We will record unrealized depreciation on
investments when we believe that an investment has become impaired, including
where collection of a loan or realization of an equity security is doubtful, or
when the enterprise value of the company does not currently support the cost of
our debt or equity investment. Conversely, we will record unrealized
appreciation if we believe that the underlying portfolio company has appreciated
in value and, therefore, our equity security has also appreciated in value.
Changes in fair value are recorded in the statements of operations as "Change in
unrealized depreciation of non-controlled affiliate investments."
As a business development company, we plan to invest in liquid securities
including debt and equity securities of primarily private companies. The
structure of each private finance debt and equity security will be specifically
negotiated to enable us to protect our investment and maximize our returns. We
include many terms governing interest rate, repayment terms, prepayment
penalties, financial covenants, operating covenants, ownership parameters,
dilution parameters, liquidation preferences, voting rights, and put or call
rights. Our investments are generally subject to restrictions on resale and
generally have no established trading market. Because of the type of investments
that we make and the nature of our business, our valuation process requires an
analysis of various factors. Our fair value methodology includes the examination
of, among other things, the underlying investment performance, financial
condition and market changing events that impact valuation.
Valuation Methodology - Private Finance. Our process for determining the fair
value of a private finance investment begins with determining the enterprise
value of the portfolio company. The fair value of our investment is based on the
enterprise value at which the portfolio company could be sold in an orderly
disposition over a reasonable period of time between willing parties other than
in a forced or liquidation sale. The liquidity event whereby we exit a private
finance investment is generally the sale, the recapitalization or, in some
cases, the initial public offering of the portfolio company.
There is no one methodology to determine enterprise value and, in fact, for any
one-portfolio company, enterprise value is best expressed as a range of fair
values, from which we derive a single estimate of enterprise value. To determine
the enterprise value of a portfolio company, we analyze its historical and
projected financial results. We generally require portfolio companies to provide
monthly unaudited financial statements, as well as annual projections for the
upcoming fiscal year. Typically in the private equity business, companies are
bought and sold based upon multiples of EBITDA, cash flows, net income, revenues
or, in limited instances, book value. The private equity industry uses financial
measures such as EBITDA or EBITAM (Earnings Before Interest, Taxes,
Depreciation, Amortization and, in some instances, Management fees) in order to
assess a portfolio company's financial performance and to value a portfolio
company. EBITDA and EBITAM are not intended to represent cash flow from
operations as defined by accounting principles generally accepted in the United
States of America and such information should not be considered as an
8
alternative to net income, cash flow from operations, or any other measure of
performance prescribed by accounting principles generally accepted in the United
States of America. When using EBITDA to determine enterprise value, we may
adjust EBITDA for non-recurring items. Such adjustments are intended to
normalize EBITDA to reflect the portfolio company's earnings power. Adjustments
to EBITDA may include compensation to previous owners, acquisition,
recapitalization, or restructuring related items or one-time non-recurring
income or expense items.
In determining a multiple to use for valuation purposes, we look to private
merger and acquisition statistics, discounted publicly trading multiples or
industry practices. In estimating a reasonable multiple, we consider not only
the fact that our portfolio company may be a private company relative to a peer
group of public comparables, but we also consider the size and scope of our
portfolio company and its specific strengths and weaknesses. In some cases, the
best valuation methodology may be a discounted cash flow analysis based on
future projections. If a portfolio company is distressed, a liquidation analysis
may provide the best indication of enterprise value.
COMPLIANCE WITH THE SARBANES-OXLEY ACT OF 2002 AND NYSE CORPORATE GOVERNANCE
REGULATIONS. On July 30, 2002, President Bush signed into law the Sarbanes-Oxley
Act of 2002 (the "Sarbanes-Oxley Act"). The Sarbanes-Oxley Act imposes a wide
variety of new regulatory requirements on publicly-held companies and their
insiders. Many of these requirements will affect us. For example:
- - Our chief executive officer and chief financial officer must now certify the
accuracy of the financial statements contained in our periodic reports;
- - Our periodic reports must disclose our conclusions about the effectiveness of
our disclosure controls and procedures;
- - Our periodic reports must disclose whether there were significant changes in
our internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses; and
- - We may not make any loan to any director or executive officer and we may not
materially modify any existing loans.
The Sarbanes-Oxley Act has required us to review our current policies and
procedures to determine whether we comply with the Sarbanes-Oxley Act and the
new regulations promulgated thereunder. We will continue to monitor our
compliance with all future regulations that are adopted under the Sarbanes-Oxley
Act and will take actions necessary to ensure that we are in compliance
therewith.
CODE OF ETHICS, AUDIT COMMITTEE CHARTER AND INVESTMENT COMMITTEE CHARTER
The board of directors of the Company adopted a Code of Ethics, an Audit
Committee Charter and an Investment Committee Charter, all effective as of
August 27, 2003.
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The Code of Ethics in general prohibits any officer, director or advisory person
(collectively, "Access Person") of the Company from acquiring any interest in
any security which the Company (i) is considering a purchase or sale thereof,
(ii) is being purchased or sold by the Company, or (iii) is being sold short by
the Company. The Access Person is required to advise us in writing of his or her
acquisition or sale of any such security.
The primary responsibility of the Audit Committee is to oversee our financial
reporting process on behalf of our Board of Directors and report the result of
their activities to tFhe Board. Such responsibilities shall include, but shall
not be limited to, the selection and, if necessary, the replacement of our
independent auditors and review and discussion with such independent auditors of
(i) the overall scope and plans for the audit, (ii) the adequacy and
effectiveness of the accounting and financial controls, including our system to
monitor and manage business risks, and legal and ethical programs, and (iii) the
results of the annual audit, including the financial statements to be included
in our annual report on Form 10-K. Ross Silvey, an independent director, had
been designated the Audit Committee's "financial expert."
The Investment Committee shall have oversight responsibility with respect to
reviewing and overseeing our contemplated investments in portfolio companies and
other investments on behalf of the Board and shall report the results of their
activities to the Board. Such Investment Committee shall (i) have the ultimate
authority for and responsibility to evaluate and recommend investments, and (ii)
review and discuss with management (a) the performance of portfolio companies,
(b) the diversity and risk of our investment portfolio, and, where appropriate,
make recommendations respecting the role or addition of portfolio investments
and (c) all solicited and unsolicited offers to purchase portfolio companies.
The members of the Audit Committee are Ross Silvey and Terry Turner, both
independent directors of the Company. The members of the Investment Committee
includes the full Board of Directors.
ITEM 1A: RISK FACTORS
In the normal course of business in an effort to keep our shareholders and the
public informed about our operations and portfolio of investments, we may from
time-to-time issue certain statements, either in writing or orally, that contain
or may contain forward-looking information. Generally, these statements relate
to our business plans or strategies or portfolio companies, projected or
anticipated benefits or consequences of such plans or strategies, projected or
anticipated benefits of new or follow-on investments made by or to be made by
us, or projections involving anticipated purchases or sales of securities or
other aspects of our operating results. Forward-looking statements are not
guarantees of future performance and are subject to risks and uncertainties that
could cause actual results to differ materially. As noted elsewhere in this
report, our operations and portfolio of investments are subject to a number of
uncertainties, risks, and other influences, many of which are outside our
control, and any one of which, or a combination of which, could materially
affect the results of our operations, or our NAV, the market price of our common
stock, and whether any forward-looking statements made by us ultimately prove to
be accurate.
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Investing in Global involves a number of significant risks relating to our
business and investment objective. As a result, there can be no assurance that
we will achieve our investment objective. In addition, the following risk
factors are applicable to an investment in our common stock.
GENERAL RISK FACTORS
Investments in the Company by new shareholders will be diluted immediately.
Due, in part, to increases in our share price, some of our present shareholders
have acquired an interest in our common stock at a total cost substantially less
than the total cost that newer investors will likely pay for their shares.
Therefore, the newer investors will bear a greater proportion of the risk of
loss (measured by the cost of shares). As of March 1, 2006, there were
950,000,000 shares of common stock authorized and 41,312,391 common shares
outstanding.
We may sell additional equity in the future that may further dilute the value of
your investment.
Reductions in the price of our stock resulting from the performance of our
portfolio or other market conditions might result in stock being sold to new
investors, including management, at prices below the price paid by you. Senior
management may be granted the right, and others may have the right, under
certain circumstances, to acquire additional shares of our common stock at a
price equal to the market price as it exists at a point in the future. If such a
grant of a right occurred at a time when the price of the stock has fallen
relative to the current market value and falls below the price paid by you,
management might be given the right to purchase stock at a price below your
cost. In either of these cases, the value of your investment would be further
diluted.
Limitation of liability and indemnification of management.
While limitations of liability and indemnification are themselves limited, we
have instituted provisions in our bylaws indemnifying, to the extent permitted,
against and not making management liable for, any loss or liability incurred in
connection with our affairs, so long as such loss or liability arose from acts
performed in good faith and not involving any fraud, gross negligence or willful
misconduct. Therefore, to the extent that these provisions provide any
protection to management, that protection may limit the right of a shareholder
to collect damages from members of management. Management is accountable to the
shareholder as a fiduciary and, consequently, members of management are required
to exercise good faith and integrity in handling our affairs.
Our business may become subject to extensive regulation at the federal and state
levels. The value of securities we own may be adversely impacted by subsequent
regulatory changes.
Our operations are and will be affected by current and future legislation and by
the policies established from time to time by various federal and state
regulatory authorities. It is not possible to predict what changes, if any, will
be made to existing federal and state legislation and regulations or the effect
that such changes may have on our future business and earnings prospects. Our
current investment strategy includes purchase of unregistered securities in both
private companies as well as private placements offered by public companies. We
are able to purchase securities pursuant to exemptions to the registration
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requirements of United States Federal securities laws. Changes in such laws or
their interpretation could adversely impact our ability to resell such
securities which would have a negative effect on the value of such securities as
well as impact our overall investment strategy and the liquidity of our
investments. In such an event, we may need to reformulate our investment
strategy or we may choose to liquidate.
We cannot guarantee paying dividends to our stockholders.
We are allowed by our articles of incorporation and/or by-laws to pay dividends
to our stockholders. However, there can be no guarantee we will have sufficient
revenues to pay dividends during any period. We intend to make distributions on
a quarterly basis to our stockholders out of assets legally available for
distribution. We cannot assure you that we will achieve investment results or
maintain a tax status that will allow or require any specified level of cash
distributions or year-to-year increases in cash distributions. In addition, due
to the asset coverage test applicable to us as a business development company,
we may be limited in our ability to make distributions. Investors in need of
liquidity through the payment of dividends should refrain from common stock
which does not have a dividend requirement.
Investing in our shares may involve a high degree of risk.
The investments we make in accordance with our investment objective may result
in a higher amount of risk than alternative investment options and volatility or
loss of principal. Our investments in portfolio companies may be speculative and
aggressive, and therefore, an investment in our shares may not be suitable for
someone with low risk tolerance.
The market price of our common stock may fluctuate significantly.
The market price and liquidity of the market for shares of our common stock may
be significantly affected by numerous factors, some of which are beyond our
control and may not be directly related to our operating performance. These
factors, may adversely affect our ability to raise capital through future equity
financings. These factors include:
o significant volatility in the market price and trading volume of
securities of business development companies or other companies in the
beverage industry, which are not necessarily related to the operating
performance of these companies;
o changes in regulatory policies or tax guidelines, particularly with
respect to RICs or business development companies;
o our common stock is unlikely to be followed by any market analysts,
and there may be few institutions acting as market makers for the
common stock which can adversely affect its price;
o loss of or inability to qualify for RIC status or BDC status;
o changes in earnings or variations in operating results;
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o changes in the value of our portfolio of investments;
o any shortfall in revenue or net income or any increase in losses from
levels expected by investors or securities analysts;
o departure of one or more of our key personnel;
o operating performance of companies comparable to us;
o potential legal and regulatory matters;
o changes in prevailing interest rates;
o general economic trends and other external factors; and
o loss of a major funding source.
Sales of substantial amounts of our common stock in the public market may have
an adverse effect on the market price of our common stock.
We currently have 41,312,391 shares of common stock outstanding. We plan to
raise funds in the future through sales of our common stock pursuant to
Regulation E, which provides in part for issuance of freely trading shares.
Sales of substantial amounts of our common stock or the availability of such
shares for sale could adversely affect the prevailing market price for our
common stock. If this occurs and continues, it could impair our ability to raise
additional capital through the sale of equity securities should we desire to do
so.
Our Board of Directors also has authority, without action or vote of the
shareholders, to issue all or part of our authorized but unissued shares. Any
such issuance will dilute the percentage ownership of shareholders and may,
subject to the regulations pertaining to the minimum prices for which shares may
be sold, further dilute the book value of the common stock. These issuances may
also serve to enhance existing management's ability to maintain control of the
Company.
We have the right, but do not intend to issue senior securities, including debt.
If we were to reverse that decision and offer for sale and/or issue senior
securities, you will be exposed to additional risks, including the typical risks
associated with leverage.
You will be exposed to increased risk of loss if we incur debt to make
investments. If we do incur debt, a decrease in the value of our investments
would have a greater negative impact on the value of our common stock than if we
did not use debt.
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o Our ability to pay dividends would be restricted if our asset coverage
ratio were not at least 200% and any amounts that we use to service
our indebtedness would not be available for dividends to our common
stockholders.
o It is likely that any debt we incur will be governed by an indenture
or other instrument containing covenants restricting our operating
flexibility.
o We and you as shareholders will bear the cost of issuing and servicing
our senior securities.
o Any convertible or exchangeable securities that we issue in the future
may have rights, preferences and privileges more favorable than those
of our common stock.
Our investments may require us to raise additional capital on different terms.
We will require additional capital in the future. For additional requirements,
we may raise capital by issuing equity or convertible debt securities, and when
we do, the percentage ownership of our existing stockholders will be diluted. In
addition, any new securities we issue could have rights, preferences and
privileges senior to our existing equity (although we do not intend to sell debt
or preferred equity interests).
Our ability to raise capital as a BDC is limited by the requirement that we not
sell shares below the NAV/S without approval of a majority of our shareholders.
While we do not anticipate that the NAV/S calculation will ever result in a
negative number or a nominally positive number, the Company would be severely
limited in its ability to sell shares if such a negative number or a nominally
positive number were to be the result of a NAV/S calculation.
Increases in market interest rates may both reduce the value of our portfolio
investments and increase our cost of capital.
We expect that we may offer loans to our portfolio companies with interest at
fixed rates and the value of these investments could be negatively affected by
increases in market interest rates. In addition, an increase in interest rates
would make it more expensive to use debt to finance our investments. As a
result, a significant increase in market interest rates could both reduce the
value of our portfolio investments and increase our cost of capital, which would
reduce our net investment income.
The lack of liquidity in our investments may adversely affect our business.
We will generally make investments in private companies. Substantially all of
these securities will be subject to legal and other restrictions on resale or
will otherwise be less liquid than publicly traded securities. The illiquidity
of our investments may make it difficult for us to sell such investments if the
need arises. In addition, if we are required to liquidate all or a portion of
our portfolio quickly, due to changes in capital needs or otherwise, we may
realize significantly less than the value at which we have previously recorded
our investments. In addition, we may face other restrictions on our ability to
14
liquidate an investment in a portfolio company to the extent that we or our
investment adviser has material non-public information regarding such portfolio
company.
We may experience fluctuations in our quarterly and annual results.
We could experience fluctuations in our quarterly and annual operating results
due to a number of factors, including the interest or dividend rates payable on
the debt or equity securities we acquire, performance and/or default rate on
securities we acquire, the level of our expenses, variations in and the timing
of the recognition of realized and unrealized gains or losses, the degree to
which we encounter competition in our markets, changes in the beverage industry,
and general economic conditions. As a result of these factors, results for any
period should not be relied upon as being indicative of performance in future
periods.
We may not realize gains or income from our investments.
We seek to generate both current income and capital appreciation. However, the
securities, in which we invest, may not appreciate and, in fact, may decline in
value, and the issuers of debt securities, in which we invest, may default on
interest and/or principal payments. Accordingly, we may not be able to realize
gains from our investments, and any gains that we do realize may not be
sufficient to offset any losses we experience.
Your influence in matters requiring shareholder action will be subject to the
probability that most shareholders will follow management's direction.
No officer or director owns any of the issued and outstanding shares of our
voting securities and there are no major shareholders with a controlling
interest and no consortium of shareholders has been identified with a block of
control or who would likely exercise voting control over all matters that may be
submitted for approval by our shareholders. Without such a controlling block,
management positions will be the most likely to be presented to shareholders and
more likely to influence shareholder decisions (assuming a fact that
shareholders will likely "vote with" management). Therefore, while the number of
shares controlled by the officers and directors is less that a majority, their
position of control is material and significant.
Pursuant to our articles of incorporation, our Board of Directors has the
authority to issue shares of stock without any further vote or action by the
stockholders. The issuance of stock under certain circumstances could have the
effect of delaying or preventing a change in control of the Company or may deter
takeover attempts.
Our articles of incorporation contain provisions that may have the effect of
discouraging, delaying or making more difficult a change in control and
preventing the removal of incumbent directors. The existence of these provisions
may reduce any premiums over market price that a potential acquirer would offer
to shareholders for their shares of our common stock. Furthermore, we are
subject to provisions of the Nevada Revised Statutes that may make it difficult
for a potential acquirer to exert control over our Board of Directors and may
discourage attempts to gain control without the consent of the Board of
Directors.
15
GENERAL RISKS ASSOCIATED WITH BUSINESS DEVELOPMENT COMPANIES
BDCs generally require substantial amounts of time to realize the benefits from
investments.
Venture capital investments typically take from four to eight years from the
date of initial investment to reach a state of maturity at which liquidation can
be considered practical. We have not completed funding of some of our portfolio
companies and we anticipate that there may be an additional period of time
ranging from three to six months before we have obtained funding and completed
investing that funding in our portfolio companies for our first round of equity
investments. In light of the foregoing, it is unlikely that any significant
distributions of the proceeds from the liquidation of equity investments will be
made for several years after inception, if at all.
Our present senior management team has limited experience managing a business
development company under the Investment Company Act of 1940.
The 1940 Act imposes numerous constraints on the operations of business
development companies. For example, business development companies are required
to invest at least 70% of their total assets primarily in securities of
privately held or thinly traded U.S. public companies, cash, cash equivalents,
U.S. government securities and other high quality debt investments that mature
in one year or less. The lack of experience of our senior management team in
managing a portfolio of assets under such constraints may hinder their ability
to take advantage of attractive investment opportunities and, as a result,
achieve our investment objective. Within the BDC format, the information about
deals and deal flow generated by our senior management in connection with their
investment and portfolio management activities will have a significant impact on
our future success as a BDC. The senior management team will evaluate,
structure, negotiate terms and close investments on those terms, monitor and
service our investments and their abilities to perform these functions as
members of a BDC will also have a significant impact on our future success as a
BDC.
We will be wholly dependent for the selection, structuring, closing and
monitoring of all of our investments on the diligence and skill of our
management, acting under the supervision of our Board of Directors. None of
these individuals has substantial experience, within or under a BDC investment
and management format, in acquiring and investing in growth stage companies, the
negotiation of the terms of such investments and the monitoring of such
investments after they are made. In addition, we will engage outside consultants
and professionals known to management to assist in evaluating and monitoring
portfolio companies and maintaining regulatory compliance.
While we believe that our management possesses certain fundamental business
skills that will increase our likelihood to succeed, our management team has
never operated a BDC and must be considered as inexperienced when it comes to
the both the day to day operations of an investment company and the management
of investments. We intend to rely on the general skills and business acumen of
our management team as well as engaging other professionals and consultants from
time to time to insure that it gains the expertise to manage a BDC.
16
We may change our investment policies without further shareholder approval.
Although we are limited by the 1940 Act with respect to the percentage of our
assets that must be invested in qualified portfolio companies, we are not
limited with respect to the minimum standard that any investment company must
meet, nor the industries in which those investment companies must operate. We
may make investments without shareholder approval and such investments may
deviate significantly from our historic operations. Any change in our investment
policy or selection of investments could adversely affect our stock price,
liquidity, and the ability of our shareholders to sell their stock.
We may allocate the net proceeds from stock sales in ways with which you may not
agree.
We will have significant flexibility in investing the net proceeds of our stock
sales. We may use the net proceeds in ways with which you may not agree or for
investments other than those contemplated at the time we sell the stock, unless
such change in the use of proceeds is subject to stockholders' approval or
prohibited by law.
We will have broad discretion in using the proceeds from this Offering
Although we have identified generally the manner in which we expect to utilize
the proceeds from sales of our common stock, our management has broad discretion
with respect to the specific application of the net proceeds of any funding that
we obtain. While our corporate governance resolutions require the Board of
Directors and Investment Committee to adhere to certain standards, even acting
in compliance with those guidelines, our Board of Directors and Investment
Committee have discretion. We do not permit the Board of Directors and
Investment Committee to use proceeds in a manner inconsistent with the operation
of a BDC. Although substantially all of the net proceeds from any offering is
intended to be applied for investments in eligible portfolio companies which
satisfy our investment criteria, we may invest some of the proceeds in the
provision of services to our portfolio companies rather than invest directly.
Therefore, we can not accurately predict costs associated with such
professionals and consultants. For that reason, the use of proceeds can not be
determined with absolute certainty. You will not have an opportunity to evaluate
the basis for our decisions on the use of the proceeds, and will not be able to
participate in such decisions.
Our investments may not generate sufficient income to cover our operations.
While we intend to make investments into those qualified companies that will
provide the greatest overall return on our investment, we are required to make
investments into those companies which, whether due to lack of experience or
financial instability (including insolvency), may present the greatest risk.
This is in conformity with the Small Business Investment Incentive Act of 1980
which amended the 1940 Act and permitted the creation of BDC's. However, certain
of those investments may fail, in which case we will not receive any return on
our investment. In addition, our investments may not generate income, either in
the immediate future, or at all. As a result, we may have to sell additional
stock, or borrow money, to cover our operating expenses. The effect of such
actions could cause our stock price to decline or, if we are not successful in
17
raising additional capital, we could cease to continue as a going concern. It
should be noted that our operational costs are higher as a result of our having
elected to be governed as a BDC.
Shares in a BDC will likely trade at a discount.
Shares of many closed-end investment companies and most BDC's frequently trade
at a discount to their net asset value. This characteristic is separate and
distinct from the risk that our net asset value could decrease as a result of
investment activities. This likely discount in share pricing in the market may
pose a greater risk to investors expecting to sell their shares in a relatively
short period after purchase. We cannot predict whether our shares will trade at
prices above, at or below our net asset value.
Regulations governing our operation as a business development company affect our
ability to raise, and the way in which we raise, additional capital.
We have the right to issue debt securities or preferred stock and/or borrow
money from banks or other financial institutions, which we refer to collectively
as "senior securities," only in amounts such that our asset coverage, as defined
in the 1940 Act, equals at least 200% after each issuance of senior securities,
the maximum amount permitted by the 1940 Act. If the value of our assets
declines, we may be unable to satisfy this test. If that happens, we may be
required to sell a portion of our investments or sell additional shares of
common stock and, depending on the nature of our leverage, to repay a portion of
our indebtedness at a time when such sales may be disadvantageous. In addition,
any future issuance of additional shares of our common stock could dilute the
percentage ownership of our current stockholders in us.
As a business development company regulated under provisions of the 1940 Act, we
are not generally able to issue and sell our common stock at a price below net
asset value per share. We may, however, sell our common stock, or warrants,
options or rights to acquire our common stock, at a price below the current net
asset value of our common stock (1) if our Board of Directors determines that
such sale is in the best interests of us and our stockholders, and (2) our
stockholders approve such sale. In any such case, the price at which our
securities are to be issued and sold may not be less than a price which, in the
determination of our Board of Directors, closely approximates the market value
of such securities (less any sales load).
In addition, we may in the future seek to securitize or hypothecate loans
previously made by us to generate cash for funding new investments. To
securitize or hypothecate these loans, we may contribute a pool of such loans to
a wholly-owned subsidiary. This could include the sale of interests in the
subsidiary on a non-recourse basis to purchasers who we would expect to be
willing to accept a lower interest rate to invest in investment grade loan pools
although we would expect to retain a portion of the equity in the securitized
pool of loans. An inability to successfully securitize and sell all of part of
such a loan portfolio could limit our ability to grow our business, fully
execute our business strategy and decrease our earnings, if any. Moreover, the
successful securitization of our loan portfolio might expose us to losses
because the residual loans in which we do not sell interests will tend to be
those that are riskier and more likely to generate losses.
18
Our election to be governed as a BDC will require us to comply with significant
regulatory requirements.
We elected to be regulated as a Business Development Company under the 1940 Act
and be subject to Sections 54 through 65 of said Act. As a result of this
election, the Company is subject to the provisions of 1940 Act as it applies to
BDCs as of the date of such election. Being subject to the BDC provisions
requires us to meet significant numbers of regulatory and financial
requirements. Compliance with these regulations is expensive and may create
financial problems for us in the future. These laws and regulations, as well as
their interpretation, may be changed from time to time. Accordingly, any change
in these laws or regulations could have a material adverse effect on our
business.
Specifically, it must be noted that there are increased costs associated with
compliance with the 1940 Act as a result of our election to become a BDC. These
costs include costs associated with the increased demand for compliance
including oversight by our Chief Compliance Officer and counsel to the Company
as well as increased costs due to accounting methodology and valuations which
increase the time and work required of both our accounting service providers and
independent auditors. These costs require us to expend capital and resources
that might otherwise be used to meet the needs or opportunities relating to
investments and/or our portfolio companies or other income-producing assets.
If we do not remain a business development company, we might continue to be
regulated as a closed-end investment company under the 1940 Act, which would
decrease our operating flexibility. We cannot assure you that we will
successfully retain our BDC status.
If our primary investments are deemed not to be qualifying assets, we could lose
our status as a business development company or be precluded from investing
according to our current business plan.
Under the 1940 Act, in order to maintain our status as a business development
company, we must not acquire any assets other than "qualifying assets" unless,
at the time of and after giving effect to such acquisition, at least 70% of our
total assets are qualifying assets. If we acquire mezzanine loans or
dividend-paying equity securities from an issuer that has outstanding marginable
securities at the time we make an investment, these acquired assets cannot be
treated as qualifying assets since the issuer might not be considered an
"eligible portfolio company" under the 1940 Act. "Marginable securities" include
any non-equity security, pursuant to certain 1998 amendments to Regulation T
under the Securities Exchange Act of 1934, as amended, which raises the question
as to whether a private company that has outstanding debt securities would
qualify as an eligible portfolio company.
We operate in a highly competitive market for investment opportunities.
A large number of entities will compete with us to make the types of investments
that we plan to make in target portfolio companies in the beverage industry and
in other industries. We will compete with other business development companies,
public and private funds, commercial and investment banks and commercial
financing companies. Many of our competitors are substantially larger and have
considerably greater financial, technical and marketing resources than we do.
For example, some competitors may have a lower cost of funds and access to
funding sources that are not available to us. In addition, some of our
19
competitors may have higher risk tolerances or different risk assessments, which
could allow them to consider a wider variety of investments and establish more
relationships than us. Furthermore, many of our competitors are not subject to
the regulatory restrictions that the 1940 Act imposes on us as a business
development company. We cannot assure you that the competitive pressures we face
will not have a material adverse effect on our business, financial condition and
results of operations. Also, as a result of this competition, we may not be able
to take advantage of attractive investment opportunities from time to time, and
we can offer no assurance that we will be able to identify and make investments
that are consistent with our investment objective.
We may never be able to qualify for the income tax benefits offered to RICs.
We will be classified as a non-diversified investment company under the 1940
Act. Until we achieve a threshold level of diversification, we will not be
subject to the applicable provisions for RICs under the Internal Revenue Code.
Therefore, we will not receive favorable pass through tax treatment on
distributions to our shareholders. This means that we will be taxed as an
ordinary corporation on our taxable income even if that income is distributed to
shareholders, and all distributions out of our earnings and profits will be
taxable to shareholders as dividends. Thus, this income will be subject to a
double layer of taxation.
RISKS ASSOCIATED WITH INVESTMENTS AND PORTFOLIO COMPANIES
There are costs associated with the purchase and sale of securities.
While the general approach of a BDC may suggest a long-term holding position of
the securities of its portfolio companies, some of our strategies may include
purchases of different classes of securities or frequent trading to maximize
profits and, as a consequence, risks related to turnover and costs such as
brokerage commissions may be greater than for an investment in a single entity
for a single class of security held for a longer period of time. Our operating
expenses, including, but not limited to, fees paid to accountants, attorneys,
fees to execute trades, manage investments and fees paid to any investment
advisor may, in the aggregate, constitute a high percentage relative to the
expenses and fees than for an investment in a single entity for a single class
of security held for a longer period of time.
There are numerous risks arising from investing in securities.
The securities industry is generally competitive and methods of investment
strategy involve a degree of risk. We will compete with firms, including many of
the larger securities and investment banking firms, which have substantially
greater financial resources and research staffs. Where we purchase securities in
portfolio companies for appreciation, our profitability substantially depends
upon our ability to correctly assess the future price movements of stocks. There
can be no assurance that we will be able to accurately predict price movements
of securities purchased.
Security investments generally involve a high degree of risk. The performance of
securities in which we may invest are subject to numerous factors which are
neither within the control of nor predictable by us. Such factors can include a
20
wide range of economic, political, competitive and other conditions which may
affect investments in general or specific industries or companies. In recent
years, the securities markets have become increasingly volatile and this
volatility has increased the degree of risk.
Our investments in prospective portfolio companies may be risky and you could
lose all or part of your investment.
We will invest primarily in companies in the beverage industry, most of which
have relatively short or no operating histories. These companies will be subject
to all of the business risk and uncertainties associated with any new business
enterprise, including the risk that these companies may not reach their
investment objective and the value of our investment in them may decline
substantially or fall to zero. Most of the portfolio companies into which we
intend to invest will be considered "growth stage" companies.
Investments in growth stage companies offer the opportunity for significant
gains. However, each investment involves a high degree of business and financial
risk that can result in substantial losses. Among these are the risks associated
with:
o these companies may have limited financial resources and may be unable
to meet their obligations under their securities that we hold, which
may be accompanied by a deterioration in the value of their equity
securities or of any collateral with respect to debt securities and a
reduction in the likelihood of us realizing on any guarantees we may
have obtained in connection with our investment;
o they may have shorter operating histories, narrower product lines and
smaller market shares than larger businesses, which tend to render
them more vulnerable to competitors' actions and market conditions, as
well as general economic downturns;
o because many of these companies are privately held companies, public
information is generally not available about these companies. As a
result, we will depend on the ability of our investment adviser to
obtain adequate information to evaluate these companies in making
investment decisions. If our investment adviser is unable to uncover
all material information about these companies, it may not make a
fully informed investment decision, and we may lose money on our
investments;
o they are more likely to depend on the management talents and efforts
of a small group of persons; therefore, the death, disability,
resignation or termination of one or more of these persons could have
a material adverse impact on our portfolio company and, in turn, on
us;
o companies operating at a loss or with substantial variations in
operating results from period to period, with the need for, but
generally limited ability to provide for internally, substantial
additional capital to support expansion or to achieve or maintain a
competitive position;
21
o these companies may face intense competition, including competition
from companies with greater financial resources, more extensive
development, manufacturing, marketing, and service capabilities, and
larger number of qualified managerial and technical personnel; and
o they may have less predictable operating results, may from time to
time be parties to litigation, may be engaged in changing businesses
with products subject to a risk of obsolescence and may require
substantial additional capital to support their operations, finance
expansion or maintain their competitive position. In addition, our
executive officers, directors and our investment adviser could, in the
ordinary course of business, be named as defendants in litigation
arising from our investments in the portfolio companies.
Economic recessions or downturns could impair our portfolio companies and harm
our operating results.
Our portfolio companies will generally be affected by the conditions and overall
strength of the national, regional and local economies, including interest rate
fluctuations, changes in markets and changes in the prices of their primary
commodities and products. These factors also impact the amount of growth in the
beverage industry. Additionally, these factors could adversely impact the
customer base of our portfolio companies. As a result, many of our portfolio
companies may be susceptible to economic slowdowns or recessions and may be
unable to repay loans or meet other obligations during these periods. Therefore,
our non-performing assets are likely to increase, and the value of our portfolio
is likely to decrease, during these periods. Adverse economic conditions also
may decrease the value of collateral securing some of our loans and the value of
our equity investments. Economic slowdowns or recessions could lead to financial
losses in our portfolio and a decrease in revenues, net income and assets.
Unfavorable economic conditions also could increase our funding costs, limit our
access to the capital markets or result in a decision by lenders not to extend
credit to us. These events could prevent us from increasing investments and harm
our operating results.
A portfolio company's failure to satisfy financial or operating covenants
imposed by us or other investors or lenders could lead to defaults and,
potentially, termination of loans and foreclosure on secured assets, which could
trigger cross-defaults under other agreements and jeopardize our portfolio
company's ability to meet its obligations under the debt or equity securities
that we hold. We may incur expenses to the extent necessary to seek recovery
upon default or to negotiate new terms, which may include the waiver of certain
financial covenants, with a defaulting portfolio company. In addition, if one of
our portfolio companies were to go bankrupt, even though we may have structured
our interest as senior debt or preferred equity, depending on the facts and
circumstances, including the extent to which we actually provided managerial
assistance to that portfolio company, a bankruptcy court might recharacterize
our debt or equity holding and subordinate all or a portion of our claim to
those of other creditors.
Our portfolio companies may incur debt or issue equity securities that rank
equally with, or senior to, our investments in such companies.
22
We intend to invest primarily in mezzanine debt and dividend-paying equity
securities issued by our portfolio companies. Our portfolio companies usually
will have, or may be permitted to incur, other debt, or issue other equity
securities, that rank equally with, or senior to, the securities in which we
invest. By their terms, such instruments may provide that the holders are
entitled to receive payment of dividends, interest or principal on or before the
dates on which we are entitled to receive payments in respect of the securities
in which we invest. Also, in the event of insolvency, liquidation, dissolution,
reorganization or bankruptcy of a portfolio company, holders of securities
ranking senior to our investment in that portfolio company would typically be
entitled to receive payment in full before we receive any distribution in
respect of our investment. After repaying the senior security holders, the
portfolio company may not have any remaining assets to use for repaying its
obligation to us. In the case of securities ranking equally with securities in
which we invest, we would have to share on an equal basis any distributions with
other security holders in the event of an insolvency, liquidation, dissolution,
reorganization or bankruptcy of the relevant portfolio company. In addition, we
may not be in a position to control any portfolio company in which we invest. As
a result, we are subject to the risk that a portfolio company in which we invest
may make business decisions with which we disagree and the management of such
company, as representatives of the holders of their common equity, may take
risks or otherwise act in ways that do not serve our interests as debt or
preferred equity investors.
We may not be able to fully realize the value of any collateral securing any
debt investments made into portfolio companies.
Although we expect that a substantial amount of our debt investments will be
protected by holding security interests in the assets of the portfolio
companies, we may not be able to fully realize the value of the collateral
securing any such investments due to one or more of the following factors:
o since these debt investments will be primarily made in the form of
unsecured or wrap-loans, the liens on the collateral, if any, will be
subordinated to those of the senior secured debt of the portfolio
companies, if any. As a result, we may not be able to control remedies
with respect to the collateral;
o the collateral may not be valuable enough to satisfy all of the
obligations under our secured loan, particularly after giving effect
to the repayment of secured debt of the portfolio company that ranks
senior to our loan;
o bankruptcy laws may limit our ability to realize value from the
collateral and may delay the realization process;
o our rights in the collateral may be adversely affected by the failure
to perfect security interests in the collateral;
o how effectively the collateral would be liquidated and the value
received could be impaired or impeded by the need to obtain regulatory
and contractual consents; and
o by its nature, some or all of the collateral may be illiquid and may
have no readily ascertainable market value. The liquidity and value of
the collateral could be impaired as a result of changing economic
conditions, competition, and other factors, including the availability
of suitable buyers.
23
Our success will depend upon the success of the portfolio companies and, in
great part, upon the abilities of their management.
Although our management expects to provide portfolio companies with assistance
(particularly with regard to capital formation, major personnel decisions, and
strategic planning), the day-to-day operations will be controlled by the
management of the portfolio companies. As the portfolio companies have not all
been identified, investors must rely upon our management to select portfolio
companies that have, or can obtain, the necessary management resources. We will
depend on the diligence, skill and network of business contacts of the senior
management of each of the portfolio companies in which we invest and the
professionals chosen by them, subject to the oversight of our senior management,
and the information and interaction between management of the portfolio
companies and our management. Our future success will depend to a significant
extent on the continued service of the senior management team of each portfolio
company, the departure of any of whom, could have a material adverse effect on
our ability to achieve our investment objective. Problems may arise at portfolio
companies that local management do not recognize or cannot resolve. In addition,
the management of portfolio companies may conceal the existence of problems from
us.
Many of our portfolio investments will be recorded at fair value as determined
in good faith by our board of directors and, as a result, there will be
uncertainty as to the value of our portfolio investments.
A large percentage of our portfolio investments will consist of securities of
privately held or thinly traded public companies. The fair value of these
securities may not be readily determinable. We will value these securities
quarterly at fair value as determined in good faith by our Board of Directors
based on input from our audit committee with or without the benefit of an
opinion from a third party independent valuation firm. We may also be required
to value any publicly traded securities at fair value as determined in good
faith by our Board of Directors to the extent necessary to reflect significant
events affecting the value of those securities. Our Board of Directors may, to
the extent circumstances warrant it, utilize the services of an independent
valuation firm to aid it in determining the fair value of any securities. The
types of factors that may be considered in fair value pricing of our investments
include the nature and realizable value of any collateral, the portfolio
company's ability to make payments and its earnings, the markets in which the
portfolio company does business, comparison to publicly traded companies,
discounted cash flow and other relevant factors. Because such valuations, and
particularly valuations of private securities and private companies, are
inherently uncertain, may fluctuate over short periods of time and may be based
on estimates, the determinations of fair value by our Board of Directors may
differ materially from the values that would have been used if a ready market
for these securities existed. Our net asset value could be adversely affected if
the determinations regarding the fair value of our investments were materially
higher than the values that we ultimately realize upon the disposal of such
securities.
Limitations on availability of investment capital may adversely affect other
investments.
24
We may be reliant on the availability of capital to generate profits under our
investment strategy and such availability will depend, in part, on our ability
to timely liquidate existing positions in order to reinvest the proceeds
thereof. To the extent that we own securities which are not subject to a valid
registration statement or otherwise available for trading under applicable
securities laws, our ability to liquidate our position in such securities may be
limited. We intend to require some of our portfolio companies to use their best
efforts to cause a registration statement covering the resale of the securities
purchased by us to be filed and declared effective by the SEC or become
otherwise freely tradeable. However, there can be no guarantee that the SEC or
other regulating body will declare such a registration statement effective or
permit such security to become free of restrictions within such period and,
until such securities become freely tradable, we will likely be unable to freely
liquidate such interests in restricted securities in the manner and at the
prices desired. This resulting lack of liquidity could impair our ability to
generate the cash flow from these positions to timely pay our liabilities or
obtain funds for the purpose of reinvestment. Although we intend to maintain
adequate liquidity to achieve our future investment objectives, there can be no
assurance this can be accomplished in all circumstances.
Portfolio companies are likely to need additional funding.
We expect that many portfolio companies will require additional financing to
satisfy their working capital requirements. The amount of additional financing
needed will depend upon the maturity and objectives of the particular company.
Each round of venture financing, whether from us or other investors is typically
intended to provide a portfolio company with enough capital to reach the next
major valuation milestone. If the funds provided are not sufficient, a portfolio
company may have to raise additional capital at a price unfavorable to us and
the other existing investors. The availability of capital is generally a
function of capital market conditions that are beyond our control or the control
of any portfolio company. We cannot assure you that our management or the
managements of portfolio companies will be able to predict accurately the future
capital requirements necessary for success or that additional funds will be
available to portfolio companies from any source. If funding is not available,
some portfolio companies may be forced to cease operations.
BDC investments are generally illiquid.
We anticipate that most of our holdings in portfolio companies will be
securities that are subject to restrictions on resale. Generally, unless the
securities are subsequently registered under the 1933 Act, we will not be able
to sell these securities unless we meet all of the conditions of Rule 144 or
another rule under the 1933 Act that permits limited sales under specified
conditions. When restricted securities are sold to the public, we may be deemed
an underwriter, or possibly a controlling person, with respect thereto for the
purpose of the Securities Act and may be subject to liability as such under the
1933 Act. These restrictions could require us to hold securities or refrain from
sale and be unable to liquidate a position even at a loss.
Even if we meet all of the conditions of the 1933 Act, there may be no market
for the securities that we hold. These limitations on liquidity of a BDC's
investments could prevent a successful sale thereof, result in delay of any
sale, or substantially reduce the amount of proceeds that might otherwise be
realized. It is possible that one or more of the portfolio companies may not
25
qualify to rely on such exemptions or to use a registration statement. In such
event, we would end up owning "restricted" securities subject to resale under
Rule 144
There are risks which result from the inherent concentration of investments
prior to diversification.
While we intend to allocate our investments among different portfolio companies,
it is possible that, prior to our achieving diversification, a significant
amount of or all of our investments and, hence, our NAV could, at any one time,
be invested in the securities of just a few portfolio companies. Thus, our
success and its NAV would be dependent on the success of just a few portfolio
companies and all of the risks associated with ownership of such portfolio
companies including success dependent on management, success dependent on market
conditions within the industry or field of such portfolio companies, success
dependent on achieving the business objectives of such portfolio companies and
success dependent on economic conditions and other conditions relative to the
operation of such portfolio companies, would become risks borne by us.
There are risks associated with investments in companies with small
capitalization.
The portfolio companies that we expect to invest in are thinly capitalized and
generally will have a market capitalization below $100 million (and frequently
substantially less). These companies generally do not have experience, market
awareness, tracking by analysts, institutional investors and other benefits of
larger companies that result in more marketability and more stability pricing of
their securities. This impacts the liquidity of securities issued by those
portfolio companies. It is expected that the securities of most, if not all, of
the portfolio companies will be thinly traded. This could present a problem when
we determine to liquidate our position. We may not be able to sell the
securities in the time frame and at the price we would like. Furthermore, in
certain situations, as a result of a security being thinly traded, we could
experience a significant loss in value should we be forced to liquidate our
investment as a result of rapidly changing market conditions or other factors.
There are risks associated with investments in companies with securities that
are not readily marketable.
We may invest in securities that are initially, or that later become, not
readily marketable. For example, we may acquire restricted securities of an
issuer in a private placement pursuant to an arrangement whereby the issuer
agrees to register the resale of those securities, or, in the case of an
investment in convertible or exchangeable securities, the securities underlying
such securities, within a certain period of time. Such registration requires
compliance with United States Federal and state securities laws and the approval
of the SEC. Unless and until such registration or compliance with applicable
regulation occurs, there is likely to be no market for the restricted
securities. No assurance can be given that issuers will not breach their
obligation to obtain or meet such registration or other compliance obligation.
Similarly, securities that are at one time marketable may become unmarketable
(or more difficult to market) for a number of reasons. For example, securities
traded on a securities exchange or quotation system may become unmarketable if
delisted from such exchange or quotation system for among other reasons, failing
to satisfy the requirements for continued listing, which may include minimum
price requirements. In addition, we may acquire restricted securities, for which
no market exists, which are convertible or exchangeable into common stock of the
26
issuer. No assurances can be given that a portfolio company which has sold a
convertible security requiring exchange or conversion, will not breach its
obligation to convert or exchange such securities upon demand, in which case our
liquidity may be adversely affected. In general, the stability and liquidity of
the securities in which we invest will depend in large part on the
creditworthiness of the issuers. Issuers' creditworthiness will be monitored on
an ongoing basis by us. If there is a default by the issuer, we may have
contractual remedies under the applicable transaction documents. However,
exercising such contractual rights may involve delays in liquidating our
position and the incurrence of additional costs.
Portfolio companies in which investments are made may have publicly-traded
securities but those companies or their securities may become subject to
restrictions due to non-compliance. Our ability to generate profits from our
investment activities may be adversely affected by a failure of portfolio
companies to comply with registration, conversion, exchange or other obligations
under the agreements pursuant to which such securities have been sold to us. The
failure of an issuer to register the resale of its securities sold to us may
decrease the amount of available capital with which we may pursue other
investment opportunities or meet current liabilities. We may invest in
securities that are convertible into or exchangeable for common stock of the
issuer, the resale of which by us is (or is to be) registered. If an issuer
refuses, is unable to, or delays in timely honoring its obligation to issue
conversion or exchange securities, our ability to liquidate our position will be
adversely affected, and our profits may be adversely affected.
We have not yet identified all of the potential investments for our portfolio.
We have not yet identified all of the potential investments for our portfolio,
and, thus, you will not be able to evaluate all of our potential investments
prior to purchasing shares of our common stock. This factor will increase the
uncertainty, and thus the risk, of investing in our shares.
We may sustain losses from fraud within our portfolio companies.
The risk of fraud losses on our assets varies with, among other things, the
effectiveness of security procedures utilized. Management anticipates that fraud
losses, if any, will be unlikely as controls and other security measures will
have been adopted by each portfolio company as a condition to our investment to
protect against fraudulent misappropriation of cash and other assets. However,
although our management believes that any loss due to fraud will be unlikely,
there can be no assurance that fraud loss experience will not become material in
amount. Fraud at the BDC level is far less likely as BDC's are required to have
and to have tested controls to limit this possibility. It must be noted that, in
addition to basic controls as to financial data, BDC's are required to have in
place certain safeguards which may render risks to investment assets from fraud
to be nominal but these risks do exist and even requirements such as holding
physical certificates of shares in portfolio companies in a safe do not, in and
of themselves, eliminate the possibility of fraud.
Our investments in foreign securities may involve significant risks in addition
to the risks inherent in U.S. investments.
Our investment strategy contemplates potential investments in securities of
foreign companies. Investing in foreign companies may expose us to additional
risks not typically associated with investing in U.S. companies. These risks
27
include changes in exchange control regulations, political and social
instability, expropriation, imposition of foreign taxes, less liquid markets and
less available information than is generally the case in the U.S., higher
transaction costs, less government supervision of exchanges, brokers and
issuers, less developed bankruptcy laws, difficulty in enforcing contractual
obligations, lack of uniform accounting and auditing standards and greater price
volatility. Although we expect that most of our investments will be U.S.
dollar-denominated, our investments that are denominated in a foreign currency
will be subject to the risk that the value of a particular currency will change
in relation to one or more other currencies. Among the factors that may affect
currency values are trade balances, the level of short-term interest rates,
differences in relative values of similar assets in different currencies,
long-term opportunities for investment and capital appreciation, and political
developments.
We may employ hedging techniques to minimize these risks, but we can offer no
assurance that such strategies will be effective. If we engage in hedging
transactions, we may expose ourselves to risks associated with such
transactions. We may utilize instruments such as forward contracts, currency
options and interest rate swaps, caps, collars and floors to seek to hedge
against fluctuations in the relative values of our portfolio positions from
changes in currency exchange rates and market interest rates. Hedging against a
decline in the values of our portfolio positions does not eliminate the
possibility of fluctuations in the values of such positions or prevent losses if
the values of such positions decline. However, such hedging can establish other
positions designed to gain from those same developments, thereby offsetting the
decline in the value of such portfolio positions. Such hedging transaction may
also limit the opportunity for gain if the values of the portfolio positions
should increase. Moreover, it may not be possible to hedge against an exchange
rate or interest rate fluctuation that is so generally anticipated that we are
not able to enter into a hedging transaction at an acceptable price. The success
of our hedging transactions will depend on our ability to correctly predict
movements, currencies and interest rates. Therefore, while we may enter into
such transactions to seek to reduce currency exchange rate and interest rate
risks, unanticipated changes in currency exchange rates or interest rates may
result in poorer overall investment performance than if we had not engaged in
any such hedging transactions. In addition, the degree of correlation between
price movements of the instruments used in a hedging strategy and price
movements in the portfolio positions being hedged may vary. Moreover, for a
variety of reasons, we may not seek to establish a perfect correlation between
such hedging instruments and the portfolio holdings being hedged. Any such
imperfect correlation may prevent us from achieving the intended hedge and
expose us to risk of loss. In addition, it may not be possible to hedge fully or
perfectly against currency fluctuations affecting the value of securities
denominated in non-U.S. currencies because the value of those securities is
likely to fluctuate as a result of factors not related to currency fluctuations.
RISKS RELATING TO FOCUSING OUR INVESTMENTS IN A SPECIFIC INDUSTRY
Our portfolio will be concentrated initially in a limited number of portfolio
companies in the beverage industry, which will subject us to a risk of
significant loss if any of these companies defaults on its obligations under any
of the securities that we hold or if the beverage industry experiences a
downturn.
28
As we intend to limit our investments primarily to a single industry, there are
risks associated with this specialization. This risk is different than that
associated with merely investing in a limited number of companies. One
consequence of this lack of diversification is that the aggregate returns we
realize may be significantly adversely affected by industry factors which may
cause a number of such portfolio companies to perform poorly or require us to
write down the value of any one or more of these investments. We intend to
concentrate on making investments in the beverage industry and to invest, under
normal circumstances, at least 80% of the value of our net assets (including the
amount of any borrowings for investment purposes) in companies in this industry.
As a result, a downturn in the beverage industry could materially adversely
affect a number of the portfolio companies and, consequently, affect our net
asset value.
The beverage industry is subject to many risks. We intend to concentrate our
investments in the beverage industry. Our definition of beverage, as used in the
context of the beverage industry, is broad, includes both alcoholic and
non-alcoholic beverages and waters and flavored water and different sectors in
the beverage industry may be subject to variable risks and economic pressures.
As a result, it will be difficult to anticipate the impact of changing economic
and political conditions on our portfolio companies and, as a result, our
financial results. The revenues, income (or losses) and valuations of beverage
companies can fluctuate suddenly and dramatically due to any one or more of the
following factors:
o Demand Risk. Beverages have sustained growth as more people opt for
higher-priced alternatives to "tap-water" but this is an industry
phenomenon and may be reversed. A decline in consumer demand for such
higher-priced alternatives to tap water, including bottled water,
flavored water, sports drinks and other drinks would affect many of
the companies in the beverage industry including those which are
presently portfolio investments and those which might be in the
future.
o Regulatory Risk. The profitability of beverage companies could be
adversely affected by changes in the regulatory environment. The
businesses of beverage companies are heavily regulated by federal,
state and local governments in diverse manners, both as to quality and
health factors and claims for benefits. Such regulation can change
over time in scope and intensity.
o Costs of Production Risk. The profitability of beverage companies may
be materially impacted by costs associated with production including
raw materials and political factors where some raw materials originate
across national or even state boundaries. Where raw materials may
include fruits and vegetables, unseasonable extreme weather patterns
could affect production and hence, costs.
o Operational Risk. Like most industries, beverage companies are subject
to various operational costs and risks arise in the unforeseen
increase in cost increases within the industry.
o Competition Risk. Like most industries, there is potential for
increased competition in the beverage industry. This competition is
reflected in risks associated with marketing and selling beverages in
the evolving beverage market and a competitor's development of a
29
lower-cost or better-marketed beverage might affect a number of
portfolio companies at the same time.
Lack of diversity of investments by a BDC presents risks associated with
specific industries.
We have indicated that our intent for the foreseeable future will be to focus
our investments in a specific industry. Additionally, we do not anticipate that
we will be able to diversify our investments with the industry during in the
early years of our pursuit of this investment strategy and, as a result, we will
not gain the benefit of diversification which is the balancing of adverse
economic conditions. Most of our holdings in portfolio companies will be
securities that are subject to restrictions on resale. Because our investments
will be limited to a few portfolio companies primarily within a single industry,
we will be subjected to the specific risks associated with operating a business
in that industry.
The businesses in which we plan to invest are materially affected by
competition.
Our portfolio companies will face competition on a nationwide basis. Competition
for their products will come primarily from companies with widespread
distribution and established brands. We believe that our ability to compete
successfully depends upon a number of factors, including: market presence;
customer service and satisfaction; the capacity, reliability and security of our
delivery network; convenience; the pricing policies of our competitors; and, the
introduction of new products and services by our competitors and us. There are
risks associated with the beverage industry relating to competition due to the
fact that many of the competitive products are controlled by and marketed by the
largest competitors in the industry.
RISKS OF THE COMPANY AT ITS PRESENT STAGE
Although we have been in existence for a number of years, we may still be
considered to have a limited operating history as a BDC. We are a relatively new
business development company with limited resources and sources of revenues.
We were incorporated in January 29, 1997 and we have commenced investment
operations but the extent of our investment activities may characterize us as a
newer investment company. We made our election to become a BDC on June 19, 2003,
and, while we have owned some portfolio companies, we have not realized any
significant revenues from the sale or other liquidity event involving our past
or present portfolio companies. As we have made investments only in two
portfolio companies within our targeted industry, we have limited experience
relating to the identification, evaluation and acquisition of target businesses
and, accordingly, there is only a limited basis upon which to evaluate our
prospects for achieving our intended business objectives. We have limited
resources and have realized limited revenues to date. In addition, we will not
achieve any revenues until, at the earliest, we are able to obtain funding, make
investments and sell our position of securities in an underlying portfolio
company for a profit. We will be wholly dependent for the selection,
structuring, closing and monitoring of all of our investments on the diligence
and skill of our management, acting under the supervision of our Board of
Directors. None of these individuals has substantial experience, within the BDC
30
business format, in acquiring and investing in growth stage companies, the
negotiation of the terms of such investments and the monitoring of such
investments after they are made. We cannot assure you that we will attain our
investment objective.
We are subject to all of the business risks and uncertainties associated with
any new business enterprise, including the risk that we will not achieve our
investment objective and that the value of your investment in us could decline
substantially or fall to zero.
We will be confronted by competition from entities having substantially greater
resources and experience.
Other entities and individuals compete for investments similar to those proposed
to be made by us, many of whom will have greater financial and management
resources than we do. Furthermore, we must comply with provisions of the 1940
Act pertaining to BDCs and, if we qualify as a RIC, provisions of the Internal
Revenue Code pertaining to RICs might restrict our flexibility as compared with
our competitors. The need to compete for investment opportunities may make it
necessary for us to offer portfolio companies more attractive transaction terms
than otherwise might be the case. These factors may prevent us from ever
becoming profitable.
We have historically incurred losses and losses may continue in the future.
We have historically lost money. Accordingly, we may experience significant
liquidity and cash flow problems if we are not able to raise additional capital
as needed and on acceptable terms. No assurances can be given that we will be
successful in reaching or maintaining profitable operations.
Distributions to shareholders may never equal the amount invested by the
shareholders.
We cannot assure you that any distributions to shareholders will be made by us
or that aggregate distributions, if any, will equal or exceed the shareholders'
investment in us. Sales of portfolio company securities will be a principal
source of distributable cash to shareholders. The Board of Directors has
absolute discretion in the timing of distributions to shareholders. Securities
acquired by us through equity investments will be held by us and will be sold or
distributed at the sole discretion of the Board of Directors.
There are significant potential conflicts of interest, which could impact our
investment returns
Our executive officer(s) and Director(s) serve or may serve as officers and
directors of entities who operate in the same or related line of business as we
do. Accordingly, they may have obligations to investors in those entities, the
fulfillment of which might not be in the best interests of us or our
stockholders. It is possible that new investment opportunities that would
otherwise meet our investment objective may come to the attention of one these
entities, and, if so, such opportunity might not be offered, or otherwise made
available, to us. However, our executive officer(s) and Director(s) do have
fiduciary obligations to act in our best interests and must, in such a
circumstance or conflict, endeavor to allocate investment opportunities in a
fair and equitable manner over time so as not to discriminate one company
against another, where equal fiduciary obligations are owed. In addition, they
may not be available to us if there are time conflicts involving other entities.
31
Our common stock is subject to the "Penny Stock" rules of the SEC and the
trading market in our securities is limited, which makes transactions in our
stock cumbersome and may reduce the value of an investment in our stock.
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes
the definition of a "penny stock," for the purposes relevant to us, as any
equity security that has a market price of less than $5.00 per share or option
to acquire any equity security with an exercise price of less than $5.00 per
share, subject to certain exceptions. For any transaction involving a penny
stock, unless exempt, the rules require:
o that a broker or dealer approve a person's account for transactions in
penny stocks; and
o the broker or dealer receive from the investor a written agreement to
the transaction, setting forth the identity and quantity of the penny
stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny stocks
are suitable for that person and the person has sufficient knowledge
and experience in financial matters to be capable of evaluating the
risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Commission relating to the penny
stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities
subject to the "penny stock" rules. This may make it more difficult for
investors to dispose of our common stock and cause a decline in the market value
of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in
both public offerings and in secondary trading and about the commissions payable
to both the broker-dealer and the registered representative, current quotations
for the securities and the rights and remedies available to an investor in cases
of fraud in penny stock transactions. Finally, monthly statements have to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.
We have limited operating history upon which to base your investment decision.
32
While we started operations on January 29, 1997, we have a limited operating
history available to evaluate the likelihood of the success of our business. We
became a BDC on June 19, 2003. Our prospects should be considered in light of
the risks, expenses and uncertainties that may be encountered by development
stage companies. Among other things, we must build our customer base, respond to
competitive developments, attract, retain and motivate qualified employees and
establish and maintain our technologies, products, and services on an ongoing
basis. There can be no assurance that we will be successful in addressing such
risks and implementing our business strategy.
As a result of our lack of operating history, and the other risks described
herein, we are unable to accurately forecast our revenues. Our future expense
levels are based predominately on our operating plans and estimates of future
revenues, and to a large extent are fixed. We may be unable to adjust spending
in a timely manner to compensate for revenues that do not materialize.
Accordingly, any significant shortfall in revenues or lack of revenue would
likely have an immediate material adverse effect on our business, operating
results and financial condition.
Our ability to generate revenues will depend upon many factors. We will be
required to build our business by implementing operational systems, hiring
additional employees, developing and implementing a marketing and sales strategy
and implementing our technology applications. Our expenses will initially exceed
our revenues and no assurances can be made that we will become profitable or
provide positive cash flows.
We cannot assure you that we will be successful in selling the common shares or,
if sold, at what price. We have limited assets without the sale of these common
shares and we cannot assure you that we will attain our investment objective.
As of the date of filing of our Form 10K, we have minimal cash or other assets
and net worth from which to invest in successful portfolio companies to insure
our success. Our success will depend, in part, upon raising the necessary funds
to fund investments.
Restrictions imposed upon the resale of our capital stock may require you to
hold your stock for an indefinite period of time.
None of the securities to be issued based upon future sales will be registered
under the Securities Act. The common stock to be sold is intended to be exempt
from registration pursuant to Regulation E which permits, in conformity
therewith, issuance of shares without restriction on further transfer. While we
do not anticipate such an adverse decision or determination on the part of the
Securities and Exchange Commission, the SEC has the right, even after permitting
the offering to become effective, to enjoin the sale of securities or determine
that such sales are not exempt under Regulation E. While we will make every
effort to insure our compliance with the requirements under Regulation E, there
can be no assurance of such exemption; as the SEC does not, as a matter of
policy, affirmatively indicate the effectiveness of the notification under
Regulation E.
CERTAIN GOVERNMENT REGULATIONS
33
We operate in a highly regulated environment. The following discussion generally
summarizes certain government regulations.
BUSINESS DEVELOPMENT COMPANY. A business development company is defined and
regulated by the 1940 Act. A business development company must be organized in
the United States for the purpose of investing in or lending to primarily
private companies and making managerial assistance available to them. A business
development company may use capital provided by public shareholders and from
other sources to invest in long-term, private investments in businesses.
As a business development company, we may not acquire any asset other than
"qualifying assets" unless, at the time we make the acquisition, the value of
our qualifying assets represent at least 70% of the value of our total assets.
The principal categories of qualifying assets relevant to our business are:
(1) Securities purchased in transactions not involving any public offering from
the issuer of such securities, which issuer (subject to certain limited
exceptions) is an eligible portfolio company, or from any person who is, or has
been during the preceding 13 months, an affiliated person of an eligible
portfolio company, or from any other person, subject to such rules as may be
prescribed by the SEC. An "eligible portfolio company" is defined in the 1940
Act as any issuer which:
(a) is organized under the laws of, and has its principal place of
business in, the United States;
(b) is not an investment company (other than a small business investment
company wholly owned by the business development company) or a company
that would be an investment company but for certain exclusions under
the 1940 Act; and
(c) satisfies any of the following:
o does not have any class of securities with respect to which a
broker or dealer may extend margin credit;
o is controlled by a business development company or a group of
companies including a business development company and the
business development company has an affiliated person who is a
director of the eligible portfolio company; or
o is a small and solvent company having total assets of not more
than $4 million and capital and surplus of not less than $2
million.
(2) Securities of any eligible portfolio company which we control.
(3) Securities purchased in a private transaction from a U.S. issuer that is not
an investment company or from an affiliated person of the issuer, or in
transactions incident thereto, if the issuer is in bankruptcy and subject to
reorganization or if the issuer, immediately prior to the purchase of its
securities was unable to meet its obligations as they came due without material
assistance other than conventional lending or financing arrangements.
34
(4) Securities of an eligible portfolio company purchased from any person in a
private transaction if there is no ready market for such securities and we
already own 60% of the outstanding equity of the eligible portfolio company.
(5) Securities received in exchange for or distributed on or with respect to
securities described in (1) through (4) above, or pursuant to the exercise of
warrants or rights relating to such securities.
(6) Cash, cash equivalents, U.S. Government securities or high-quality debt
maturing in one year or less from the time of investment.
To include certain securities described above as qualifying assets for the
purpose of the 70% test, a business development company must make available to
the issuer of those securities significant managerial assistance such as
providing significant guidance and counsel concerning the management,
operations, or business objectives and policies of a portfolio company, or
making loans to a portfolio company. We offer to provide managerial assistance
to each of our portfolio companies.
As a business development company, we are entitled to issue senior securities in
the form of stock or senior securities representing indebtedness, including debt
securities and preferred stock, as long as each class of senior security has an
asset coverage ratio of at least 200% immediately after each such issuance. See
"Risk Factors." We may also be prohibited under the 1940 Act from knowingly
participating in certain transactions with our affiliates without the prior
approval of our Independent Directors and, in some cases, prior approval by the
SEC.
As with other companies regulated by the 1940 Act, a business development
company must adhere to certain other substantive ongoing regulatory
requirements. A majority of our directors must be persons who are not
"interested persons," as that term is defined in the 1940 Act. Additionally, we
are required to provide and maintain a bond issued by a reputable fidelity
insurance company to protect the business development company. Furthermore, as a
business development company, we are prohibited from protecting any director or
officer against any liability to the company or our shareholders arising from
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of such person's office.
We maintain a code of ethics that establishes procedures for personal investment
and restricts certain transactions by our personnel. Our code of ethics
generally does not permit investment by our employees in securities that may be
purchased or held by us. You may read and copy our code of ethics at the SEC's
Public Reference Room in Washington, D.C. You may obtain information on
operations of the Public Reference Room by calling the SEC at (202) 942-8090. In
addition, our code of ethics is available on the EDGAR Database on the SEC
Internet site at http://www.sec.gov. You may obtain copies of our code of
ethics, after paying a duplicating fee, by electronic request at the following
email address: publicinfo@sec.gov, or by writing to the SEC's Public Reference
Section, 100 F Street, NE, Washington, D.C. 20549.
We may not change the nature of our business so as to cease to be, or withdraw
our election as, a business development company unless authorized by vote of a
"majority of the outstanding voting securities," as defined in the 1940 Act, of
35
our shares. A majority of the outstanding voting securities of a company is
defined by the 1940 Act as the lesser of: (i) 67% or more of such company's
shares present at a meeting if more than 50% of the outstanding shares of such
company are present and represented by proxy, or (ii) more than 50% of the
outstanding shares of such company.
We are periodically examined by the SEC for compliance with the 1940 Act.
ITEM 2: PROPERTIES
We currently maintain our corporate office at 7633 East 63rd Place, Suite 220,
Tulsa, Oklahoma, on a month-to-month basis, at a cost of $1,000 per month.
ITEM 3: LEGAL PROCEEDINGS
On September 23, 2005, Golden Gate Investors, Inc. filed a complaint for breach
of contract and specific performance of contract, Case No. GIC 854356 in the
Superior Court of the State of California, County of San Diego, Central
Division, against the Company. Plaintiff claims that they are owed $53,768 in
actual losses and has further claimed they had damages in the amount of $24,851
as a result of an alleged breach of contract by the Company. Plaintiff has been
granted a judgment in the amount of approximately $60,000, which amount is
included in accrued expenses on the statements of net assets. Management of the
Company expects to attempt to work out some form of payout of the judgment.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the over-the-counter bulletin board
stock market under the symbol "GBVS.OB".
The market closing, high and low prices at the end of each quarter for the years
ended December 31, 2004 and 2005, are as follows:
QUARTER ENDED CLOSING HIGH LOW
March 31, 2004 .026 .026 .025
36
June 30, 2004 .027 .028 .026
September 30, 2004 .009 .010 .009
December 31, 2004 .005 .006 .005
March 31, 2005 .0005 .0007 .0005
June 30, 2005 .64 3.00 .10
September 30, 2005 .68 .86 .51
December 31, 2005 1.67 1.67 .40
As of March 1, 2006, there were 41,312,391 shares of common stock issued and
outstanding, held by approximately 343 shareholders of record.
Dividends on Common Stock
We have not declared a cash dividend on our common stock in the last three
fiscal years and we do not anticipate the payment of dividends in the near
future. We may not pay dividends on our common stock without first paying
dividends on our preferred stock. There are no other legal restrictions that
currently limit our ability to pay dividends on our common stock other than
those generally imposed by applicable state law.
ITEM 6: SELECTED FINANCIAL DATA
The following table sets forth selected financial data as of and for each of the
three fiscal years ended December 31, 2005, 2004 and 2003, and is derived from
our audited financial statements. The data set forth below should be read in
conjunction with "Item 8: Financial Statements" and related Notes to Financial
Statements appearing elsewhere herein and "Item 7: "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
2005 2004 2003
------------ ------------ ------------
Revenues $ 13,889 $ -- $ --
Expenses 1,053,032 1,171,186 5,232,485
Net loss from operations (1,039,143) (1,171,186) (5,232,485)
Net realized and unrealized losses (666,603) (1,411,812) --
Net decrease in net assets from
operations (1,705,746) (2,582,998) (5,232,485)
Net decrease in net assets from
operations per share: $ (.09) $ (23.11) $ (72.34)
37
Weighted average shares
outstanding 18,418,649 111,755 72,331
Statements of Net Assets Data:
Investments at fair value $ 5,715,000 $ 377,478 $ 559,405
Investments at cost 5,915,000 377,478 559,405
Cash and cash equivalents 245,370 43,466 517
Total assets 5,987,331 523,795 559,922
Total liabilities 160,207 127,794 132,156
Net assets 5,827,124 396,001 427,766
Common stock outstanding
at year end 41,312,391 185,896 76,149
The revenue from sales by the subsidiary portfolio companies is recorded in the
books of the relevant portfolio companies and is not included in our revenues.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements and the notes thereto included elsewhere in this Form 10-K. The Form
10-K contains forward-looking statements regarding the plans and objectives of
management for future operations. This information may involve known and unknown
risks, uncertainties and other factors which may cause our actual results,
performance or achievements to be materially different from future results,
performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words "may," "will," "should," "expect," "anticipate," "estimate,"
"believe," "intend," or "project" or the negative of these words or other
variations on these words or comparable terminology. These forward-looking
statements are based on assumptions that may be incorrect, and we cannot assure
you that the projections included in these forward-looking statements will come
to pass. Our actual results could differ materially from those expressed or
implied by the forward-looking statements as a result of various factors.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements.
Critical accounting policies are those that are both important to the
presentation of our financial condition and results of operations and require
management's most difficult, complex, or subjective judgments. Our most critical
accounting policy relates to the valuation of our investments.
Pursuant to the requirements of the Investment Company Act of 1940 ("1940 Act"),
our Board of Directors is responsible for determining in good faith the fair
38
value of our investments for which market quotations are not readily available.
At the current time, none of our investments has a market quotation.
We 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. Our valuation
process is intended to provide a consistent basis for determining the fair value
of the portfolio. We will record unrealized depreciation on investments when we
believe that an investment has become impaired, including where realization of
an equity security is doubtful. We will record unrealized appreciation if we
believe that the underlying portfolio company has appreciated in value and,
therefore, our equity security has also appreciated in value.
Our equity interest in portfolio companies for which there is no liquid public
market are valued using industry valuation benchmarks, and then the value is
assigned a discount reflecting the illiquid nature of the investment as well as
our minority, non-control position. When an external event such as a purchase
transaction, public offering, or subsequent equity sale occurs, the pricing
indicated by the external event is used to corroborate our valuation. The
determined values are generally discounted to account for restrictions on resale
and minority ownership positions, if applicable.
GENERAL
Our primary investment objective is to increase our net assets by investing in
targeted start-up companies, principally in the beverage arena. We seek to sell
our investments in private companies into publicly traded portfolio companies
whenever possible, as this provides us with the potential for added liquidity.
In addition to our investment objective, we seek to earn interest on our loans
to portfolio companies and in some cases will have management fee agreements
with the portfolio companies.
Our expenses include salaries and wages, professional fees and general and
administrative costs. General and administrative costs include rent,
depreciation, office, investor and other overhead costs.
FINANCIAL CONDITION
Our total assets were $5,987,331 and our net assets were $5,827,124 at December
31, 2005, as compared to total assets of $523,795 and net assets of $396,001 at
December 31, 2004. The substantial increase in assets and net assets during 2005
is primarily due to our new investments in Rudy Beverage, Inc. and EON Beverage
Group, Inc.
Our common shares increased from 185,896 (adjusted for a reverse split of
2,500:1 which occurred on April 18, 2005) at December 31, 2004 to 41,312,391 at
December 31, 2005. The increase consisted of 33,092,854 shares issued in private
placement transactions to raise $1,900,500; 6,000,000 shares issued in the
acquisition of Rudy Beverage, Inc.; 2,024,326 net shares issued in the
conversion of all remaining preferred stock to common stock; 20,000 shares
issued for convertible debentures; 12,000 shares cancelled in the disposal of
Island Tribe, Inc.; and 1,315 shares issued for rounding from the reverse stock
split.
39
Our financial condition is dependent upon a number of factors, primarily the
value of our portfolio companies and the proceeds we receive from any liquidity
events. We have invested a substantial portion of our assets in private
development stage or start-up companies. These businesses are thinly
capitalized, unproven, small companies that lack management depth, are dependent
on new, commercially unproven technologies or business plans and have no or a
limited history of operations.
During 2005, we experienced a 100% turnover of our investments. At the end of
2004, we determined that our wholly owned subsidiary portfolio companies,
Unboxed and Total Sports, could not reach profitability in a reasonable period
of time. Accordingly, it was determined to liquidate the businesses. We retained
our 51% ownership of Island Tribe until November when it was exchanged with the
original seller for the 12,000 shares of our common stock which was issued in
the original acquisition. These transactions eliminated our investments in
portfolio companies involved in the apparel business. The following summarizes
our investment activity during 2005, including follow-on investments:
Island Tribe $ 377,478
----------
Balance at December 31, 2004 377,478
----------
Additions:
Rudy 5,130,000
EON 585,000
TDS 200,000
Unboxed and Total Sports 69,826
Island Tribe 19,299
----------
Total costs added in 2005 6,004,125
----------
Dispositions:
Unboxed and Total Sports (69,826)
Island Tribe (396,777)
----------
Total dispositions in 2005 (466,603)
----------
Balance at December 31, 2005, at cost 5,915,000
Unrealized depreciation (200,000)
-----------
Investments at fair value, December 31, 2005 $5,715,000
==========
Following an initial investment in a portfolio company, we may make additional
investments in such portfolio company in order to: (1) increase our ownership
percentage; (2) exercise warrants or options that were acquired in a prior
financing; (3) preserve our proportionate ownership in a subsequent financing;
or (4) attempt to preserve or enhance the value of our investment. Such
additional investments are referred to as "follow-on" investments. There can be
no assurance that we will make follow-on investments or have sufficient funds to
make additional investments. The failure to make such follow-on investments
could jeopardize the viability of the portfolio company and our investment or
could result in a missed opportunity for us to participate to a greater extend
in a portfolio company's successful operations. We attempt to maintain adequate
liquid capital to make follow-on investments in our private portfolio companies.
However, there can be no assurance that we will have sufficient liquid capital.
We may elect not to make a follow-on investment either because we do not want to
40
increase our concentration of risk, because we prefer other opportunities, or
because we are inhibited by compliance with BDC requirements, even though the
follow-on investment opportunity appears attractive.
During 2005, we made the following follow-on investments, which are included in
the investment summary above:
Unboxed and Total Sports $ 69,826
Island Tribe 19,298
EON 185,000
Rudy 270,000
---------
Total $ 544,124
=========
The follow-on investment in Unboxed and Total Sports represents the net cost of
winding-down these operations.
RESULTS OF OPERATIONS
The principal measure of our financial performance is the "Net increase in net
assets from operations" which is the sum of three elements. The first element is
"Net income from operations," which is the difference between our income from
interest, dividends, fees and other income and our operating expenses, net of
applicable income tax provision. The second element is "Net realized gain (loss)
on investments," which is the difference between the proceeds received from
disposition of portfolio securities and their stated cost, net of applicable
income tax provision. The third element, "Increase (decrease) in unrealized
appreciation on investments," is the net change in the fair value of our
investment portfolio, net of increase (decrease) in deferred income taxes that
would become payable if the unrealized appreciation were realized through the
sale or other disposition of the investment portfolio.
YEAR ENDED DECEMBER 31, 2005 COMPARED TO DECEMBER 31, 2004
We had a net decrease in net assets from operations of $1,705,746 in 2005 as
compared to a net decrease in net assets from operations of $2,582,998 in 2004,
which is summarized as follows:
2005 2004
---------- ----------
Net loss from operations $1,039,143 $1,171,186
Net realized loss on investments 466,603 1,411,812
Net unrealized loss on investments 200,000 -
---------- ----------
Net decrease in net assets from operations $1,705,746 $2,582,998
========== ==========
Our loss from operations declined $132,043 (11.3%) in 2005, to $1,039,143 from
$1,171,186 in 2004. The 2005 amount includes $310,915 in professional fees,
$235,412 in salaries and wages, $306,500 in interest and amortization of debt
discount from convertible debentures, $98,816 in other administrative expenses
and $60,000 for the judgment granted a company which previously assisted us in
raising capital. The 2004 amount includes $486,092 in professional fees,
41
$257,347 in salaries and wages, $169,914 in interest and amortization of debt
discount from convertible debentures and $257,833 in other administrative
expenses.
We recorded realized losses from our portfolio companies as follows:
2005 2004
Unboxed and Total Sports $ 69,826 $1,411,812
Island Tribe 396,777 -
---------- ----------
Total $ 466,603 $1,411,812
========== ==========
We recorded a change in depreciation of non-controlled affiliate investments of
$200,000 in 2005 on our investment in TDS.
YEAR ENDED DECEMBER 31, 2004 COMPARED TO DECEMBER 31, 2003
As noted above, we had a net loss from operations of $1,171,186 and a net
realized loss on investments of $1,411,812 for a total net decrease in net
assets from operations of $2,582,998 in 2004. In 2003, we had a net loss from
operations and a net decrease in net assets from operations of $5,232,485.
The principal components in the decline in net loss from operations of
($5,232,485-$1,171,186) or $4,060,999 include costs incurred in 2003 of
$2,784,600 related to the rescission of the Company's previously reported
deferred compensation plan; $418,326 for the cost of common stock warrants
issued in connection with Unboxed obtaining a license, with option to buy, for
the Bluetorch trade name; and $134,000 related to the rescission of a trademark
acquisition.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market rates and
prices. We are primarily exposed to equity price risk. The following is a
discussion of our equity market risk.
Equity price risk arises from exposure to securities that represent an ownership
interest in our portfolio companies. The value of our equity securities and our
other investments are based on quoted market prices or our Board of Directors'
good faith determination of their fair value (which is based, in part, on quoted
market prices). Market prices of common equity securities, in general, are
subject to fluctuations, which could cause the amount to be realized upon sale
or exercise of the instruments to differ significantly from the current reported
value. The fluctuations may result from perceived changes in the underlying
economic characteristics of our portfolio companies, the relative price of
alternative investments, general market conditions and supply and demand
imbalances for a particular security.
42
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
GLOBAL BEVERAGE SOLUTIONS, INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page
----
Report of Independent Registered Public Accounting Firm 44
Report of Independent Registered Public Accounting Firm 45
Report of Independent Registered Public Accounting Firm 46
Statements of Net Assets at December 31, 2005 and 2004 47
Statements of Operations for the years ended December 31, 2005,
2004 and 2003 48
Statements of Cash Flows for the years ended December 31, 2005,
2004 and 2003 49-50
Statements of Changes in Net Assets for the years ended December 31,
2005, 2004 and 2003 51
Schedules of Investments at December 31, 2005 and 2004 52-53
Notes to Financial Statements 54-70
Schedules of Financial Ratios for the years ended December 31, 2005,
2004 and 2003 71
43
REPORT OF INDEPENDENT REGISTERED PUBLIC ACOUNTING FIRM
To the Board of Directors and Stockholders
Global Beverage Solutions, Inc.
We have audited the accompanying statement of net assets, including the schedule
of investments in portfolio companies, of Global Beverage Solutions, Inc. (the
"Company") as of December 31, 2005, and the related statement of operations,
changes in net assets and cash flows for the year ended December 31, 2005. 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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes 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 Global Beverage Solutions, Inc.
as of December 31, 2005, and the results of its operations and cash flows for
the year ended December 31, 2005 in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 10 to the
financial statements, the Company has generated limited revenues and has
incurred losses totaling $9,657,290 for the period from August 26, 2002
(inception) through December 31, 2005. These factors, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans regarding these matters are also described in Note 10. The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/Turner, Stone & Company, LLP
April 12, 2006
Dallas, Texas
44
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Global Beverage Solutions, Inc.
We have audited the accompanying statement of net assets, including the schedule
of investments in portfolio companies, of Global Beverage Solutions, Inc.
(formerly, Bluetorch Inc.) (the "Company") as of December 31, 2004, and the
related statement of operations, changes in net assets and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our 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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes 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.
As discussed more fully in Note 2 to the financial statements, securities
amounting to $377,478 (72% of total assets) at December 31, 2004 have been
valued at fair value as determined by the Board of Directors. We have reviewed
the procedures applied by the directors in valuing such securities and have
inspected underlying documentation; while in the circumstances the procedures
appear to be reasonable and the documentation appropriate, determination of fair
values involves subjective judgment which is not susceptible to substantiation
by auditing procedures.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Global Beverage Solutions, Inc.
(formerly, Bluetorch Inc.) as of December 31, 2004, and the results of its
operations and cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 10 to the
financial statements, the Company has generated no revenues and has incurred
recurring losses from its inception. These factors, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans regarding these matters are also described in Note 10. The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Squar, Milner, Reehl & Williamson, LLP
April 13, 2005
Newport Beach, California
45
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Bluetorch, Inc.
Long Beach, California
We have audited the accompanying statement of operations and cash flows of
Bluetorch, Inc. for the year ended December 31, 2003. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects the results of operations and cash flows for the year
ended December 31, 2003 of Bluetorch, Inc. in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 10 to the
financial statements, as of December 31, 2003, the Company has generated no
revenues and has incurred losses totaling $5,368,546 for the period from August
26, 2002 (inception) through December 31, 2003. These items raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 10. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Stonefield Josephson, Inc.
Santa Monica, CA
April 9, 2004
46
GLOBAL BEVERAGE SOLUTIONS, INC.
Statements of Net Assets
As of December 31, 2005 and December 31, 2004
2005 2004
------------ ------------
ASSETS
Investments in portfolio companies (cost $5,915,000 at December 31,
2005 and $377,478 at December 31, 2004) $ 5,715,000 $ 377,478
Cash and cash equivalents
245,370 43,466
Interest and fees receivable from portfolio companies
13,889 --
Deposits and prepaid expenses
13,072 49,006
Deferred financing costs, net
-- 28,125
Property and equipment, net
-- 25,720
------------ ------------
TOTAL ASSETS
5,987,331 523,795
------------ ------------
LIABILITIES
Accounts payable
25,857 60,603
Accrued expenses
134,350 58,367
Convertible debentures, net of discount
-- 8,824
------------ ------------
TOTAL LIABILITIES
160,207 127,794
------------ ------------
NET ASSETS $ 5,827,124 $ 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; 0 and 190,000 shares issued and outstanding at
December 31, 2005 and 2004, respectively -- 190
Convertible preferred Series C, $.001 par value; 10,000,000 shares
authorized; none and 10,000,000 shares issued and outstanding at
December 31, 2005 and 2004, respectively -- 10,000
Common stock, $.0001 par value, authorized 950,000,000 shares;
41,312,391 and 185,896 shares issued and outstanding at
December 31, 2005 and 2004, respectively 41,312 186
Common stock held in escrow -- (69,643)
Common stock subscriptions receivable -- (9,600)
Additional paid in capital 15,443,102 8,416,412
Accumulated deficit:
Accumulated net operating loss (7,578,875) (6,539,732)
Net realized loss on investments (1,878,415) (1,411,812)
Net unrealized appreciation (depreciation) of investments (200,000) --
------------ ------------
Net assets $ 5,827,124 $ 396,001
============ ============
Net asset value per share $ 0.1411 $ 2.1302
============ ============
See accompanying notes to financial statements.
47
GLOBAL BEVERAGE SOLUTIONS, INC.
Statements of Operations
Three Years Ended December 31, 2005, 2004 and 2003
2005 2004 2003
------------ ------------ ------------
Income from operations:
Interest income $ 3,889 $ -- $ --
Management income 10,000 -- --
------------ ------------ ------------
13,889 -- --
Expenses:
Selling, general and administrative expense 706,158 1,001,272 5,232,485
Interest expense 334,000 169,914 --
Loss on sale of furniture and fixtures 12,874 -- --
------------ ------------ ------------
1,053,032 1,171,186 5,232,485
------------ ------------ ------------
Loss before income taxes (1,039,143) (1,171,186) (5,232,485)
Income taxes -- -- --
------------ ------------ ------------
Net loss from operations (1,039,143) (1,171,186) (5,232,485)
------------ ------------ ------------
Net realized and unrealized losses:
Net realized loss on investments, net of income tax
benefit of $0 for 2005, 2004 and 2003,
respectively (466,603) (1,411,812) --
Change in unrealized depreciation of non-controlled
affiliate investments, net of deferred tax expense
of $0 in 2005, 2004 and 2003, respectively (200,000) -- --
------------ ------------ ------------
Net decrease in net assets from operations $ (1,705,746) $ (2,582,998) $ (5,232,485)
============ ============ ============
Net decrease in net assets from operations per share,
basic and diluted $ (0.093) $ (23.113) $ (72.341)
============ ============ ============
Weighted average shares outstanding 18,418,649 111,755 72,331
============ ============ ============
See accompanying notes to financial statements.
48
GLOBAL BEVERAGE SOLUTIONS, INC.
Statements of Cash Flows
Three Years Ended December 31, 2005, 2004 and 2003
2005 2004 2003
----------- ----------- -----------
Cash flows from operating activities:
Net decrease in net assets from operations $(1,705,746) $(2,582,998) $(5,232,485)
Adjustments to reconcile net decrease in net assets from
operations to net cash used in operating activities:
Loss on investments in portfolio investment companies 658,203 1,411,812 --
Depreciation 12,546 10,813 --
Amortization of deferred financing costs 28,125 28,125 --
Amortization of beneficial conversion feature on convertible
debentures 234,926 140,074 8,000
Loss on sale of furniture and fixtures 12,874 -- --
Proceeds from sale of furniture and fixtures 300 -- --
Accrued investment income (13,889) -- --
Common and preferred shares issued for compensation,
services and in connection with employee stock options -- -- 1,560,113
Cost associated with cancellation of options -- -- 2,404,350
Shares issued for settlement expense -- -- 495,000
Cash payment for settlement expense -- -- 25,000
Notes payable issued for services -- -- 243,750
Penalties related to conversion of Preferred Series B -- 60,000 --
Changes in operating assets and liabilities:
Deposits and prepaid expenses 35,935 (3,843) --
Accounts payable and accrued expenses 41,235 12,814 (22,857)
----------- ----------- -----------
Net cash used in operating activities (695,491) (923,203) (519,129)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of equipment -- (36,533) --
Investments in and advances to portfolio investment companies (1,144,124) (857,886) (141,079)
----------- ----------- -----------
Net cash used in investing activities (1,144,124) (894,419) (141,079)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common and preferred stock 1,900,500 1,666,445 659,813
Proceeds from convertible debenture 50,000 250,126 --
Additional proceeds from sale of common stock in prior year 91,019 -- --
Loans payable -- (26,000) --
Redemption of Preferred Series B -- (30,000) --
----------- ----------- -----------
Net cash provided by financing activities 2,041,519 1,860,571 659,813
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 201,904 42,949 (395)
Cash and cash equivalents, beginning of year 43,466 517 912
----------- ----------- -----------
Cash and cash equivalents, end of year $ 245,370 $ 43,466 $ 517
=========== =========== ===========
See accompanying notes to financial statements
Continued
49
GLOBAL BEVERAGE SOLUTIONS, INC.
Statements of Cash Flows, Continued
Three Years Ended December 31, 2005, 2004 and 2003
2005 2004 2003
----------- ----------- -----------
Supplemental disclosure of non-cash investing and financing activities
Cash paid for interest and income taxes:
Interest (1) $ 306,500 $ 124,874 $ --
Income taxes -- -- --
(1) The 2005 interest was prepaid in 2004 as part of a convertible
debenture financing. The 2004 amount includes deferred financing
costs paid in 2004
Non-cash investing and financing activities:
Shares issued for acquisition of 80% of Rudy Beverage, Inc. $ 4,860,000 $ -- $ --
Deferred financing costs and prepaid interest for issuance of
convertible debentures 306,500 124,874 --
Stock subscription written off (9,600) (112,500) --
Common stock subscribed -- 142,600 112,500
Shares issued in settlement of notes payable -- -- 497,500
Warrants issued for investments in portfolio investment companies -- -- 418,326
Shares issued in connection with conversion of convertible debentures -- 131,250 78,750
Common shares issued for acquisition of 51% of Island Tribe, Inc. -- 372,000 --
Beneficial conversion feature -- 375,000 --
See accompanying notes to financial statements.
50
GLOBAL BEVERAGE SOLUTIONS, INC.
Statements of Changes in Net Assets
Three Years Ended December 31, 2005, 2004 and 2003
2005 2004 2003
----------- ----------- -----------
Changes in net assets from operations:
Net loss from operations $(1,039,143) $(1,171,186) $(5,232,485)
Net realized loss on sale of investments, net (466,603) (1,411,812) --
Change in net unrealized depreciation of investments, net (200,000) -- --
----------- ----------- -----------
Net decrease in net assets from operations (1,705,746) (2,582,998) (5,232,485)
----------- ----------- -----------
Capital stock transactions:
Common stock issued for cash 1,900,500 1,656,444 659,813
Common stock issued for conversion of convertible debentures 293,750 131,250 78,750
Additional proceeds from sale of common stock in prior year 91,019 -- --
Common stock issued in acquisition of investments 4,860,000 372,000 --
Common shares cancelled in connection with recission of
acquisition (8,400) -- --
Series B preferred stock transactions -- 30,000 --
Debt discount related to beneficial conversion feature -- 375,000 --
Reclassification of interest receivable on convertible
debentures -- (23,461) --
Shares issued in connection with combination financing -- 10,000 --
Preferred and common shares issued for compensation, services
and in connection with recission of employee stock options -- -- 1,227,613
Recission of stock option/deferred compensation plan -- -- 2,404,350
Issuance of convertible debentures with beneficial conversion
feature -- -- 8,000
Shares issued in settlement of notes payable -- -- 497,500
Warrants issued in connection with license agreement/option
purchase agreement -- -- 418,326
Shares cancelled in connection with recission of trademark
acquisition, net -- -- (5,288,824)
----------- ----------- -----------
Net increase in net assets from stock transactions 7,136,869 2,551,233 5,528
----------- ----------- -----------
Net increase (decrease) in net assets 5,431,123 (31,765) (5,226,957)
Net assets, beginning of year 396,001 427,766 5,654,723
----------- ----------- -----------
Net assets, end of year $ 5,827,124 $ 396,001 $ 427,766
=========== =========== ===========
See accompanying notes to financial statements.
51
GLOBAL BEVERAGE SOLUTIONS, INC.
Schedule of Investments
December 31, 2005
Date of Historical Fair
Shares Acquisition Cost Value
COMMON STOCK IN PORTFOLIO COMPANIES
9% Jul-05 EON Beverage Group, Inc., privately held;
10% of net assets; manufactures structured
water pursuant to proprietary process 585,000 585,000
80% Nov-05 Rudy Beverage, Inc., privately held; 85% of net
assets; manufactures and sells beverages higher
in nutritional value and lower in sugar than
existing brands 5,130,000 5,130,000
Investments with $0 value - see schedule below 200,000 --
---------- ----------
Total investments at December 31, 2005 $5,915,000 5,715,000
==========
Cash and other assets, less liabilities 112,124
----------
Net assets at December 31, 2005 $5,827,124
==========
SCHEDULE OF INVESTMENTS WITH $0 VALUE
8% Jun-05 Titanium Design Studio, Inc., privately held;
3% of net assets; a titanium jewelry manufacturer $ 200,000 $ --
51% Aug-04 Island Tribe, Inc., privately held; 0% of net
assets; distributor of extreme sports apparel 396,777 --
100% Costs associated with previously discontinued
businesses, Unboxed Distribution, Inc. and Total
Sports Distribution, Inc. 69,826 --
Discontinued investments
(466,603) --
---------- ----------
$ 200,000 $ --
========== ==========
See accompanying notes to financial statements.
52
GLOBAL BEVERAGE SOLUTIONS, INC.
Schedule of Investments
December 31, 2004
Date of Historical 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.
53
GLOBAL BEVERAGE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
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 6,500,000
(pre-stock split) shares 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 after
the exchange, the Company was treated as the acquirer for accounting purposes.
Accordingly, the financial statements, as presented here, are the historical
financial statements of the Company and include the transactions of MedEx only
from the date of acquisition, using reverse merger accounting.
The Company's name was changed to Bluetorch Inc. ("Bluetorch") effective
November 3, 2003. On April 25, 2005, the Company changed its name to Pacific
Crest Investments and as a result of a conflict in name with an existing company
changed its name to Pacific Peak Investments on May 5, 2005. On October 10,
2005, the Company changed its name to Global Beverage Solutions, Inc. ("Global"
or the "Company") and began trading on the OTC Bulletin Board under the symbol
GBVS.OB.
On June 19, 2003, the Company became a business development company" ("BDC")
pursuant to applicable provisions of the Investment Company Act of 1940.
Until June 19, 2003 the Company was a development stage enterprise under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 7,
"Accounting and Reporting by Development Stage Enterprises." Upon commencing
their operations as a BDC, the Company no longer qualified under the guidelines
of SFAS No. 7.
On April 7, 2003 the Company completed a 3-to-1 stock split, followed on May 27,
2003 by an additional 5-to-1 stock split. On April 18, 2005, the Company
completed a 2,500-to-1 reverse stock split. The accompanying financial
statements have been restated to reflect these stock splits for all periods
presented.
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.
54
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 periods. Significant estimates include the valuation of the
investments in portfolio companies and deferred tax asset valuation allowances.
Actual results could differ from those estimates.
Cash & Cash Equivalents
Cash equivalents include all highly liquid unencumbered debt instruments with
original maturities of three months or less when purchased.
Concentrations of Credit Risk
Cash is maintained at a financial institution. The Federal Deposit Insurance
Corporation ("FDIC") insures accounts at each institution for up to $100,000. At
times, cash may be in excess of the FDIC insurance limit of $100,000.
Revenue Recognition
The Company has accrued interest income from its follow-on investments in
portfolio companies and has accrued management fees from its portfolio companies
in 2005. The Company did not recognize any revenues for the years ended December
31, 2004 and 2003, and will in the future also recognize revenue based upon the
appreciation of the investments in its portfolio companies (see Note 2).
Fair Value of Financial Instruments
SFAS 107, "Disclosures About Fair Value of Financial Instruments," requires
disclosure of fair value information about financial instruments when it is
practicable to estimate that value. The carrying amounts of the Company's cash,
accounts payable and accrued expenses, and convertible debentures approximate
their estimated fair values due to the short-term maturities of these financial
instruments and because related interest rates offered to the Company
approximate current offered rates.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is recorded using the stratight-line method over the estimated
useful lives of the respective assets (two to five years). Maintenance and
repairs are charged to operations when incurred. Betterments and renewals are
capitalized. When property and equipment are sold or otherwise disposed of, the
asset account and related accumulated depreciation account are relieved, and any
gain or loss is included in operations. Total cost of property and equipment at
December 31, 2004, consists of $31,406 and $5,127 of computer hardware and
software and furniture and fixtures, respectively, and accumulated depreciation
totaled $10,813.
55
Income Taxes
The Company accounts for income taxes under SFAS 109, "Accounting for Income
Taxes." Under the asset and liability method of SFAS 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statements carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period the
enactment occurs. A valuation allowance is provided for certain deferred tax
assets if it is more likely than not that the Company will not realize tax
assets through future operations.
Segment Reporting
Based on the Company's integration and management strategies, 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 will
be included in the Company's financial statements. Since inception, no revenue
has been earned and all operations are domestic.
Stock-Based Compensation
Until December 31, 2005, the Company accounted for stock-based employee
compensation arrangements in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" and complies with the disclosure provisions of SFAS No.123,
"Accounting for Stock-Based Compensation." Under APB No. 25, employee
compensation cost is recognized over the vesting period based on the excess, if
any, on the date of grant of the fair value of the Company's shares over the
employee's exercise price. When the exercise price of the employee share options
is less than the fair value price of the underlying shares on the grant date,
deferred stock compensation is recognized and amortized to expense in accordance
with FASB Interpretation No. 44 over the vesting period of the individual
options. Accordingly, if the exercise price of the Company's employee options
equals or exceeds the market price of the underlying shares on the date of
grant, no compensation expense is recognized. Options or shares awards issued to
non-employees are valued using the fair value method and expensed over the
period services are provided.
In December 2004, the FASB issued SFAS 123-R, "Share-Based Payment," which
requires that the compensation cost relating to share-based payment transactions
(including the cost of all employee stock options) be recognized in the
financial statements. That cost will be measured based on the estimated fair
value of the equity or liability instruments issued. SFAS 123-R covers 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. SFAS 123-R replaces SFAS 123, "Accounting for
Stock-Based Compensation," and supersedes Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." As originally
issued, SFAS 123 established as preferable a fair-value-based method of
56
accounting for share-based payment transactions with employees. However, that
pronouncement permitted entities to continue applying the intrinsic-value model
of APB Opinion 25, provided that the financial statements disclosed the pro
forma net income or loss based on the preferable fair-value method. This
statement is effective as of the first reporting period that begins after
December 15, 2005. Accordingly, the Company will adopt SFAS 123-R in the 1st
quarter of 2006. Thus, the Company's financial statements will reflect an
expense for (a) all share-based compensation arrangements granted on or after
January 1, 2006 and for any such arrangements that are modified, cancelled, or
repurchased after that date, and (b) the portion of previous share-based awards
for which the requisite service has not been rendered as of that date, based on
the grant-date estimated fair value. The Company may have stock-based payment
transactions in the future which would require accounting as discussed above.
As of December 31, 2005 and 2004, there were no options outstanding.
Basic and Diluted Earnings (Loss) Per Share
Basic earnings (loss) per share are determined by dividing the net earnings
(loss) by the weighted average shares of common stock outstanding during the
period. Diluted earnings (loss) per share are determined by dividing the net
earnings (loss) by the weighted average shares of common stock outstanding plus
the dilutive effects of stock options, warrants and other convertible
securities. None, 10,095 and 10,240 common stock equivalents, representing
common shares eligible to be converted in relation to preferred stock and
warrants, calculated using the market price on December 31, 2005, 2004 and 2003,
respectively, have been excluded from the calculation of diluted loss per share
for the years ended December 31, 2005, 2004 and 2003, respectively, as their
effect would be anti-dilutive.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
Significant Recent Accounting Pronouncements
Recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not or are not believed by
management to have a material impact on the Company's present or future
financial statements.
(2) Investments
Rudy Beverage, Inc.
- -------------------
On November 17, 2005, we executed a Stock Purchase Agreement with the
shareholders ("Sellers") of Rudy Beverage, Inc. ("Rudy"), a Nevada corporation,
whereby we exchanged 6,000,000 shares of our common stock for 80% of the issued
and outstanding common stock of Rudy. The Company's investment was valued at
$4,860,000 based upon the trading price of the Company's common stock on the
date of the transaction. The Sellers can receive up to 10,000,000 additional
shares of our common stock if Rudy achieves certain sales and net revenue goals
by the twelve month periods ended June 30, 2007 and 2008. Rudy was founded by
57
Rudy Ruettiger and Drew Carver to create a unique line of beverages higher in
nutritional value but lower in sugar than existing brands. Rudy currently has
developed two distinct products: Rudy Flying Colors, catering to children K1
through 8; and Rudy Revolution, a sport drink aimed at athletes across the
board. The goal of the Rudy line of beverages is to create flavorful juice
blends, some of which will incorporate the hydration capabilities of EON
Structured Water.
EON Beverage Group, Inc.
- ------------------------
On July 8, 2005, we consummated the transactions contemplated by the Share
Purchase Agreement (dated June 28, 2005) with EON Beverage Group, Inc. ("EON")
and, as a result, we 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, based
on the representations of EON.
On January 23, 2006, the Company executed a letter of intent with certain
shareholders of EON which could increase the Company's ownership of EON to 53%,
subject to due diligence and a definitive contract. The agreement has been
delayed pending completion of additional due diligence.
Titanium Design Studio, Inc.
- ----------------------------
On June 6, 2005, we signed a Share Purchase Agreement with Titanium Design
Studio, Inc. ("TDS"), a Nevada corporation, whereby we 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.
Early in 2006, TDS relocated its operations to Thailand in order to access
cheaper labor. The Board of Directors of the Company recorded a reserve in the
amount of $200,000 relating to this investment.
Unboxed Distribution, Inc.
- --------------------------
On August 21, 2003, the Company formed Unboxed Distribution, Inc. ("Unboxed")
for the purpose of owning and operating the Bluetorch license agreement.
On March 12, 2005, the Company and its wholly-owned subsidiary, Unboxed
Distribution, Inc., signed a Mutual Settlement and Release Agreement with Gotcha
Brands Inc., the Bluetorch licensor, and this agreement requires the Company's
subsidiary, Unboxed Distribution, Inc., to cease the selling and marketing of
Bluetorch apparel. In keeping with this agreement, the Company also agreed to
change its corporate name by April 20, 2005.
Total Sports Distribution, Inc.
- -------------------------------
On October 21, 2003, the Company formed Total Sports Distribution, Inc. ("Total
Sports") for the purpose of owning and operating the True Skate Apparel brand
58
("TSABrand)". Furthermore, on February 19, 2004 Total Sports signed a definitive
agreement with Collective Licensing International, LLC to license the Airwalk
brand for apparel in the United States market.
On March 22, 2005, the Company and its wholly-owned subsidiary, Total Sports
Distribution, Inc., signed a Mutual Settlement and Release Agreement with
Collective Licensing International, LLC, the licensor of the Airwalk apparel
brand, and this agreement requires the Company's subsidiary, Total Sports
Distribution, Inc., to cease the selling and marketing of Airwalk apparel.
Island Tribe, Inc.
- ------------------
Effective August 1, 2004, the Company acquired a 51% interest in Island Tribe,
Inc., ("Island Tribe") a surf apparel company in exchange for 12,000 (30,000,000
shares pre-split) shares of the restricted common stock of the Company, which
was valued at $372,000, based on the current trading value of the Company's
common stock. Over the next 4 years, this purchase agreement provided for the
Company to receive an additional 24% ownership of Island Tribe, Inc. Effective
November 20, 2005, the Company exchanged its 51% ownership in Island Tribe for
the 12,000 restricted common shares originally issued to acquire Island Tribe.
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
59
of purchase, special reports prepared by analysts, 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 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 absence of a recent appraisal, the value of the investment
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.
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 subsidiaries should be valued at December 31, 2005 as follows:
o Rudy Beverage, Inc.
Rudy has not yet developed revenues and is currently testing its
products and developing marketing plans. Accordingly, based upon the
established valuation method, Rudy is valued at its cost of $4,860,000
at December 31, 2005.
o EON Beverage Group, Inc.
EON has been involved in test marketing its structured water produce
and has had limited revenues during this testing phase. On January 23,
2006, the Company entered into a letter of intent with certain
shareholders of EON which would increase the Company's ownership from
9% to 53%, in exchange for 1,750,000 shares of Global common stock.
The agreement is subject to due diligence and a definitive contract.
In addition, EON expects to sell a substantial volume of its
structured water to Rudy for use in certain of its drinks.
Accordingly, based on the established valuation method, EON is valued
at its cost of $400,000 at December 31, 2005.
60
o Titanium Design Studio, Inc.
Early in 2006, TDS relocated its operations to Thailand in order to
access cheaper labor. As a result, the Company fully reserved its
investment of $200,000.
o Island Tribe, Inc.
As noted above, the Company sold its interest in Island Tribe on
November 20, 2005.
Investments Discontinued in 2004
o Unboxed Distribution, Inc.
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). In March 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.
o Total Sports Distribution, Inc.
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 Sports' ability to
market and sell the TSABrand label. As previously noted, in March
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.
(3) Asset Purchase Agreement
On December 15, 2002, the Company acquired the Hot Tuna, Xisle and the
children's surf brands, Piranha Boy and Piranha Girl, and trademarks from
Federation Group Limited ("FGL" or the "Seller") in exchange for an aggregate of
a $250,000 deposit payable in cash, 7,800 shares of the Company's common stock
and 400,000 shares of the Company's Series A preferred stock (the "Series APS").
$25,000 of the cash deposit was paid, with $125,000 of the cash deposit
satisfied in shares of the Company's common stock. The trademarks were valued at
the cash deposit and fair value of the shares issued, both common and preferred.
As a result of disputes between the parties, they agreed to unwind the
transaction. All trademarks and related assets were returned to FGL and they
61
returned all but 1,325 shares of the Company's common stock. The returned shares
were cancelled.
As the intent and economic substance of the settlement is in fact an unwinding
of the original Asset Purchase Agreement, all amounts have been reversed out at
the amount at which they were originally recognized. Accordingly, as of December
31, 2003, the Company provided for the net impact of this agreement as if it had
been executed September 30, 2003. The entire value of the trademarks has been
reversed and $5,783,824 charged to equity for the original value of the common
and preferred shares. The Company recognized as a settlement expense $495,000
for the shares retained by FGL, plus the $25,000 cash deposit retained by FGL.
(4) Notes Payable
Notes payable to four parties, payable on demand or by May 31, 2005, were issued
on May 30, 2003 in exchange for consulting and other services, carrying interest
at 8% per annum; total amount of notes issued was $325,000. These notes were
converted to 6,000 shares of common stock during the year ended December 31,
2003.
(5) Convertible Debentures
On April 1, 2003 the Company issued a $25,000 convertible debenture, convertible
at the holder's option into common shares at a price equal to the lesser of 75%
of the lowest closing bid price over the 15 trading days prior to conversion or
100% of the average closing prices bid over the 20 trading days prior to
conversion. The debenture was repaid during the quarter ended September 30, 2003
and unamortized debt issue costs were charged to expense.
On November 8, 2004, the Company issued a convertible debenture in the amount of
$187,500, convertible at the holder's option into common shares at a price of
$0.0035 per share. All principal is due on the maturity date of November 8, 2006
and the interest rate is 9.15%. The Company received net proceeds totaling
$125,063, net of deferred financing costs of $28,125 and prepaid interest
totaling $34,312. As of December 31, 2004, the debenture holder had converted
$131,250 of the debenture into 15,000 shares of common stock. Subsequent to
December 31, 2004, the debenture holder converted the balance of $56,250 of the
debenture into 6,429 shares of common stock.
On December 14, 2004, the Company issued a convertible debenture in the amount
of $187,500, convertible at the holder's option into common shares at a price of
$0.0035 per share. All principal is due on the maturity date of December 14,
2006 and the interest rate is 9.15%. The Company received net proceeds totaling
$125,063, net of deferred financing costs of $28,125 and prepaid interest
totaling $34,312. As of December 31, 2004, the debenture holder had not
converted any of this debenture into shares of common stock. Subsequent to
December 31, 2004, the debenture holder converted $187,500 of the debenture into
21,429 shares of common stock.
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
62
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 was $234,926 in 2005 and $140,074 in
2004.
Amortization expense of deferred financing costs for these convertible
debentures totaled $28,125 for both 2005 and 2004. At December 31, 2004, the
remaining unamortized portion of deferred financing costs totaled $28,125 in the
accompanying balance sheets.
(6) Income Taxes
During the years ended December 31, 2005, 2004 and 2003 the provision for taxes
(substantially all deferred) differs from the amounts computed by applying the
U.S. Federal income tax rate of 34% to income before provision for taxes as a
result of the following:
2005 2004 2003
Computed "expected" tax benefit 34% 34% 34%
Addition to (reduction in) income taxes
resulting from:
State income taxes, net of federal benefit 4% 4% --
Non-deductible expenses -- -- (18%)
Change in deferred tax asset valuation
allowance (38%) (38%) (16%)
---- ---- ----
Total -- -- -
==== ==== ====
The effects of temporary differences, that give rise to significant portions of
deferred tax assets and liabilities at December 31, 2005 and 2004, are presented
below:
2005 2004
Deferred tax assets:
Tax net operating loss carry-forwards $ 2,544,600 $ 1,368,000
Investments 80,000 565,000
----------- -----------
Total gross deferred tax asset 2,624,600 1,933,000
Less valuation allowance (2,624,600) (1,933,000)
----------- -----------
Total net deferred tax asset $ -- $ --
=========== ===========
The valuation allowance increased by $691,600 and $1,053,000 during the years
ended December 31, 2005 and 2004. The current provision for income taxes for the
years ended December 31, 2005, 2004 and 2003 is not significant.
63
At December 31, 2005, the Company had net tax operating loss carry-forwards of
approximately $6,361,000 available to offset future taxable federal and state
income. If not utilized to offset future taxable income, the carry-forwards will
expire in various years through 2025. In the event the Company were to
experience a greater than 50% change in ownership as defined in Section 382 of
the Internal Revenue Code, the utilization of the Company's tax net operating
loss carry-forwards could be severely restricted.
(7) Rescission of Options
During the year ended December 31, 2003, the Company granted 13,260 options to
employees, all of which would have vested from March 2004 through March 2007. In
accordance with APB 25, a $2,784,600 compensation cost was included in deferred
compensation costs, to be recognized over the future vesting period.
Subsequent to the issue of the options, the Company obtained agreements from
employees to rescind all of these options, in exchange for restricted common
shares to be issued immediately. Accordingly, the $2,784,600 option cost,
previously deferred, has been charged to operations in the year ended December
31, 2003.
(8) Stockholders' Equity
Preferred Stock
The Company is authorized to issue up to 50,000,000 shares of preferred stock at
$0.001 par value. As of December 31, 2005 the authorized and issued preferred
shares are as follows:
Series A preferred stock ("Series APS"), 400,000 shares originally authorized;
none issued and outstanding
These shares were issued in connection with the Asset Purchase Agreement
described in Note (4). The shares were cancelled in connection with the
rescission of the transactions contemplated by the Asset Purchase Agreement in
November 2003.
Series B preferred stock ("Series BPS"), 610,000 shares authorized; none issued
and outstanding
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").
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
64
described in the preceding paragraph. All shares of Series B outstanding three
(3) years from the date of issuance shall automatically be converted into common
stock based upon the foregoing formula.
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.
Series BPS holders are entitled to one vote per share of Series BPS.
Series BPS shares of 190,000, 290,000 and 130,000 were converted into 392,092,
4,866 and 2,035 shares of common stock during 2005, 2004 and 2003, respectively.
Series C preferred stock ("Series CPS"), 10,000,000 shares authorized; none
issued and outstanding
The holders of the Series CPS are not entitled to receive dividends and are
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.
There is no liquidation preference or voting rights for Series CPS holders.
On June 18, 2003, the Company issued an aggregate of 10,000,000 of its Series C
Preferred Shares to one certain officer and director, in lieu of the rescission
of stock options, and to two consultants in exchange for services provided of
$367,500, based on the fair market value of the underlying common shares. The
Series C Preferred Shares are convertible on a 1:1 basis into shares of the
Company's common stock.
During 2005, the 10,000,000 shares of Series CPS were converted into 1,632,234
shares of common stock.
Equity Transactions
Year ended December 31, 2003:
During the year ended December 31, 2003, the Company issued 7,426 common shares,
in exchange for which it received cash proceeds totaling $423,263.
During the year ended December 31, 2003, the Company issued 2,477 shares of
common stock to employees, consultants and other vendors for services, valued at
$519,863, the market value of the shares on the dates issued. The total cost has
been reflected in the accompanying financial statements, as follows: $368,662
has been included in General and Administrative expense; the balance of
$151,201, representing the difference between the value of services rendered and
65
the market value of shares issued, has been charged to shares issued at a
discount in exchange for services.
During the year ended December 31, 2003, the Company issued 273 shares of common
stock to five current and former employees in exchange for their agreement to
the rescission by the Company of 13,260 options, which had been granted during
the quarter ended March 31, 2003. The full $47,750 cost of these shares, at
market value at date of issuance, has been charged to "write-off of deferred
compensation" expense in the accompanying statements of operations for the year
ended December 31, 2003.
During the year ended December 31, 2003, the Company issued 210 shares of common
stock to former holders of convertible debentures, which had been converted to
Series B Preferred Stock during the period from inception through December 31,
2002, in satisfaction of an offer of inducement to convert. $78,750, the market
value of the shares on the date of issuance, has been reflected as debt
conversion costs.
On March 7, 2003, the Company issued 300 shares of common stock, valued at their
market value of $112,500, to a foreign entity for resale under Regulation S. As
these shares have not yet been resold by the foreign entity, and no
consideration has been received, the shares have been reflected in common stock
subscriptions receivable on the accompanying financial statements at December
31, 2003.
During the year ended December 31, 2003, 2,035 shares of common stock were
issued in connection with a shareholder's election to convert 130,000 shares of
Preferred Series B.
During the year ended December 31, 2003, 7,280 common shares were issued in
satisfaction of notes payable in the amount of $413,000.
During the year ended December 31, 2003, with shareholder approval, the Company
issued warrants for the purchase of 6,000 shares of the Company's common stock
at exercise prices ranging from $.05 to $.10 per share in connection with a
licensing agreement for Unboxed Distribution, Inc. The estimated value of the
warrants totaled approximately $418,326 at the date of grant. The value of the
warrants was estimated using the Black-Scholes option pricing model with the
following assumptions: risk-free interest of 5.5%; dividend yield of 0%;
volatility factor of the expected market price of the Company's common stock of
173.5%; and a term of 5 years. This amount has been included in the valuation of
the investment. These warrants were exercisable upon issuance.
Year ended December 31, 2004:
During the year ended December 31, 2004, the Company issued 51,220 common shares
in exchange for which it received cash proceeds totaling $1,533,945.
The Company also issued 12,000 restricted common shares for the purchase of a
51% interest in Island Tribe, Inc., valued at $372,000. (see Note 2). The number
of shares issued was based on a formula whereby the shareholders of Island Tribe
received $372,000 of the Company's restricted common stock.
66
During the year ended December 31, 2004, 2,308 common shares and 10,000 Series
CPS were returned to the Company.
The common stock subscriptions receivable of $9,600 in the accompanying balance
sheet at December 31, 2004 consists of amounts receivable from an investment
banking company related to the purchase of common shares.
During September 2004, 10,000 shares of Series CPS stock were issued in
connection with the issuance of 445 shares of common stock for total proceeds of
$10,000.
On November 8, 2004, the Company issued a convertible debenture in the principal
amount of $187,500, convertible at the holder's option into common shares at a
price of $0.0035 per share. As of December 31, 2004, the debenture holder had
converted $131,250 of the debenture into 15,000 shares of common stock.
Subsequent to December 31, 2004, the debenture holder converted the remaining
$56,250 of the debenture into 6,429 shares of common stock.
On December 14, 2004, the Company issued an additional convertible debenture in
the principal amount of $187,500, convertible into 21,429 common shares of the
Company. Subsequent to December 31, 2004 and through March 31, 2005, the
debenture holder converted the total $187,500 of this debenture into 21,429
shares of common stock. The unconverted shares of these convertible debentures
were held in an escrow account and were presented as such in the accompanying
financial statements at December 31, 2004.
During the year ended December 31, 2004, 4,867 common shares were issued upon
conversion of Series BPS. An additional 67 common shares were issued as
settlement for penalties and interest in connection with the conversion of these
Series BPS.
Year ended December 31, 2005:
During the year ended December 31, 2005, 190,000 Series BPS were converted into
392,092 shares of common stock.
During the year ended December 31, 2005, 20,000 shares of common stock were
issued in exchange for convertible debentures in the amount of $50,000. In
addition, 27,858 shares were released from the December 31, 2004, escrow in
satisfaction of $243,750 in convertible debentures which were outstanding at
December 31, 2004.
On April 18, 2005, the Company completed a 2,500-to-1 stock split, which reduced
issued and outstanding common shares to 218,500 shares. (Share rounding of 1,315
resulted in increasing the calculated 217,185 shares to 218,500 shares.)
During the year ended December 31, 2005, the Company issued 1,632,234 common
shares in exchange for all 10,000,000 shares of the Series C Preferred stock.
During the year ended December 31, 2005, the Company sold 33,092,854 common
shares in exchange for cash in the amount of $1,900,500 in private placement
transactions.
67
On November 17, 2005, the Company issued 6,000,000 common shares in exchange for
an 80% interest in Rudy Beverage, Inc.
On November 20, 2005, the Company exchanged its 51% interest in Island Tribe,
Inc. for 12,000 shares of its common stock. The Company retired the shares.
(9) Commitments and Contingencies
The Company has a month-to-month agreement with its chief executive officer
which provides for payment of compensation of $10,000 per month, commencing in
January 2006.
As a part of its January 23, 2006, letter of intent to increase its ownership of
EON to 53%, the Company agreed to loan EON an additional $350,000. The loan was
scheduled to be advanced at the rate of $70,000 per month commencing February 1,
2006. The Company advanced $140,000 as a part of this agreement in January 2006.
The remaining $210,000 has been delayed pending completion of additional due
diligence.
The Company leases its office facility on a month-to-month basis at the rate of
$1,000 per month.
The Company has agreed to loan Rudy $525,000 during its initial start-up. As of
March 23, 2006, the Company had advanced $230,000 of this amount.
(10) 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 December 31, 2005, the Company had limited revenues and incurred
net losses totaling $9,657,290 since inception through December 31, 2005.
Additionally, as of December 31, 2005, the Company has limited working capital.
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 should be
sufficient to fund its capital expenditures, provide working capital and other
necessary cash requirements for the year ending December 31, 2006. 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.
The Company currently estimates it will require a total of approximately
$1,100,000 to meet its operating cash flow requirements and its currently
committed follow-on investments in 2006. The operating cash flow requirement
estimate is approximately $435,000 and the committed follow-on investments are
approximately $665,000. As of April 11, 2006, including cash on-hand at December
31, 2005, the Company had raised approximately $860,000 of this amount.
Management plans to take the following steps in response to these problems:
68
o Revenue
It has been determined that, as an investment company, the Company will only
invest in/acquire businesses which are cash flow positive and profitable or
businesses which projections indicate can become cash flow positive and
profitable within a reasonable period. These entities will have good growth
potential as a result of access to additional capital and/or additional
management acumen.
As part of this strategic process, the Company has decided to concentrate its
efforst in the beverage industry. 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.
o Financing
On June 19, 2003, Bluetorch Inc. filed an Offering Circular that authorizes the
Company to raise up to $3,000,000 via sale of its common stock. Through December
31, 2005, the Company had raised $2,267,057 against this limit. This sum
includes both cash proceeds and conversion of debt.
On June 24, 2004, the Company filed a new Offering Circular that authorized the
Company to raise up to $5,000,000 via sale of its common stock.
On October 18, 2004, and on November 1, 2004, the Company filed amendments to
the June 24, 2004 Offering Circular, reducing the minimum offering share price
to $0.004 and $0.0035, respectively. In addition, these amendments included a
reduction in the authority to raise capital from $5,000,000 to $2,500,000. As of
December 31, 2004, the Company had raised $658,850 against this limit.
Subsequent to December 31, 2004 and up to December 31, 2005, the Company raised
an additional $243,750 against this limit.
On March 15, 2005, the Company filed an additional amendment to the June 24,
2004 Offering Circular, reducing the minimum offering share price to $0.001. In
addition, these amendments included a reduction in the authority to raise
capital from $2,500,000 to $375,000. As of December 31, 2005, the Company has
raised $50,000 against this limit.
On April 27, 2005, subsequent to the 2,500:1 reverse stock split on April 18,
2005, the Company issued Amendment No. 4 to the June 24, 2004 Offering Circular,
which provided authority for raising $2,500,000 with a minimum offering share
price of $.05. As of December 31, 2005, the Company did not raise any funds with
this Amended Offering Circular.
On May 17, 2005, the Company issued Amendment No. 5 to the June 24, 2004
Offering Circular, which provided authority for raising $4,000,000 with a
minimum offering share price of $.05. As of December 31, 2005, the Company had
raised $350,000 against this limit.
On June 24, 2005, the Company filed a new Offering Circular that authorized the
Company to raise up to $5,000,000 via sale of its common stock with a minimum
69
share price of $.05. As of December 31, 2005, the Company had raised $1,550,500
against this limit.
Interim Capital Agreements
On May 18, 2005, the Company executed an agreement with Interim Capital Corp. in
its capacity as Agent for a number of investors, which provided for the sale of
20,800,000 shares of the Company's common stock for $1,040,000. This funding was
completed in September 2005.
On July 5, 2005, the Company executed a second agreement with Interim Capital
Corp. in its capacity as Agent for a number of investors, which provided for the
sale of 14,200,000 shares of the Company's common stock for $994,000. As of
December 31, 2005, $860,500 of this funding has been completed.
Whereas the Company believes it will be successful with its plans, due to market
factors and economic conditions, no assurance can be given that financing will
be available on favorable terms or at all.
The financial statements do not include any adjustments related to
recoverability and classification of assets carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
(11) Subsequent Events
On January 23, 2006, the Company executed a letter of intent with certain
shareholders of EON which could increase the Company's ownership of EON to 53%,
subject to due diligence and a definitive contract. The agreement has been
delayed pending completion of additional due diligence.
70
GLOBAL BEVERAGE SOLUTIONS, INC.
Schedules of Financial Ratios
Three Years Ended December 31, 2005. 2004 and 2003
2005 2004 2003
-------------- ----------- -------------
Per share information:
Net asset value, beginning of year (2) $ 2.13 $ 5.59 $ 74.26
Net decrease from operations (1) (0.06) (10.48) (72.34)
Net change in realized and unrealized depreciation
on investments (1) (0.04) (12.63) --
Net increase from stock transactions (3) (1.89) 19.65 3.67
-------------- ----------- -------------
Net asset value, end of year (2) $ 0.14 $ 2.13 $ 5.59
============== =========== =============
Ratios/supplemental data:
Net assets, end of year $ 5,827,124 $ 396,001 $ 427,766
Average net assets 1,305,000 412,000 3,041,000
Ratio of expenses to average net assets 0.81 2.84 1.72
Ratio of decrease in net assets from operations to
average net assets 1.31 6.27 1.72
Weighted average number of shares outstanding during
the year 18,418,649 111,755 72,331
Number of shares outstanding, end of year 41,312,391 185,896 76,581
(1) Calculated based on the weighted average number of shares outstanding
during the year.
(2) Calculated based on the number of shares outstanding at the beginning or
end of the year.
(3) The net increase from stock transactions includes the effect of increases
in the number of shares outstanding.
71
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On November 17, 2005, the Company dismissed its former independent registered
public accountants, Squar, Milner, Reehl & Williamson, LLP ("Squar Milner"),
Certified Public Accountants, of Newport Beach, California and engaged Turner,
Stone & Company, LLP ("Turner Stone"), Certified Public Accountants, of Dallas,
Texas, as its independent registered public accounting firm. The decision to
change accountants was approved by the Board of Directors of the Company.
During the fiscal year ended December 31, 2004 and the subsequent interim
periods until the change, there were no disagreements with Squar Milner on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Squar Milner would have caused them to make reference in
connection with their report to the subject matter of the disagreement, and
Squar Milner has not advised the Company of any reportable events as defined in
Item 304(a)(1)(v) of Regulation S-K except as follows:
Squar Milner advised us as part of their 2004 audit as to deficiencies in our
disclosure controls, which have resulted in a pattern of late filings with the
Securities and Exchange Commission. Management and the board of directors have
now taken specific steps to correct these issues in the 2005 quarterly reports.
The report of independent registered public accounting firm of Squar Milner as
of and for the year ended December 31, 2004, did not contain any adverse opinion
or disclaimer of opinion, nor was it qualified or modified as to audit scope or
accounting principle. The report contained a "going concern" modification.
During the year ended December 31, 2004, and through November 17, 2005, the
Company did not consult with Turner Stone regarding any of the matters or events
set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.
On June 15, 2004, the Board of Directors of the Company approved the dismissal
of Stonefield Josephson, Inc. ("Stonefield") as independent auditors, effective
immediately. The Company's Audit Committee approved this action of the Board of
Directors.
Stonefield's reports on the Company's financial statements for the two years
ended December 31, 2003 and 2002, did not contain an adverse opinion or
disclaimer of opinion, and were not qualified or modified as to uncertainty,
audit scope or accounting principles. However, Stonefield's opinion in its
report on the Company's financial statements for the two years ended December
31, 2003 and 2002 included an explanatory paragraph which expressed substantial
doubt with respect to the Company's ability to continue as a going concern.
During the period from January 1, 2002 to June 14, 2004, there have not been any
disagreements with Stonefield on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Stonefield, would have
caused them to make reference to the subject matter of the disagreement in
connection with their reports. None of the events described in Item
304(a)(1)(iv)(B) of Regulation S-X have occurred with respect to Stonefield.
72
On June 15, 2004, the Board of Directors of the Company approved the Company's
engagement of Squar Milner as independent auditors for the Company, to replace
Stonefield. The Company engaged Squar on June 15, 2004. The Company's Audit
Committee approved this action of the Board of Directors.
During the period from January 1, 2002 to June 15, 2004, neither the Company nor
anyone on its behalf consulted Squar Milner regarding (i) the application of
accounting principles to a specific completed or contemplated transaction, (ii)
the type of audit opinion that might be rendered on the Company's financial
statements, or (iii) any matter that was the subject of a disagreement or event
identified in response to Item 304(a)(1)(v) of Regulation S-K (there being
none).
ITEM 9A: 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 December 31, 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
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 designated its
Chief Executive Officer with the added responsibility of its Chief Compliance
Officer.
The Company updated its internal controls as of December 31, 2005, at which time
they were adopted by the Board of Directors. There were no significant changes
made in the Company's internal controls over financial reporting 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.
ITEM 9B: OTHER INFORMATION
None.
73
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following section sets forth the names, ages and current positions with the
Company held by the Directors, Executive Officers and Significant Employees;
together with the year such positions were assumed. There is no immediate family
relationship between or among any of the Directors, Executive Officers or
Significant Employees, and the Company is not aware of any arrangement or
understanding between any Director or Executive Officer and any other person
pursuant to which he was elected to his current position. Each Executive Officer
will serve until he or she resigns or is removed or otherwise disqualified to
serve, or until his or her successor is elected and qualified.
Each Director will serve until he or she resigns or is removed or otherwise
disqualified to serve or until his or her successor is elected. The Company
currently has one Director. The Board of Directors does not expect to appoint
additional Directors until a potential acquisition is identified.
NAME AGE POSITION
Richard T. Clark 58 President, CEO and Director since
September 2005
Bryce Knight 22 Vice-president, CFO, Secretary and
Treasurer since September 2005
Ross Silvey 78 Outside Director since September 2005
Terry Turner 59 Outside Director since September 2005
Richard T. Clark - Mr. Clark became President, CEO and a Director in September
2005 upon the resignation of the former CEO. Since 1992, Mr. Clark is the owner
and principal operating officer of Clark Capital Corp., a private company with
emphasis on public company corporate restructuring, including bankruptcies and
tax arbitrage. Previously, from 1980 until 1989, Mr. Clark was a stock broker
with Harris Uphan & Co. before becoming vice-president with Rotan Mosle, Paine
Webber and Dean Witter Reynolds. Mr. Clark worked as an independent broker
dealer dealing in corporate finance for S.C. Costa Co. from 1989 to 1992. Mr.
Clark graduated from the University of Tulsa with a Master's degree in Finance.
Bryce Knight - Mr. Knight became Vice-President and Chief Financial Officer of
the Company upon the resignation of his predecessor. Mr. Knight also serves as
Chief Executive Officer and Director of Photonics Corporation. He is the
President of Knight Consulting Corporation, a corporate strategy and financial
consulting firm, as well. Previously Mr. Knight worked with General Electric as
a financial analyst for its consumer products division and with Robert Bosch
Tool Corporation in the marketing department. Mr. Knight graduated with honors
from Bellarmine University with a Business Administration degree and a Master's
of Business Administration.
74
Ross Silvey - Mr. Silvey was elected as an outside Director of the Company in
September 2005. Mr. Silvey has owned and operated franchised automobile
businesses, finance companies and insurance companies for over thirty years. Mr.
Silvey has taught as an adjunct or full-time professor most of the courses in
the upper division and MBA programs at Tulsa University, Oral Roberts
University, Langston University and Southern Nazarene University. His formal
education is an MBA from the Harvard Business School. He has also been awarded
the Ph.D. degree from the Walden Institute of Advance Studies. Mr. Silvey serves
as Chairman of the Audit Committee.
Terry Turner - Mr. Turner was elected an outside Director of the Company in
September 2005. Mr. Turner has been a restaurant owner in Tulsa for over 35
years and has previously served as an independent director on the boards of two
other public companies. Mr. Turner has a BS degree in Business Administration
from the University of Arkansas.
AUDIT COMMITTEE
The Board of Directors has determined that Ross Silvey meets the requirements of
a financial expert and serves as Chairman of the Audit Committee. Mr. Silvey is
independent as specified in Item 7 (d)(3)(iv) of Schedule 14A under the Exchange
Act.
We have a separately designated standing audit committee established in
accordance with Section 3 (a)(58)(A) of the Exchange Act, which is currently
made up of Mr. Silvey and Mr. Turner.
The primary responsibility of the Audit Committee is to oversee our financial
reporting process on behalf of the Board of Directors and report the result of
their activities to the Board. Such responsibilities shall include, but shall
not be limited to, the selection and, if necessary, the replacement of our
independent auditors and review and discussion with such independent auditors of
(i) the overall scope and plans for the audit, (ii) the adequacy and
effectiveness of the accounting and financial controls, including our system to
monitor and manage business risks, and legal and ethical programs, and (iii) the
results of the annual audit, including the financial statements to be included
in our annual report on Form 10-K.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our
executive officers, directors and persons who own more than ten percent of our
common stock to file initial reports of ownership and changes in ownership with
the SEC. Additionally, SEC regulations require that we identify any individuals
for whom one of the referenced reports was not filed on a timely basis during
the most recent fiscal year or prior fiscal years. To our knowledge, based
solely on a review of reports furnished to us, Mr. Clark, Mr. Silvey and Mr.
Turner did not file their Form 3 when they became a Director and Mr. Clark, Mr.
Silvey and Mr. Turner did not timely file their required Form 5 for fiscal 2005.
CODE OF ETHICS
75
The Board of Directors of the Company adopted a Code of Ethics effective as of
August 27, 2003.
The Code of Ethics in general prohibits any officer, director or advisory person
(collectively, "Access Person") of the Company from acquiring any interest in
any security which we (i) are considering a purchase or sale thereof, (ii) are
being purchased or sold by us, or (iii) are being sold short by us. The Access
Person is required to advise us in writing of his or her acquisition or sale of
any such security.
INVESTMENT COMMITTEE
The Board of Directors of the Company adopted an Investment Committee Charter
effective as of August 27, 2003.
The Investment Committee shall have oversight responsibility with respect to
reviewing and overseeing our contemplated investments and portfolio companies
and investments on behalf of the Board and shall report the results of their
activities to the Board. Such Investment Committee shall (i) have the ultimate
authority for and responsibility to evaluate and recommend investments, and (ii)
review and discuss with management (a) the performance of portfolio companies,
(b) the diversity and risk of our investment portfolio, and, where appropriate,
make recommendations respecting the role or addition of portfolio investments
and (c) all solicited and unsolicited offers to purchase portfolio companies.
ITEM 11: EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors deliberates executive
compensation matters to the extent they are not delegated to the Chief Executive
Officer.
76
SUMMARY COMPENSATION TABLE
The following table shows the compensation of the Company's Chief Executive
Officer and each executive officer whose total cash compensation exceeded
$100,000 for the three years ended December 31, 2005.
ANNUAL COMPENSATION
Other Annual
Name and principal position Year Salary Bonus Compensation
- --------------------------- ---- -------- ----- ------------
Richard T. Clark (CEO since 2005 $ 7,500 $ - $ -
September 2005) (1) 2004 N/A N/A N/A
2003 N/A N/A N/A
Bruce MacGregor (CEO until 2005 $119,640 - -
September 2005) (3) 2004 $132,000 - -
2003 $ 91,100 - -
Bryce Knight (CFO since 2005 $ 2,500 $ - $ -
September 2005) (2) 2004 N/A N/A N/A
2003 N/A N/A N/A
Bernard Gurr (CFO from 2005 $ 99,771 $ - $ -
August 2004 until 2004 $ 41,666 $ - $ -
September 2005) 2003 N/A N/A N/A
Scott Battenberg (CFO from 2005 N/A N/A N/A
January until July 2004) 2004 $ 58,333 $ - $ -
2003 N/A N/A N/A
(1) Mr. Clark's compensation increased to $10,000 per month commencing January
1, 2006.
(2) Mr. Knight's part-time compensation increased to $2,500 per month
commencing January 1, 2006.
(3) Mr. MacGregor has $31,850 in accrued payroll from prior years as of
December 31, 2005, which is schedule to be paid to him during 2006.
LONG TERM COMPENSATION AWARDS
During the year ended December 31, 2005, we did not have any long term
compensation awards.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
During the year ended December 31, 2005, we did not have any option/SAR grants.
77
We do not have a long term incentive plan.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
None.
DIRECTOR COMPENSATION
Mr. Silvey received $1,000 quarterly for his services as director and audit
committee chairman. Mr Turner receives $500 quarterly for his services as a
director. Both are reimbursed for out-of-pocket costs.
EMPLOYMENT AGREEMENTS
None
REPRICING OPTIONS
We did not adjust or amend the exercise price of stock options or SAR's
previously awarded during the year ended December 31, 2005.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table indicates all persons who, as of March 1, 2006, the most
recent practicable date, are known by us to own beneficially more than 5% of any
class of our outstanding voting securities. As of March 1, 2006, there were
41,312,391 shares of our common stock outstanding. Except as otherwise indicated
below, to the best of our knowledge, each person named in the table has sole
voting and investment power with respect to the securities beneficially owned by
them as set forth opposite their name.
Name and Address of Amount and Nature of
Title of Class Beneficial Owner Beneficial Owner % of Class
- -------------- ------------------------ -------------------- ----------
Common Drew Carver 3,000,000 7.26%
7633 E 63rd Pl, Ste 220
Tulsa, OK 74133
Common Ruettiger Family Trust 3,000,000 7.26%
7633 E 63rd Pl, Ste 220
Tulsa, OK 74133
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SECURITY OWNERSHIP OF MANAGEMENT
The following table indicates the beneficial ownership of our voting securities
of all Directors of the Company and all Executive Officers who are not Directors
of the Company, and all officers and directors as a group, as of March 1, 2006,
the most recent practicable date. As of March 1, 2006, there were 41,312,391
shares of our common stock outstanding. Except as otherwise indicated below, to
the best of our knowledge, each person named in the table has sole voting and
investment power with respect to the securities beneficially owned by them as
set forth opposite their name. All options are currently exercisable, unless
otherwise indicated.
Name and Address of Amount and Nature of
Title of Class Beneficial Owner Beneficial Owner % of Class
- -------------- -------------------------- -------------------- ----------
Common Richard T. Clark - -
Common Bryce Knight - -
Common Ross Silvey - -
Common Terry Turner - -
Common All officers and directors - -
as a Group (4 persons)
EQUITY COMPENSATION PLAN INFORMATION
We do not currently have an equity compensation plan.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 26, 2004, Scott Battenburg resigned as a director and Read Worth was
appointed a director of the Company. Mr. Battenburg was appointed the Company's
Chief Financial Officer and Secretary, effective January 26, 2004.
Effective July 31, 2004, Mr. Battenburg resigned as Chief Financial Officer and
Mr. Bernard Gurr was appointed Chief Financial Officer on August 2, 2004.
On March 11, 2005, Shane Traveller resigned as a director of the Company and
Kenneth Wiedrich was appointed to the board of directors.
On September 15, 2005, Bruce MacGregor resigned his position as President, Chief
Executive Officer and Director; Bernard Gurr resigned his position as Chief
Financial Officer; Kenneth Wiedrich resigned his position as Director; and Read
79
Worth resigned his position as Director. Simultaneously, Richard T. Clark was
appointed President, Chief Executive Officer and Director; Bryce Knight was
appointed Chief Financial Officer; Ross Silvey was appointed Director; and Terry
Turner was appointed Director. C.R. Garner was also appointed a Director,
although he elected not to serve due to other time commitments.
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Annual Report on Form 10-K for the year ended December 31, 2004, was audited
by Squar, Milner, Reehl & Williamson, LLP ("Squar Milner") (Certified Public
Accountants).
The Company changed auditors to Turner, Stone & Company, LLP ("Turner Stone") on
November 17, 2005.
AUDIT FEES:
For the fiscal year ended December 31, 2005, and through March 23, 2006, Turner
Stone billed the Company $19,950 for services rendered for the audit of the
Company's financial statements included in its report on Form 10-K and the
reviews of the financial statements included in its reports on Form 10-Q filed
with the SEC.
For the fiscal year ended December 31, 2004, Squar Milner billed the Company
$35,000 for services rendered for the audit of the Company's financial
statements included in its report on Form 10-K and the reviews of the financial
statements included in its reports on Form 10-Q filed with the SEC.
TAX FEES
The auditors have billed no fees for 2004 or 2005 for tax services.
OTHER FEES
None.
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ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
1. Financial Statements - The following financial statements of
Global Beverage Solutions, Inc. are contained in Item 8 of this
Form 10-K:
o Reports of Independent Certified Public Accountants
o Statements of Net Assets at December 31, 2005 and 2004
o Statements of Operations - For the fiscal years ended
December 31, 2005, 2004 and 2003
o Statements of Cash Flows - For the fiscal years ended
December 31, 2005, 2004 and 2003
o Statements of Changes in Net Assets - For the fiscal
years ended December 31, 2005, 2004 and 2003
o Schedule of Investments - At December 31, 2005 and 2004
o Notes to the Financial Statements
o Schedules of Financial Ratios for the years ended
December 31, 2005, 2004 and 2003
2. Financial Statement Schedules were omitted, as they are not
required or are not applicable, or the required information is
included in the Financial Statements.
3. Exhibits - The following exhibits are filed with this report or
are incorporated herein by reference to a prior filing, in
accordance with Rule 12b-32 under the Securities Exchange Act of
1934.
Exhibit Description
31.1 Certification of the Chief Executive Officer pursuant to Rule
13a-14 of the Securities Exchange Act of 1934
31.2 Certification of the Chief Financial Officer pursuant to Rule
13a-14 of the Securities Exchange Act of 1934
32.1 Certification of the Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
32.2 Certification of the Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on April 13, 2006.
GLOBAL BEVERAGE SOLUTIONS, INC.
By: /s/ Richard T. Clark
-------------------------------
Richard T. Clark, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
Date Title (Capacity) Signature
April 13, 2006 Chairman and Chief Executive Officer /s/ Richard T. Clark
--------------------
(Principal Executive Officer) Richard T. Clark
April 13, 2006 Chief Financial Officer (Principal /s/ Bryce Knight
--------------------
Financial and Accounting Officer) Bryce Knight
April 13, 2006 Director /s/ Ross Silvey
--------------------
Ross Silvey
April 13, 2006 Director /s/ Terry Turner
--------------------
Terry Turner
82