SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of report: August 12, 2005
Ventures-National Incorporated
(Exact Name of Registrant as Specified in its Charter)
Utah 000-32847 87-0433444
(State of Incorporation) (Commission File Number) (IRS Employer ID)
44358 Old Warm Springs Boulevard
Fremont, California 94538
(Address of principle executive offices)
(510) 824-1200
(Registrant's telephone number, including area code)
(Former name or former address, if changed since last report)
Copies to:
Gregory Sichenzia, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas
New York, New York 10018
Phone: (212) 930-9700
Fax: (212) 930-9725
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instructions A.2. below):
/_/ Written communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
/_/ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
/_/ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 240.14d-2(b))
/_/ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act (17 CFR 240.13e-4(c))
Explanatory Note:
This Form 8-K/A is being filed as an amendment to the Form 8-K that was filed by
Ventures-National Incorporated (the "Company") related to events which occurred
on August 12, 2005. The only portion of such Form 8-K being amended is to
include the filing of financial statements required to be filed thereunder.
Item 9.01 Financial Statements and Exhibits
(a) Financial Statements of Businesses Acquired
(b) Pro Forma Financial Information
Exhibit
Number Description
- --------------------------------------------------------------------------------
4.1 Certificate of Designation for the Series A Cumulative
Convertible Preferred Stock of Oblio Telecom, Inc. defining te
rights of the holders of the Preferred Stock of Oblio Telecom,
Inc.Credit Agreement dated August 12, 2005, between Oblio
Telecom, Inc., Pinless, Inc. and CapitalSource Finance LLC (1)
10.1 Asset Purchase Agreement dated July 28, 2005 among Farwell Equity
Partners, Oblio Telecom, Inc., Oblio Telecom L.L.P., Sammy Jibrin
and Radu Achiriloaie(2)
10.2 Stock Purchase Agreement dated August 12, 2005 between the
Company and Farwell Equity Partners (1)
10.3 Employment Agreement dated August 12, 2005, between Oblio
Telecom, Inc. and Radu Achiriloaie, (1)
10.4 Employment Agreement dated August 12, 2005, between Oblio
Telecom, Inc. and Sammy Jibrin (1)
10.5 Agreement, dated August 12, 2005, between the Company and Laurus
Master Fund, Ltd.(1)
10.6 Credit and Security Agreement dated as of August 12, 2005 between
Oblio Telecom, Pinless, Inc. and CapitalSource Finance LLC (1)
99.1 Fairness Opinion dated August 8, 2005, issued by vFinance
Investments, Inc. (1)
99.2 Press Release dated August 12, 2005 (1)
99.3 Press Release dated August 12, 2005 (1)
- ----------
(1) Previously filed.
(2) Incorporated by reference to the Company's Current Report on Form 8-K filed
August 1, 2005
SIGNATURE
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.
VENTURES-NATIONAL INCORPORATED
By:/s/ Daniel D. Guimond
---------------------
Daniel D. Guimond
Chief Financial Officer
Date: September 19, 2005
Item 9.01 (a)
FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
Oblio Telecom, LLP
Independent Registered Public Accounting Firm's Report
Balance Sheets as of June 30, 2005 (unaudited) and December 31, 2004, 2003 and
2002
Statements of Income for the six months ended June 30, 2005 (unaudited) and
the calendar years ended December 31, 2004, 2003 and 2002
Statements of Shareholder's Equity for the six months ended June 30, 2005
(unaudited) and the calendar years ended December 31, 2004, 2003 and 2002
Statements of Cash Flows for the six months ended June 30, 2005 (unaudited) and
the calendar years ended December 31, 2004, 2003 and 2002
Notes to Financial Statements
KBA Certified
Public
Accountants
GROUP LLP
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
To the Partners of
Oblio Telecom L.L.P.
We have audited the accompanying balance sheets of Oblio Telecom L.L.P. ("the
Company") as of December 31, 2004, 2003 and 2002 and the related statements of
income, equity, and cash flows for the years 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 audits.
We conducted our audits in accordance with 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 financial position of Oblio Telecom L.L.P. as of
December 31, 2004, 2003 and 2002 and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
KBA GROUP L.L.P.
- ----------------
KBA GROUP L.L.P.
Dallas, Texas
June 15, 2005
14241 Dallas Parkway, Suite
200 Dallas, Texas 75254
Phone 972.702.8262
Fax 972.702.0673
www.kbagroupllp.com
OBLIO TELECOM L.L.P.
BALANCE SHEETS
December 31, 2004, 2003 and 2002
ASSETS
June 30,
2005
(Unaudited) 2004 2003 2002
----------- ----------- ----------- ------------
CURRENT ASSETS
Cash and cash equivalents $ 1,905,129 $ 5,171,859 $ 3,623,704 $ _
Available for sale securities 8,325,000 8,700,000 7,000,000 15,000,000
Accounts receivable 5,841,152 7,755,588 8,231,604 6,178,871
Inventory 90,768 34,618 255,774 433,820
Prepaid expenses 5,338 5,338 11,038 5,338
----------- ----------- ----------- ------------
Total current assets 16,167,387 21,667,403 19,122,120 21,618,030
----------- ----------- ----------- ------------
Property and equipment, net of accumulated depreciation
of $109,793, $105,263, $96,080, and $79,360, respectively 14,401 16,703 20,824 27,800
----------- ----------- ----------- ------------
OTHER ASSETS
Other 34,009 17,209 -
Due from related party 207,452 193,826 104,301 -
----------- ----------- ----------- ------------
Total other assets 241,461 211,035 104,301 -
----------- ----------- ----------- ------------
TOTAL ASSETS $16,243,249 $21,895,141 $19,247,245 $21,645,830
=========== =========== =========== ============
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable $ 8,437,274 $11,433,911 $14,830,569 $13,447,241
Accrued liabilities - 82,500 626,513 707,835
----------- ----------- ----------- ------------
Total current liabilities 8,437,274 11,516,411 15,457,082 14,155,076
OWNERS' EQUITY
Common Stock - - - 1,000
Retained earnings - - - 7,489,754
Partners' capital 7,895,975 10,378,730 3,790,163 -
----------- ----------- ----------- ------------
Total equity 7,895,975 10,378,730 3,790,163 7,490,754
----------- ----------- ----------- ------------
TOTAL LIABILITIES AND EQUITY $16,423,249 $21,895,141 $19,247,245 $21,645,830
=========== =========== =========== ============
The accompanying notes are an integral part of these financial statements.
3
OBLIO TELECOM L.L.P.
STATEMENTS OF INCOME
For the Years Ended December 31, 2004, 2003 and 2002
Six months
ended June
30, 2005
(Unaudited) 2004 2003 2002
------------- ------------- ------------- -------------
REVENUE $ 56,040,797 $ 146,872,941 $ 163,662,257 $ 191,163,812
COST OF REVENUE 51,446,221 134,867,700 148,676,395 172,716,801
------------- ------------- ------------- -------------
Gross profit 4,594,576 12,005,241 14,985,862 18,447,011
------------- ------------- ------------- -------------
GENERAL AND ADMINISTRATIVE EXPENSES 759,137 1,595,091 922,548 2,348,712
------------- ------------- ------------- -------------
Income from operations 3,835,439 10,410,150 14,063,314 16,098,299
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE)
Interest income 145,123 131,789 121,285 316,355
Other income (expense) 26,683 46,628 55,679 (1,086)
------------- ------------- ------------- -------------
Total other income (expense) 171,806 178,417 176,964 315,269
------------- ------------- ------------- -------------
Net income before income taxes 4,007,245 10,588,567 14,240,278 16,413,568
------------- ------------- ------------- -------------
Current provision for state income taxes - - 614,869 688,818
------------- ------------- ------------- -------------
NET INCOME $ 4,007,245 $ 10,588,567 $ 13,625,409 $ 15,724,750
============= ============= ============= =============
The accompanying notes are an integral part of these financial statements.
4
OBLIO TELECOM L.L.P.
STATEMENTS OF EQUITY
For the Years Ended December 31, 2004, 2003 and 2002
Common
----------------------------- Retained Partners Total
Shares Amount Earnings Capital Equity
------------- ------------- ------------- ------------- -------------
Balance at December 31, 2001 1,000 $ 1,000 $ 12,497,004 $ - $ 12,498,004
Net income - - 15,724,750 - 15,724,750
Distributions - - (20,732,000) - (20,732,000)
------------- ------------- ------------- ------------- -------------
Balance at December 31, 2002 1,000 1,000 7,489,754 - 7,490,754
Conversion to limited liability partnership (1,000) (1,000) (7,489,754) 7,490,754 -
Net income - - - 13,625,409 13,625,409
Distributions - - - (17,326,000) (17,326,000)
------------- ------------- ------------- ------------- -------------
Balance at December 31, 2003 - - - 3,790,163 3,790,163
Net income - - - 10,588,567 10,588,567
Distributions - - - (4,000,000) (4,000,000)
------------- ------------- ------------- ------------- -------------
Balance at December 31, 2004 - - - 10,378,730 10,378,730
Net income (unaudited) - - - 4,007,245 4,007,245
Distributions (unaudited) - - - (6,400,000) (6,400,000)
------------- ------------- ------------- ------------- -------------
Balance at June 30, 2005 (unaudited) - $ - $ - $ 7,985,975 $ 7,985,975
============= ============= ============= ============= =============
The accompanying notes are an integral part of these financial statements.
5
OBLIO TELECOM L.L.P.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2004, 2003 and 2002
Six Months
ended June
30, 2005
(Unaudited) 2004 2003 2002
------------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,007,245 $ 10,588,567 $ 13,625,409 $ 15,724,750
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,530 12,515 16,721 28,705
Net change in:
Accounts receivable 1,914,436 476,016 (2,052,732) 3,244,786
Prepaid expenses (16,800) 5,700 (5,700) (2,009)
Inventory (56,150) 221,156 178,046 (90,365)
Due from related party (13,626) (89,525) (104,301) -
Accounts payable and accrued liabilities (3,079,137) (3,940,671) 1,302,006 (5,300,031)
------------ ------------ ------------ ------------
Net cash provided by operating activities 2,760,498 7,273,758 12,959,449 13,605,836
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investments 10,475,000 4,775,000 15,000,000 -
Purchases of investments (10,100,000) (6,475,000) (7,000,000) (15,000,000)
Purchases of property and equipment (2,228) (25,603) (9,745) (26,443)
------------ ------------ ------------ ------------
Net cash provided (used) in investing activities 372,772 (1,725,603) 7,990,255 (15,026,443)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions to partners (6,400,000) (4,000,000) (17,326,000) (20,732,000)
------------ ------------ ------------ ------------
Net cash used in financing activities (6,400,000) (4,000,000) (17,326,000) (20,732,000)
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (3,266,730) 1,548,155 3,623,704 (22,152,607)
CASH AND CASH EQUIVALENTS
beginning of year 5,171,859 3,623,704 - 22,152,607
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS
end of year/periodr $ 1,905,129 $ 5,171,859 $ 3,623,704 $ -
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURES
Income taxes paid $ - $ 614,869 $ 688,818 $ 593,395
============ ============ ============ ============
6
NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 2004, 2003 and 2002
NOTE A. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment
- ----------------------
Property and equipment is stated at cost and depreciated using the
double-declining method over the estimated useful life of the depreciable assets
ranging from 5 to 7 years. Maintenance and repairs are expensed as incurred.
Replacements and acquisitions are capitalized. Leasehold improvements are
amortized using the double-declining method over the shorter of the remaining
term of the lease or the estimated useful life of the asset.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flow expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.
Income Taxes
- ------------
Currently the Company is not a tax paying entity for federal and state income
tax purposes, and accordingly, no income tax expense has been recorded in the
financial statements since it became a limited partnership in December, 2003.
Prior to December, 2003, the Company was an S-corporation and was not subject to
federal income taxes. The Company utilized the asset and liability approach in
accounting for state income taxes. Deferred income tax assets and liabilities
were computed annually for differences between the financial and tax basis of
assets and liabilities that would result in taxable or deductible amounts in the
future based on enacted tax laws and rates applicable to the periods in which
the differences were expected to affect taxable income. State income tax expense
was the tax payable for the period plus or minus the change during the period in
deferred tax assets and liabilities. There were no significant timing
differences for 2003 or 2002. The Company's federal taxable income is included
in the partners' respective income tax returns.
Revenue Recognition
- -------------------
Revenues are recorded at the time prepaid phone cards are shipped or when
prepaid wireless services are activated and are reported net of returns and
discounts. Costs of revenues, which are the costs the Company negotiates for
prepaid phone services, are recorded at the same time corresponding revenues are
recognized.
Use of Estimates and Assumptions
- --------------------------------
Management uses estimates and assumptions in preparing financial statements in
accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenues and
expenses. Actual results could vary from the estimates that were used.
7
NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 2004, 2003 and 2002
NOTE B. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 2004, 2003 and
2002:
2004 2003 2002
----------------------------------
Office equipment, furniture and fixtures $ 74,595 $ 69,533 $ 61,439
Software 42,808 42,808 41,158
Leasehold improvements 4,563 4,563 4,563
----------------------------------
121,966 116,904 107,160
Less accumulated depreciation and
amortization (105,263) (96,080) (79,360)
----------------------------------
Net property and equipment $ 16,703 $ 20,824 $ 27,800
----------------------------------
Total depreciation and amortization expense for the years ended December 31,
2004, 2003 and 2002 was $12,514, $16,720 and $28,705, respectively.
NOTE C. CONCENTRATIONS
Financial instruments which potentially expose the Company to credit loss
include uncollateralized trade accounts receivable. Management evaluates
accounts receivable balances on an on-going basis and provides allowances as
necessary for amounts estimated to be uncollectible. In the event of complete
non-performance of accounts receivable, the maximum exposure to the Company is
the amount recorded on the balance sheet at the date of non-performance. Cash
maintained in financial institutions may, at times, exceed Federal Deposit
Insurance Corporation insured amounts. The Company monitors these accounts and
does not believe any undue risk is present.
A substantial portion of the Company's cost of revenues for the years ended
December 31, 2004, 2003 and 2002 comes from purchases made from one vendor. The
purchases from this vendor for the year ended December 31, 2004, 2003 and 2002
amounted to $110,517,498, $144,484,212 and $170,751,538 respectively. Amounts
payable to this vendor at December 31, 2004, 2003 and 2002 were $11,378,665,
$14,446,800 and $11,293,767 respectively. The Company believes that there are
other readily available vendors in the market.
Approximately 88% and 82% of total revenues for the Company came from sales to
seven customers during the years ended December 31, 2004 and 2003, respectively.
Approximately 69% of total revenues for the Company came from sales to six of
those customers for the year ended December 31, 2002.
NOTE D. PARTNERSHIP AGREEMENT
In accordance with the certificate of limited partnership, the Company's income
or loss is allocated based on each partners' ownership percentage.
8
OBLIO TELECOM L.L.P.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 2004, 2003 and 2002
NOTE E. RELATED PARTY TRANSACTIONS
In May, 2003, the Company's partners formed Pinless, Inc. (Pinless), whose
purpose is to sell prepaid phone cards over the Internet. The Company charges
Pinless for office services it provides for Pinless. Revenues and accounts
receivable from Pinless for the years ended and at December 31, 2004 and 2003
are as follows:
2003 charges for office services $ 85,846
Expenses paid by Oblio for Pinless 18,455
---------------
Accounts Receivable 2003 $ 104,301
---------------
2004 revenues from sales 66,718
2004 charges for office services 89,525
Less payments (66,718)
---------------
Accounts Receivable 2004 $ 193,826
---------------
Because Pinless is in a startup phase of operations it has not yet generated
sufficient cash flows to make payments on the amounts due the Company. The
Company believes the balance is collectible and expects that Pinless will begin
to make payments when it has generated sufficient cash flow to do so. This is
not expected to occur within the next twelve months and therefore the amounts
due are classified as long term assets on the accompanying financial statements.
NOTE F. OPERATING LEASES
The Company leases certain office and warehouse space under a noncancelable
operating lease with an expiration date of April 30, 2007. The Company is
permitted to continue to occupy the space after its expiration as a tenant at
will. The Company's future minimum lease payments are as follows:
2005 $ 45,588
2006 44,310
2007 14,770
Rental expense for the years ended December 31, 2004, 2003 and 2002 was $61,005,
$60,303 and $59,578 respectively.
NOTE G. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments has been determined using
available market information. However, considerable judgment is required in
interpreting market data to develop estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts that
the Company would realize in a current market exchange.
Cash, cash equivalents, accounts receivable, and accounts payable are carried at
cost, which approximates their fair value because of the short maturities of
these instruments. The Company's short-term investments are reported at fair
value which approximates cost.
9
NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 2004, 2003 and 2002
NOTE G. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The following is a summary of cash, cash equivalents and short term investments.
December 31, 2004
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains (Losses) Fair Value
------------- ------------ ----------- -------------
Checking and savings $ 4,871,893 $ - $ - $ 4,871,893
Money market funds 299,966 - - 299,966
Corporate debt securities 8,700,000 - - 8,700,000
------------- ------------ ----------- -------------
$ 13,871,859 $ - $ - $ 13,871,859
============= ============ =========== =============
Included in:
Cash and cash equivalents $ 5,171,859
Short-term investments 8,700,000
-------------
$ 13,871,859
=============
December 31, 2003
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains (Losses) Fair Value
Checking and savings $ 3,623,704 $ - $ - $ 3,623,704
Corporate debt securities 7,000,000 - - 7,000,000
------------- ------------ ------------ -------------
$ 10,623,704 $ - $ - $ 10,623,704
============= ============ ============ =============
Included in:
Cash and cash equivalents $ 3,623,704
Short-term investments 7,000,000
-------------
$ 10,623,704
=============
December 31, 2002
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains (Losses Fair Value
Checking and savings $ - $ - $ - $ -
Corporate debt securities 15,000,000 - - 15,000,000
------------- ------------ ------------ --------------
$ 15,000,000 $ - $ - $ 15,000,000
============= ============ ============ ==============
Included in:
Cash and cash equivalents $ -
Short-term investments 15,000,000
--------------
$ 15,000,000
==============
10
OBLIO TELECOM L.L.P.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 2004, 2003 and 2002
NOTE G. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Contractual maturities of available-for-sale debt securities at December 31,
2004, 2003 and 2002, are as follows:
2004 2003 2002
----------------------------------------------
Within one year $ - $ - $ -
1-5 years - - 5,000,000
5-10 years
After 10 years 8,700,000 7,000,000 10,000,000
----------------------------------------------
$ 8,700,000 $ 7,000,000 $ 15,000,000
----------------------------------------------
Actual maturities may differ from contractual maturities because some borrowers
have the right to call or prepay obligations with or without call or prepayment
penalties.
NOTE H. SUBSEQUENT EVENTS
Pending settlement of claims for refund of excess federal telecommunications
- ----------------------------------------------------------------------------
excise tax
- ----------
Since its inception, the Company has paid federal excise taxes (FET) of 3% of
revenues generated from communications services provided to its customers. This
tax is included in the Company's cost of sales. Recently, several courts have
ruled that this tax does not apply to services that are not based on time and
distance. Because the Company's services are based only on time, it believes
that it may not be subject to the tax and through December 31, 2004, has filed
claims for refunds totaling $6,210,880. The Company believes that it may have
additional claims that have not been filed for yet. Because the settlement of
these claims is uncertain, these amounts have not been recorded in the
accompanying financial statements and will only be recorded if and when the
claims are settled.
Pending Acquisition
The Company is currently in negotiations to be acquired by another company. This
transaction is expected to be completed during July of 2005.
11
b) PRO FORMA FINANCIAL INFORMATION
Background
On August 12, 2005, Ventures-National Incorporated d/b/a Titan Gneral
Holdings, Inc. (the "Company") completed the acquisition from Farwell Equity
Partners, LLP, a Delaware limited liability company ("Farwell"), of all the
issued and outstanding shares of common stock of Oblio Telecom, Inc. ("Oblio").
In consideration for the common stock of Oblio and for Farwell's efforts in
acquiring Oblio's assets and obtaining the accompanying financing for the
transaction, the Company issued to Farwell 66,000,000 shares of common stock of
the Company.
The acquisition of the Oblio shares occurred immediately following the
completion of the acquisition by Oblio of substantially all the assets (the
"Oblio Assets") of Oblio Telecom, L.L.P., a Texas limited liability company
("Oblio Texas"), in total consideration of $30,500,000 (primary purchase price),
consisting of $19,000,000 in cash, the issuance of 9,000 shares of Oblio's
Series A Cumulative Convertible Preferred Stock (the "Preferred Stock") with an
initial stated value of $9,000,000, and the issuance of an 18-month promissory
note in the principal amount of $2,500,000 (the "Promissory Note"). In addition,
the Company issued to Sammy Jibrin and Radu Achiriloaie, the owners of Oblio
Texas (the "Owners"), 375,000 shares of its common stock, par value $0.001 (the
"Common Stock"). Of the cash portion, $1,000,000 will be held in escrow for a
period of up to 50 days and released to Oblio Texas upon certification that as
of the day immediately preceeding the closing of the acquisition, Oblio's
current liabilities were less than its current assets. Of the cash paid in
connection with the acquisition, approximately $16,217,000 was financed by means
of a Credit Facility from CapitalSource Finance LLC ("CapitalSource"). The
CapitalSource credit facility consisted of a $15,000,000 revolving credit
facility, a $5,000,000 senior term loan (the "Term Loan A") and a $6,400,000
senior term loan (the "Term Loan B"). Approximately $16,217,000 was borrowed
upon the closing of the transaction. In connection with the execution of the
Credit Facility, the Company paid CapitalSource a commitment fee of $264,000. In
addition, CapitalSource received an aggregate of 1,250,000 shares of the
Company's common stock.
The acquisition is being accounted for as a purchase of the Oblio Assets by
the Company, and the Company has allocated the purchase price based on a
preliminary estimate of the fair value of assets acquired and liabilities
assumed. The Company is in the process of obtaining a business valuation of the
Oblio Assets to assist with the final purchase price allocation.
A summary of the primary purchase price is as follows:
Cash to sellers $ 19,000,000
Preferred Stock to sellers 9,000,000
Note payable to sellers 2,500,000
--------------
Total purchase price $ 30,500,000
==============
The sources of the purchase price including the $415,000 transaction costs
incurred are as follows:
Cash remaining in Oblio $ 3,520,000
CapitalSource debt proceeds
Term Loan A 5,000,000
Term Loan B 6,400,000
Revolving credit facility 4,495,000
Note payable to sellers 2,500,000
Preferred Stock to sellers 9,000,000
--------------
To sources of purchase price $ 30,915,000
==============
The preliminary purchase price allocation is as follows:
Cash $ 3,520,000
Accounts receivable 5,596,000
Accounts payable (9,116,000)
Other tangible assets 110,000
Excess of purchase price over
net assets acquired 30,805,000
--------------
Total purchase price $ 30,915,000
==============
12
The total amount borrowed against the CapitalSource facility on August 12, 2005
was as follows:
Cash consideration for acquisition $ 19,000,000
Cash retained in business (3,520,000)
Payment for debt fees 230,000
Payment of acquisition costs 357,000
Beginning working cash 150,000
--------------
Total borrowings $ 16,217,000
==============
CapitalSource Financing
- -----------------------
The revolving line has a three-year term and carries and interest rate of
prime plus one percent with a minimum of 6.50% and is payable monthly in
arrears. The principal is due at the end of the term. Prepayments of principal
are subject to penalty. The amounts available from time to time under the
Revolving Loan are determined by the value of Oblio's eligible receivables and
inventory.
The Term Loan A and the Term Loan B have a term of 15 months and are
amortized on a straight line basis over 24 months with a balloon payment due at
the end of the term, if necessary. Both loans carry an interest rate of prime
plus four percent. Principal and interest payments are payable monthly in
arrears. Both term loans may be prepaid without penalty. On a monthly basis,
100% of Oblio's excess cash flow will be applied equally to repayment of the
Term Loan A and the Term Loan B.
As security for its obligations under the credit Agreement, Oblio pledged
all of its assets and accounts receivable to CapitalSource. In addition, the
Company pledged its stock in Oblio. As furthur security for Oblio's obligations
under the Term Loan B only, Farwell pledged from its portfolio of publicly
traded securities with a fair market value of approximately $12.6 million. David
Marks, the Company's Chairman, is the sole managing member of Farwell.
Preferred Stock
- ---------------
The Preferred Stock consists of four tranches, the first one of which
includes 3,000 shares of Preferred Stock and each one of the others include
2,000 shares with an initial stated value of $1,000 per share, subject (except
in the case of the first tranche) to reduction in the event Oblio fails to meet
certain EBITDA targets. Holders of the Preferred Stock are entitled to
preferential cash dividends out of the Company's funds at an annual rate of 3%
of the then current stated value. Oblio may redeem the Preferred Stock at any
time at a premium of 105%, 110% and 115% of the then stated value (plus accrued
and unpaid dividends) during the first, second and third year after issuance of
the Preferred Stock, respectively. All shares of Preferred Stock must be
redeemed on the third anniversary of issuance. Commencing on each of the three
anniversaries following the issuance of the Preferred Stock, each of the second,
third and fourth tranche of Preferred Stock is convertible into a number of
shares of Common Stock equal to the then stated value (plus accrued and unpaid
dividends) divided by $1.50 (the "Conversion Price"). The Conversion Price is
subject to adjustments as a result of, among other things, stock splits and
reclassifications and contains the usual anti-dilution provisions. The Company
has undertaken to register the shares of Common Stock issuable upon conversion
of the Preferred Stock.
Laurus Debt Amendment
- ---------------------
In connection with the transaction, the Company amended the terms of the
registration rights agreement dated as of November 20, 2003 (the "Registration
Rights Agreement") with Laurus Master Fund, Ltd. ("Laurus") and certain
financial instruments for the benefit of Laurus as follows:
1. The Fixed Conversion Price under that certain minimum borrowing note
dated November 20, 2003 (the "November 2003 Revolving Note"), that
certain convertible term note dated November 20, 2003 (the "November
2003 Term Note"), and that certain convertible term note dated March
30, 2004 (the "November 2003 MB Note," together with the November 2003
Revolving Note and the November 2003 Term Note, the "Notes"), was
increased from $0.40 per share to $1.50 per share; 2. Until March 1,
2006, the Company's prepayment penalties under the Notes will be equal
to 5% of any principal amount prepaid; after March 1, 2006, the
Company's prepayment penalties will be equal to the amounts called for
under the Notes;
13
3. The maturity date of the November 2003 Revolving Note and the November
2003 MB Note, together with the loan and security agreement related
thereto, will be extended until August 12, 2008;
4. The minimum monthly principal payment pursuant to the March 2004 Term
Note will be $25,000 per month from October 1, 2005, together with
accrued interest thereon, from September 1, 2005 through February 1,
2006, and $215,000 per month, together with accrued interest thereon,
from March 1, 2006 through March 1, 2007, with any balance paid with
the final payment;
5. The minimum monthly principal payment pursuant to the November 2003
Term Note will be $25,000 per month from October 1, 2005, together
with accrued interest thereon, from September 1, 2005 through February
1, 2006, and $150,000 per month, together with accrued interest
thereon, from March 1, 2006 through November 1, 2006, with any balance
paid with the final payment;
6. The Company will be permitted to immediately borrow all funds
available pursuant to the loan and security agreement between the
Company and Laurus dated as of November 20, 2003 and the over-advance
amendment thereto dated as of April 4, 2005. The collateral pledged by
Farwell in support of such over-advance facility will continue to be
pledged to Laurus until such time as the over-advance facility is
indefeasibly repaid in full;
7. All warrants previously issued to Laurus were cancelled; and
8. The Registration Rights Agreements was amended to provide that a
registration statement covering the resale of the securities issuable
upon conversion of the Notes, together with 2,500,000 shares of the
Company's common stock issued to Laurus in connection with this
amendment, shall be declared effective by the Securities and Exchange
Commission no later than 90 days following the closing date of the
acquisition of Oblio by the Company. Such registration statement shall
also be permitted to include: (i) the shares of Common Stock issuable
upon conversion of the Preferred Stock; (ii) 375,000 shares of Common
Stock issued to the former owners of Oblio; (iii)1,250,000 shares of
Common Stock issued to CS Equity, an affiliate of CapitalSource; (iv)
500,000 shares of common stock issued to a consultant in connection
with the acquisition.
Accounting for Common Stock Issued in Connection with the Acquisition of Oblio
- ------------------------------------------------------------------------------
In determining the fair value of the Company's common stock issued in
connection with the acquisition of Oblio, the Company used $0.2245 per share,
which represents the average closing price of the stock for the five trading
days preceding the announcement of the acquisition through the five succeeding
trading days following the announcement. A summary of the shares of common stock
issued is as follows:
Farwell 66,000,000
Laurus 2,500,000
CS Equity LLC 1,250,000
Capital Solutions Group 125,000
Sellers 375,000
Consultant 500,000
------------
Total shares issued 70,750,000
============
The value of the shares issued in connection with the CapitalSource
financing and the Laurus debt amendment were recorded as capitalized loan fees.
The value of the shares issued in connection with the acquisition of Oblio was
recorded as additional purchase price consideration.
The 66,000,000 shares of the Company's common stock were issued to Farwell
in exchange for the total outstanding shares of Oblio and for the following
efforts: (1) Farwell's assistance in identifying Oblio as an acquisition
candidate and structuring the acquisition, (2) Farwell's arranging for the
CapitalSource financing, and (3) providing collateral in the form of marketable
equity securities for the CapitalSource Term Loan B. Therefore, the Company
allocated the total value of the 66,000,000 shares of common stock between the
14
investment banking services provided by Farwell and the services related to
obtaining the CapitalSource debt. In order to estimate the fair value of the
investment banking services, the Company used the Lehman formula which resulted
in $504,900 being recorded as investment banking services related to the
acquisition of Oblio and therefore additional purchase price consideration. The
remaining fair value of the shares of common stock, $14,312,100, was considered
to be capitalized loan fees related to the CapitalSource debt.
The modification to the Laurus debt, including the change in the debt term
and the exchange of the 2,500,000 shares of the Company's common stock for the
warrants held by Laurus, was recorded in accordance with the convertible debt
modifications rules. The Company determined that, based on the net present
values of the original and amended cash flows related to the debt, the amended
debt was not "substantially different." Therefore, there was no change to the
carrying value of the original debt. Additionally, the Company determined that
there was no incremental intrinsic value as a result of the amendment to the
conversion price of the debt. The fair value of the 2,500,000 shares of the
Company's common stock issued to Laurus was considered a fee paid to Laurus in
exchange for the modification and will be amortized over the remaining debt
term. The value of this stock was determined in accordance with the accounting
rules related to the exchange of equity instruments. Therefore, these shares
were valued based on the remaining unamortized carrying value of the cancelled
warrants of $741,000 plus or minus the amount by which the fair value of the
common stock issued at the weighted average price of $0.2245, or $561,250,
exceeded or was less than the fair value of the cancelled warrants immediately
prior to the exchange, or $685,400. The fair value of the warrants was
determined using the Black-Scholes option pricing model. Based on this, the
total value assigned to the stock was $616,850.
The remaining 2,250,000 shares, or $505,125, were recorded based on their
respective roles in the transaction resulting in 1,250,000 shares or $280,625
allocated to capitalized loan fees and 1,000,000 shares or $224,500 allocated to
additional purchase price consideration.
A summary of th e Company's common stock issued and the related accounting
treatment is as follows:
Purchase Capitalized
Shares Price Loan Fees Total
Farwell 66,000,000 $ 504,900 $14,312,100 $14,817,000
Laurus 2,500,000 - 616,850 616,850
CS Equity LLC 1,250,000 - 280,625 280,625
Capital Solutions Group 125,000 28,062 - 28,062
Sellers 375,000 84,188 - 84,188
Consultant 500,000 112,250 - 112,250
---------- ---------- ---------- -----------
Total 70,750,000 $ 729,400 $15,209,575 $15,938,975
========== ========== ========== ===========
The accompanying pro forma information is presented for illustrative
purposes only and is not necessarily indicative of the financial position or
results of operations which would actually have been reported had the
acquisition been in effect during the periods presented, or which may be
reported in the future. The accompanying pro forma information should be read in
conjunction with the historical financial statements and related notes thereto
for Ventures-National Incorporated d/b/a Titan General Holdings, Inc. and for
Oblio Telecom, LLP that have been filed as part of this Form 8-K/A. The Company
purchased Oblio for $31,644,000 (including cash transaction costs of $415,000
and $729,000 value of common stock allocated to the purchase price) on August
12, 2005. The proforma balance sheet presented below is as of May 31, 2005 and
may not be indicative of the actual purchase price allocation.
15
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MAY 31, 2005
(in thousands except share amounts)
Titan General Oblio Items not Pro Forma
Holdings, Telecom, Purchased Purchase & Stock Balance
Inc. Inc. (1) Financing Issued Sheet
---------- ---------- ---------- ---------- ---------- ----------
Current assets:
Cash and cash equivalents $ 299 $ 11,356 $ (7,149) $ (4,057)(2) $ - $ 449
Accounts receivable 3,008 5,807 - - - 8,815
Inventory, net 626 91 - - - 717
Prepaid expenses and other current 98 205 (205) - - 98
---------- ---------- ---------- ---------- ---------- ----------
Total current assets 4,031 17,459 (7,354) (4,057) - 10,079
Equipment and improvements, net 2,346 14 - - - 2,360
Intangible assets, net 7 17 (17) - - 7
Excess of Purchase Price over
net Assets Acquired - - - 30,805 (2,3) 729 (6) 31,534
Capitalized loan fees, net 255 - - 381 (3) 15,210 (6,7) 15,846
Other asset 305 5 - - - 310
---------- ---------- ---------- ---------- ---------- ----------
Total assets $ 6,944 $ 17,495 $ (7,371) $ 27,129 $ 15,939 $ 60,136
========== ========== ========== ========== ========== ==========
Current liabilities:
Current portion of long-term debt $ 1,147 $ - $ - $ 3,800 (2,3) $ 93 (7) $ 5,040
Line of credit 927 - - 4,229 (2,3,4) 648 (7) 5,804
Short term debt 777 - - - - 777
Accounts payable - trade 1,288 10,108 - - - 11,396
Accrued liabilities 1,576 16 - 202 (5) - 1,794
---------- ---------- ---------- ---------- ---------- ----------
Total current liabilities 5,715 10,124 - 8,231 741 24,811
Long-term debt - - - 10,100 (2) - 10,100
Convertible preferred stock - - - 9,000 (2) - 9,000
---------- ---------- ---------- ---------- ---------- ---------
Total Liabilities 5,715 10,124 - 27,331 741 43,911
---------- ---------- ---------- ---------- ---------- ---------
Common stock 25 - - - 71 (6,7) 96
Additional Paid in Capital 20,927 - - - 15,127 (6,7) 36,054
Deferred compensation (19) - - - - (19)
Partner's capital - 3,974 (3,974) - - -
Retained earnings/(Accumulated
deficit) (19,704) 3,397 (3,397) (202)(5) - (19,906)
---------- ---------- ---------- ---------- ---------- ---------
Total stockholders' equity 1,229 7,371 (7,371) (202) 15,198 16,225
---------- ---------- ---------- ---------- ---------- ---------
Total liabilities and Stockholders'
equity $ 6,944 $ 17,495 $ (7,371) $ 27,129 $ 15,939 $ 60,136
========== ========== ========== ========== ========== =========
16
(1) Assets purchased do not include certain cash, other assets and the equity
portion of Oblio Telecom, LLP's balance sheet.
(2) Purchase price of $30,500 was financed in part by the incurrence of debt
from (1) CapitalSource of $5,000 Term Loan A, $6,400 Term Loan B, $15,000
revolver of which $3,283 was drawn down upon the closing of the
transaction; and (2) $2,500 loan from the sellers. The purchase price
financing also included 9,000 shares preferred stock of Oblio Telecom, Inc.
(a wholly owned subsidiary) valued at $9,000 convertible into common shares
of the Company's common stock at $1.50 per share with a 3% cumulative
preferred dividend and a $4,317 cash difference between the accounts
receivable of $5,807 and the accounts payable and accrued expenses of
$10,124. The Company also purchased $110 in net tangible assets
(3) Includes $415 of transaction costs incurred in the purchase and $381
related to the financing of the acquisition, including $264 paid to
CapitalSource as a commitment fee.
(4) Includes additional borrowing to provide beginning working capital of $150.
(5) Includes provision for accrued dividends on preferred stock issued as part
of the acquisition as if the acquisition had occurred as of September 1,
2004 at 3% per annum.
(6) Includes the issuance of 68,250,000 shares of stock at $0.2245 per share
(average fair market value) to the following entities/individuals: Farwell
Equity Partners, LLP 66,000,000 shares; CS Equity LLC 1,250,000 shares;
Kurt Jensen 500,000 shares, sellers 375,000 shares; and Capital Solutions
Group 125,000 shares.
(7) Represents the remaining unamortized discounts ($741) associated with the
cancelled Laurus warrants and the equity exchange of warrants for 2,500,000
shares of common stock.
17
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED MAY 31, 2005
(in thousands, except share and per share amounts)
Titan General Oblio ProForma Pro Forma
Holdings, Inc. Telecom, Inc Adjustments Combined
------------- ------------ ----------- ------------
Net sales $ 12,430 $ 94,845 $ 107,275
Cost of sales 11,586 87,310 98,896
------------ ------------ ------------
Gross profit 844 7,535 8,379
Operating expenses 2,947 506 3,453
------------ ------------ ------------
Income (loss) from operations (2,103) 7,029 4,926
Interest and other income/(expense), 2 209 $ (209) (1) 2
net (1,991) - (4,150) (2,3,4,5) (6,141)
------------ ------------ ------------
Interest expense (4,092) 7,238 (4,359) (1,213)
Income (loss) before provisions for taxes - - - (6) -
------------ ------------ ------------
Provisions (benefit) for income taxes (4,092) 7,238 (4,359) (1,213)
Income (loss) - - (202) (7) (202)
------------ ------------ ------------
Deemed dividend on preferred stock $ (4,092) $ 7,238 $ (4,561) $ (1,415)
============= ============ ============ ============
Income (loss) applicable to common shareholders
Net income (loss) per share:
Basic $ (0.17) $ (0.01)
============= =============
Diluted $ (0.17) $ (0.01)
============= =============
Weighted average number of common and common
equivalent shares outstanding:
Basic 24,745,093 95,495,093(8)
========== =============
Diluted 24,745,093 95,495,093(8)
========== =============
(1) Reduces the interest income earned on investments and other cash deposits
not purchased by the Company.
(2) Includes interest expense ($1,262) on debt issued to finance the
acquisition of Oblio Telecom, LLP. Acquisition at an assumed weighted
average interest rate of 9.50%.
(3) Includes amortization of capitalized loan costs ($2,919) incurred in the
financing of the Oblio acquisition of $14,593 over the 15 month life of the
CapitalSource debt. This is the remaining amount as the initial twelve
month amortization has been included in the pro forma for the twelve month
period ended August 31, 2004 indicated below.
(4) Includes the amortization ($154) of the capitalized loan fees related to
the 2,500,000 shares of common stock issued to Laurus as part of the
amendment to the loan agreement which occurred on August 12, 2005.
(5) Includes the reduction of amortization ($185) related to the debt discount
associated with the cancelled Laurus warrants.
(6) Does not include any tax affect since the Company believes they will be
able to utilize the existing net operating loss carryforwards that have
been generated in the prior years to offset any taxable income.
(7) Includes the provision for the cumulative preferred stock dividend at a
rate of 3% annually.
(8) Includes the effect of the 68,250,000 shares issued as part of the purchase
of Oblio Telecom, L.L.P. and the 2,500,000 shares issued to Laurus as part
of their refinancing as if the acquisition and refinancing had occurred
prior to September 1, 2003 (the beginning of our last complete fiscal
year). Does not include the dilutive affect of 1,045,000 options since the
options are anti- dilutive.
18
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED AUGUST 31, 2004
(in thousands, except share and per share amounts)
Titan General Oblio ProForma Pro Forma
Holdings, Inc. Telecom, Inc Adjustments Combined
----------- ----------- ------------ -----------
Net sales $ 16,367 $ 151,678 $ 168,045
Cost of sales 14,604 139,246 153,850
----------- ----------- -----------
Gross profit 1,763 12,432 14,195
Operating expenses 6,020 1,328 7,348
----------- ----------- -----------
Income (loss) from operations (4,257) 11,104 6,847
Interest and other income/(expense), 201 123 $ (123) (1) 201
net (3,346) - (13,405) (2,3,4,5) (16,751)
----------- ----------- ------------ -----------
Interest expense (7,402) 11,227 (13,528) (9,703)
Income (loss) before provisions for taxes - - - (6) -
----------- ----------- ------------ -----------
Provisions (benefit) for income taxes (7,402) 11,227 (13,528) (9,703)
Income (loss) - - (270)(7) (270)
----------- ----------- ------------ -----------
Deemed dividend on preferred stock $ (7,402) $ 11,227 $ (13,798) $ (9,973)
=========== =========== ============ ===========
Income (loss) applicable to common shareholders
Net income (loss) per share:
Basic $ (0.39) $ (0.11)
=========== ===========
Diluted $ (0.39) $ (0.11)
=========== ===========
Weighted average number of common and
common equivalent shares outstanding:
Basic 18,879,605 89,629,605(8)
========== ============
Diluted 18,879,605 89,629,605(8)
========== ============
(1) Reduces the interest income earned on investments and other cash deposits
not purchased by the Company.
(2) Includes interest expense ($1,683) on debt issued to finance the
acquisition of Oblio Telecom, LLP. Acquisition at an assumed weighted
average interest rate of 9.50%.
(3) Includes amortization of capitalized loan costs ($11,674) incurred in the
financing of the Oblio acquisition over the 15 month life of the
CapitalSource debt.
(4) Includes the amortization ($253) of the capitalized loan fees related to
the 2,500,000 shares of common stock issued to Laurus as part of the
amendment to the loan agreement which occurred on August 12, 2005.
(5) Includes the reduction of amortization ($205) related to the debt discount
associated with the cancelled Laurus warrants.
(6) Does not include any tax affect since the Company believes they will be
able to utilize the existing net operating loss carryforwards that have
been generated in the prior years to offset any taxable income.
(7) Includes the provision for the cumulative preferred stock dividend at a
rate of 3% annually.
(8) Includes the effect of the 68,250,000 shares issued as part of the purchase
of Oblio Telecom, L.L.P. and the 2,500,000 shares issued to Laurus as part
of their refinancing as if the acquisition and refinancing had occurred
prior to September 1, 2003. Does not include the dilutive affect of
1,045,000 options since the options are anti-dilutive.
19