UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15-(D) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
Commission File Number 0-29507
CHANTICLEER HOLDINGS, INC.
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(Exact name of registrant as specified in the charter)
DELAWARE 20-2932652
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
THE ROTUNDA, 4201 CONGRESS STREET, SUITE 145, CHARLOTTE, NC 28209
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(Address of principal executive offices, including zip code)
4500 CAMERON VALLEY PARKWAY, SUITE 270, CHARLOTTE, NC 28211
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(Former address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (704) 366-5122
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.0001 PAR VALUE
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. [ ] Yes [X] No.
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.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the 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 amendment 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 accelerate 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 [X] No.
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last business day of the registrant's most recently completed fiscal
quarter: $1,905,530 as of December 31, 2006.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. There were 7,689,461 shares of
common stock outstanding as of January 31, 2007.
DOCUMENTS INCORPORATED BY REFERENCE: No documents are incorporated by reference
into this Report except those Exhibits so incorporated as set forth in the
Exhibit index.
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Chanticleer Holdings, Inc.
Form 10-K Index
Page
Part I
Item 1: Business 4
Item 1A: Risk Factors 8
Item 2: Properties 23
Item 3: Legal proceedings 23
Item 4: Submission of Matters to a Vote of Security Holders 23
Part II
Item 5: Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities 24
Item 6: Selected Financial Data 25
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations 26
Item 7A: Quantitative and Qualitative Disclosures about Market Risk 37
Item 8: Financial Statements and Supplementary Data 38
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 60
Item 9A: Controls and Procedures 60
Item 9B: Other Information 60
Part III
Item 10: Directors, Executive Officers and Corporate Governance 61
Item 11: Executive Compensation 64
Item 12: Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters 66
Item 13: Certain Relationships and Related Transactions and Director
Independence 68
Item 14: Principal Accountant Fees and Services 68
Part IV
Item 15: Exhibits and Financial Statement Schedules 69
Signatures 70
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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
Chanticleer Holdings, Inc. (the "Company," "we," "us" or "Chanticleer") filed an
election to be treated as a business development company under the Investment
Company Act of 1940 (the "1940 Act") on May 23, 2005. In connection with this
election, we have adopted corporate resolutions and are operating as a
closed-end, non-diversified management investment company and as a business
development company (a "BDC").
On April 18, 2006, we formed Chanticleer Investors LLC ("Investors LLC") and
sold units for $5,000,000, of which we own $1,150,000 (23%) as of December 31,
2006. Investors LLC's principal asset is a 6%, convertible note in the amount of
$5,000,000 with Hooters of America, Inc. ("Hooters"), collateralized with 2% of
Hooters common stock. One-third of the interest is paid to us as a management
fee and we share pro-rata with the other investors in the remaining 4% interest,
which is distributed to the investors quarterly.
On July 31, 2006, we formed Chanticleer Investors II, LLC ("Investors II").
Investors II began raising funds in January 2007 for the purpose of investing in
publicly traded value securities. As of December 31, 2006, we had not commenced
any activity in Investors II.
In January 2007, we formed Chanticleer Advisors, LLC ("Advisors"), as a wholly
owned subsidiary to manage Investors II, as well as, our other investments.
As a business development company, we are required to invest at least 70% of our
total assets in qualifying assets, which, generally, will be privately held
companies or companies with thinly traded public securities at the time we
invest in them. Qualifying assets may also include cash, cash equivalents, U.S.
Government securities or high-quality debt investments maturing in one year or
less from the date of investment. We may invest a portion of the remaining 30%
of our total assets in debt and/or equity securities of companies that may be
larger or more stable than target portfolio companies.
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THE CHARACTERISTICS OF DESIRABLE INVESTMENTS
When we begin to look at companies, we have the option of investing in public or
private companies. We look to buy businesses with the best value proposition. We
conduct what is typically referred to as fundamental analysis. We believe that
while technical analysis, or the examination of historical trends and
demand/supply complexes, may have some merit in the short-term, fundamental
characteristics in the long-term make the difference.
We look for five core characteristics in our investments:
o Profitability
o Predictable and Sustainable Returns
o Margin of Safety
o Strong Future Prospects
o Reputable Management
We look at these characteristics in a historical context and then assess what
those characteristics will look like in the future. We believe that the best
indication of what a company will do in the future is its past behavior. The
metrics that we examine are a blend of quantitative factors, like return on
equity and profit margin, and qualitative factors, like management ownership and
a company's competitive advantage. By remaining disciplined with respect to
these metrics, we can be assured that we have attempted to minimize the
potential for a loss.
PORTFOLIO AND FIRM MANAGEMENT
The investment portfolio of Chanticleer has several distinguishing
characteristics. First and foremost is the portion of our assets that we are
willing to commit to an idea. At the end of our search for outstanding companies
we must be willing to commit a meaningful percentage of our assets to our best
investment opportunities. Additionally, it is very likely that the number of our
holdings will be relatively small. There are a limited number of companies that
have stood the test of our scrutiny, so we must put a significant amount of
money in those few ideas. Our portfolio of companies is focused on the best
possible ideas.
We also make decisions within the context of our portfolio in such a way as to
minimize its turnover. When we find good companies we will not rush to make a
change at the first indication of short-term weakness. In fact such a time might
be cause for additional investment. Understanding that there will be occasions
for change, buying and selling has the unintended consequence of interrupting
the compounding effect and any resulting superior returns.
Chanticleer, though structured as a BDC, is managed much like a partnership. We
manage the business to maximize the long-term return to our shareholders and
make every effort to allow our shareholders to share that return. We are candid
in our comments about the businesses in which we invest and treat our
shareholders the way we would choose to be treated if the roles were reversed.
As such, we report all the information we believe shareholders will need to make
an assessment of our companies and our management capabilities. We will not,
however, discuss matters which may compromise future investments.
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Over the long-term it is our goal to provide a return superior to the return an
investor could obtain by simply investing in low-cost index funds. We believe
the philosophy presented here will, over the long-term, create wealth for our
shareholders, without significant risk exposure.
ONGOING RELATIONSHIPS WITH PORTFOLIO COMPANIES
MONITORING
We continuously monitor our portfolio companies in order to determine whether
they are meeting our investment criteria and achieving our business
expectations. We monitor the progress of each portfolio company to assess the
appropriate course of action for each company and to evaluate overall portfolio
quality.
MANAGERIAL ASSISTANCE
As a business development company, we are required to offer, and in some cases
may provide, significant managerial assistance to portfolio companies. This
assistance typically involves monitoring the operations of portfolio companies,
participating in their board and management meetings, consulting with and
advising their officers and providing other organizational and financial
guidance.
OTHER INCOME
In addition to our investment objectives, we seek to earn interest on our loans
to portfolio companies and in some cases may have management fee agreements with
the portfolio companies.
Frequently, to minimize the cash requirements of our portfolio companies, we may
receive restricted stock in payment of our management fees and the interest owed
us on our loans to our portfolio companies. Our investment committee will value
the restricted stock, which will become the basis for a portion of our revenue.
INVESTMENT PERSONNEL
The investment personnel of Chanticleer Holdings, Inc. currently consists of its
executive officer, Michael D. Pruitt, and three additional investment analysts
that assist in researching and valuing potential and additional investments. The
following information relates to the personnel involved in making investment and
valuation decisions.
MICHAEL D. PRUITT
Michael Pruitt, a long-time entrepreneur with a proven track record, possesses
the expertise to evaluate potential investments, form key relationships and
recognize a strong management team. Mr. Pruitt founded Avenel Financial Group, a
boutique financial services firm concentrating on emerging technology company
investments. The business succeeded immediately, and in order to grow Avenel
Financial Group to its full potential and better represent the company's ongoing
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business model, he formed Avenel Ventures, an innovative technology investment
and business development company. In the late 1980s, Mr. Pruitt owned Southern
Cartridge, Inc., which he eventually sold to MicroMagnetic, Inc., where he
continued working as Executive Vice President and a Board member until Southern
Cartridge was sold to Carolina Ribbon in 1992. From 1992 to 1996, Mr. Pruitt
worked in a trucking firm where he was instrumental in increasing revenues from
$6 million to $30 million. The firm was sold in 1996 to Priority Freight
Systems. Between 1997 and 2000, Mr. Pruitt assisted several public and private
companies in raising capital, recruiting management and preparing companies to
go public or be sold. He was the CEO, President and Chairman of the Board of
Onetravel Holdings, Inc. (formerly RCG Companies), a publicly traded holding
company formerly listed on the AMEX. Mr. Pruitt received a Bachelor of Arts
degree from Coastal Carolina University in Conway, South Carolina, where he sits
on the Board of Visitors of the Wall School of Business. He is also Managing
Director of Cain Capital Advisors.
MATTHEW S. MILLER
Matthew Miller joined Chanticleer Holdings in June of 2005. He graduated Summa
Cum Laude from Coastal Carolina University earning a Bachelor degree in Business
Administration with a concentration in Finance. At Coastal, he graduated from
the honors program and was a member of the distinguished Wall Fellows Program.
In 2004, Mr. Miller was named a Financial Executives International Scholar and
has presented on several research topics, including capital structure, insider
trading, and the Warren Buffett methodology. Most recently, he worked with
Wachovia Securities, LLC in Myrtle Beach, South Carolina where he coordinated
prospecting efforts for the Pyle/Cunningham Investment Consulting Group. Mr.
Miller has also worked for Hennecke GmbH in Sankt Augustin, Germany. There he
worked to develop a better means of recording synergies between the company and
its parent, Bayer AG.
JOSEPH T. KOSTER
Joseph Koster joined Chanticleer Holdings in June of 2005. He is a Magna Cum
Laude graduate of Coastal Carolina University. Mr. Koster graduated with a
Bachelor degree in Business Administration with a concentration in Finance. He
was a member of the Beta Gamma Sigma International Honor Society and the
distinguished Wall Fellows Program at CCU. Mr. Koster worked part-time for a
financial advisor in Myrtle Beach during his final academic year and also spent
the previous summer working in the executive offices of Kemin Europa, a global
chemical company with headquarters in Herentals, Belgium.
ALEXANDER D. KLAUS
Alexander Klaus joined Chanticleer Holdings in January of 2006. A native of
Germany, Mr. Klaus is a Cum Laude graduate of Coastal Carolina University
earning a Bachelor degree in Business Administration with a concentration in
both Finance and Management. Mr. Klaus also holds an intermediate diploma in
Tourism Management by the International University of Applied Sciences in Bad
Honnef-Bonn, Germany. He was President of the Carolina Forest Rotaract Club, and
is a member of Omikron Delta Kappa and Beta Alpha Psi Honor Societies. In 2004,
Mr. Klaus interned with Lufthansa German Airlines in Dallas, TX, where he
supported the establishment of Lufthansa's energy industry desk.
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FURTHER REGULATION AS A BUSINESS DEVELOPMENT COMPANY
We are a business development company under the 1940 Act. The 1940 Act contains
prohibitions and restrictions relating to transactions between business
development companies and their affiliates, including any investment advisers or
sub-advisers, principal underwriters and affiliates of those affiliates or
underwriters and requires that a majority of the directors be persons other than
interested persons, as that term is defined in the 1940 Act. In addition, the
1940 Act provides that we may not change the nature of our business so as to
cease to be, or to withdraw our election as, a business development company
unless approved by a majority of our outstanding common shareholders.
We are permitted, under specified conditions, to issue multiple classes of
indebtedness and one class of stock senior to our common stock if our asset
coverage, as defined in the 1940 Act, is at least equal to 200% immediately
after each such issuance. In addition, while any senior securities remain
outstanding, we must make provisions to prohibit any distribution to our
stockholders or the repurchase of such securities or shares unless we meet the
applicable asset coverage ratios at the time of the distribution or repurchase.
We may also borrow amounts up to 5% of the value of our total assets for
temporary or emergency purposes. Regulations governing our operation as a BDC
will affect our ability to, and the way in which we raise additional capital,
which may expose us to risks, including the typical risks associated with
leverage.
CODE OF ETHICS
We have adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act that
establishes procedures for personal investments and restricts certain personal
securities transactions. Personnel subject to each code may invest in securities
for their personal investment accounts, including securities that may be
purchased or held by us, so long as such investments are made in accordance with
the code's requirements.
ITEM 1A: RISK FACTORS
In the normal course of business, and 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 net asset value ("NAV"), the market
price of our common stock, and whether any forward-looking statements made by us
ultimately prove to be accurate.
8
Investing in Chanticleer 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
WE ARE A RECENTLY ORGANIZED COMPANY WITH LIMITED RESOURCES AND SOURCES OF
REVENUES.
We made our election to become a BDC in 2005 and have entered into a number of
financing transactions with portfolio companies as described in the notes to the
financial statements. 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. To date, our efforts have been limited primarily to
organizational activities and acquisition of the investments described in the
notes to the financial statements. We have raised over $2,500,000 and have a
cost basis in our investments of $2,137,089 at December 31, 2006. We have
realized only limited revenues to date. We are wholly dependent for the
selection, structuring, closing and monitoring of all of our investments on the
diligence and skill of its management, acting under the supervision of our Board
of Directors. None of these individuals has substantial experience, within the
BDC 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 FILED OUR NOTICE OF INTENT TO BECOME A BDC WHICH REQUIRES US TO COMPLY WITH
SIGNIFICANT REGULATORY REQUIREMENTS.
On May 23, 2005, we filed a notice with the Securities and Exchange Commission
of our intent to be regulated as a Business Development Company under the 1940
Act and be subject to Sections 54 through 65 of said Act. 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 obstacles 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.
The increased costs associated with compliance with the 1940 Act as a result of
our election to become a BDC 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.
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If we do not remain a BDC, we may 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.
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 or all of our NAV at any one time could 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. All of the risks associated
with ownership of such portfolio companies including success dependent on
management, market conditions within the industry or field of such portfolio
companies, achieving the business objectives of such portfolio companies and
economic conditions and other conditions relative to the operation of such
portfolio companies, would become risks borne by us.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF MANAGEMENT.
While limitations of liability and indemnification are themselves limited, we
have instituted provisions in our by-laws indemnifying 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.
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 INVESTMENTS MAY REQUIRE US TO RAISE ADDITIONAL CAPITAL ON DIFFERENT TERMS.
In the future we may require additional capital. For additional requirements, we
may raise capital by issuing equity or convertible debt securities, and if we
do, the percentage ownership of our existing stockholders would be diluted. In
addition, any new securities we issue could have rights, preferences and
privileges senior to our existing equity.
Our ability to raise capital as a BDC is limited by the requirement that we not
sell shares below the net asset value per share ("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 number was negative or nominally positive.
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WE CANNOT GUARANTEE PAYING DIVIDENDS TO OUR STOCKHOLDERS.
We are allowed by our articles of incorporation and by-laws to pay dividends to
our stockholders. However, there can be no guarantee we will have sufficient
revenues to pay dividends. Consequently, there is no assurance that the Company
will pay any dividends during any period. Investors in need of liquidity through
the payment of dividends should refrain from investing in our common stock.
GENERAL RISKS ASSOCIATED WITH BUSINESS DEVELOPMENT COMPANIES
BDCS GENERALLY REQUIRE SUBSTANTIAL AMOUNTS OF TIME TO REALIZE THE BENEFITS FROM
INVESTMENTS.
We have obtained funding and completed the initial selection of portfolio
companies for our first round of equity 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. 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.
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.
OUR INVESTMENTS MAY NOT GENERATE SUFFICIENT INCOME TO COVER OUR OPERATIONS.
We intend to make investments into qualified companies that will provide the
greatest overall return on our investment. This is in conformity with the Small
Business Investment Incentive Act of 1980 which amended the 1940 Act and created
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 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.
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RISKS ASSOCIATED WITH INVESTMENTS AND PORTFOLIO COMPANIES
THERE ARE COSTS ASSOCIATED WITH THE PURCHASE AND SALE OF SECURITIES.
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 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 and 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 each 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
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.
INVESTING IN SMALL AND GROWTH STAGE COMPANIES IS INHERENTLY RISKY.
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 Investing in companies in an early-stage of development or with little
or no operating history;
o Companies operating at a loss or with substantial variations in
operating results from period to period; and
o Companies with the need for substantial additional capital to support
expansion or to achieve or maintain a competitive position.
These companies may face intense competition, including competition from
companies with:
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o Greater financial resources;
o More extensive development, manufacturing, marketing, and service
capabilities; and
o A larger number of qualified managerial and technical personnel.
Although we intend to mitigate our risk exposure by limiting our investments in
early stage companies, we cannot assure you that the portfolio companies in
which we choose to place a majority of our investment capital are not facing the
same risks of companies that are inherent in start-up companies. In addition,
growth stage companies are likely to have a very limited operating history and
thus evaluating their worthiness for investment will be more subjective on their
future potential for growth and cannot be predicated on operating successes. We
are dependent on the quality and actions of management of portfolio companies.
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. Investors must rely upon our management
to select portfolio companies that have, or can obtain, the necessary management
resources. Problems may arise at portfolio companies that local management does
not recognize or cannot resolve. In addition, the management of portfolio
companies may conceal the existence of problems from us.
THE VALUE OF SECURITIES WE OWN MAY BE ADVERSELY IMPACTED BY SUBSEQUENT
REGULATORY CHANGES.
Our current investment strategy includes purchase of unregistered securities in
both private companies and private placements offered by public companies. We
are able to purchase securities pursuant to exemptions to the registration
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.
LIMITATIONS ON AVAILABILITY OF INVESTMENT CAPITAL MAY ADVERSELY AFFECT OTHER
INVESTMENTS.
We may be reliant on the availability of capital to generate profits under its
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
we purchase 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
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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 the
existing investors, including us. The availability of capital is generally a
function of capital market conditions that are beyond our control or beyond any
portfolio company's control. We cannot assure you that our management or the
management 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 be
able to register its shares. In such event, we would own "restricted" securities
subject to resale under Rule 144.
LACK OF DIVERSITY OF INVESTMENTS BY A BDC PRESENTS RISKS ASSOCIATED WITH
SPECIFIC INDUSTRIES.
We anticipate that we will not be able to diversify our investments in the early
years of our operation and, as a result, not gain the benefit of diversification
which is the balancing of adverse economic conditions over our holdings in
portfolio companies.
14
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 have a market capitalization below $100 million (and frequently much
smaller). 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 stability of their securities.
This impacts the liquidity of securities issued by those portfolio companies. It
is expected that the securities of a significant number 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 prefer. 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 NOT READILY
MARKETABLE SECURITIES.
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
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
15
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
registered securities, our ability to liquidate our position and our profits may
be adversely affected.
RISKS OF THE COMPANY AT ITS PRESENT STAGE
WE HAVE OBTAINED ONLY LIMITED FUNDING AT THIS TIME.
Through December 31, 2006, we raised $2,673,462 from sales of our common stock.
We intend to raise more capital through the sales of shares of our common stock.
The offer and sale of the shares will not be registered under the 1933 Act since
their issuance and sale is exempt from such registration requirements pursuant
to Regulation E of the 1933 Act. Because the first $5,000,000 raised, each year,
will be from shares that will be acquired by investors in transactions involving
an exempt private offering pursuant to Regulation E, they will be unrestricted
or free-trading securities and may be freely traded, transferred, assigned,
pledged or otherwise disposed of at the time of issuance.
WE CANNOT ASSURE YOU THAT WE WILL BE SUCCESSFUL IN SELLING THE COMMON SHARES OR,
IF SOLD, AT WHAT PRICE.
We have identified and made investments in a limited number of portfolio
companies. Investors will have a limited opportunity to evaluate the portfolio
companies that we invested in. We cannot assure you that we will locate or
successfully negotiate additional transactions with portfolio companies. We are
likely to incur substantial losses in the first years of operations.
If additional funding is obtained, it is anticipated that most of such funding,
except for operating cash reserves and funds set aside for follow-on investments
in then-existing portfolio companies, will be expended or committed within two
years, which is expected to be prior to us receiving any substantial realized
gains. Our management anticipates that we and a number of the portfolio
companies will sustain substantial losses in the initial years of operation. It
is possible that these losses may never be recovered. We cannot assure you that
we will ever be profitable.
WE ARE TOTALLY RELIANT ON MANAGEMENT.
We are 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
(currently four people) has substantial experience 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.
16
In addition, we will engage outside consultants and professionals known to
management to assist in evaluating and monitoring portfolio companies and
maintaining regulatory compliance.
WE CANNOT ASSURE YOU THAT WE WILL ATTAIN OUR INVESTMENT OBJECTIVE.
WE HAVE BROAD DISCRETIONARY USE OF THE PROCEEDS FROM ANY FUNDING THAT WE OBTAIN.
Our management has broad discretion with respect to the specific application of
the net proceeds of any funding that we obtain, 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. 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 our Board of Directors and Investment Committee to use proceeds in
a manner inconsistent with the operation of a BDC.
WE WILL BE CONFRONTED BY COMPETITION FROM ENTITIES HAVING SUBSTANTIALLY GREATER
RESOURCES AND experience.
Other entities and individuals compete for investments similar to those we
propose to make, 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 Registered Investment Company
("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 ARE UNLIKELY TO QUALIFY FOR THE INCOME TAX BENEFITS OFFERED TO RICS.
We will be classified as a non-diversified investment company under the 1940
Act. We are not subject to the diversification requirements applicable to 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 tax.
DISTRIBUTIONS TO SHAREHOLDERS MAY NEVER EQUAL THE AMOUNT INVESTED BY THE
SHAREHOLDERS.
We cannot assure you that we will make any distributions to shareholders or that
aggregate distributions, if any, will equal or exceed the shareholders'
investment. Sales of portfolio company securities will be the principal source
of distributable cash to shareholders. The directors have absolute discretion in
the timing of distributions to shareholders. Securities we acquire through
equity investments will be held by us and will be sold or distributed at the
sole discretion of the Board of Directors.
17
WE INDEMNIFY OFFICERS AND DIRECTORS TO THE MAXIMUM EXTENT PERMITTED BY DELAWARE
LAW.
Our articles of incorporation provide for indemnification of directors,
officers, employees and our agents to the full extent permitted by Delaware law
and the 1940 Act.
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 which 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. In addition, they may not be available to us if there are time
conflicts involving other entities.
OUR COMMON STOCK HAS A LIMITED TRADING HISTORY, AND WE CANNOT ASSURE YOU THAT
ANY TRADING MARKET WILL DEVELOP.
Our common stock is currently listed on the electronic quotation and reporting
service maintained by the National Association of Securities Dealers ("NASD")
and known as the "OTC Bulletin Board" or "OTCBB" system and trades under the
symbol "CEEH".
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. Either of
these factors could adversely affect the liquidity and trading price of our
common stock. Also, the stock market in general has experienced extreme price
and volume volatility that has affected the market prices of securities of many
companies. At times, this volatility has been unrelated to the operating
performance of particular companies. These broad market and industry
fluctuations may adversely affect the trading price of our common stock,
regardless of our actual operating performance.
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, which may adversely affect our
ability to raise capital through future equity financings. These factors, many
over which we have no control and that may not be directly related to us,
include the following:
o Significant volatility in the market price and trading volume of
securities of closed-end investment companies, business development
companies or other companies in our sector, 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 BDCs;
o A loss of BDC status;
o Changes in earnings or variations in operating results;
18
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 key personnel;
o Potential legal and regulatory matters;
o Operating performance of companies comparable to us; and
o General economic trends and other external factors.
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.
If a market does develop for our shares of common stock, of which we can make no
assurances, subsequent 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. We are authorized to issue up to 200,000,000 shares
of common stock, par value $.0001 per share. Our Board of Directors also has
authority, without action or vote of the shareholders, to issue all or part of
the authorized but unissued shares. Any such issuance will dilute the percentage
ownership of shareholders and may further dilute the book value of our common
stock. These issuances may also serve to enhance existing management's ability
to maintain control of the Company.
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 receives 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.
19
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 receives 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.
While we have commenced operations, we have a limited operating history
available to evaluate the likelihood of the success of our business. 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.
20
OUR MANAGEMENT HAS LIMITED EXPERIENCE WITH BDC'S.
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
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 our management gains the expertise to manage a BDC.
THE BUSINESSES IN WHICH WE INTEND TO INVEST ARE SUBJECT TO MACRO, MICRO AND
GLOBAL TRENDS IN BUSINESS, FINANCE, POLITICS, AND LAW.
Our potential portfolio investments are located nationwide. Future unfavorable
economic conditions, including those resulting from further or protracted
economic instability or down turns cannot be estimated at this time due to the
uncertainties associated with such economic conditions, and the extent to which
the sale of portfolio company products will be affected thereby.
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 from companies that may be larger, have more
experienced management and be better financed that our portfolio companies.
WE MAY SUSTAIN SUBSTANTIAL LOSSES FROM FRAUD.
The risk of fraud losses varies with, among other things, general economic
conditions, and the effectiveness of security procedures utilized. However,
although management believes that any loss due to fraud will be immaterial,
there can be no assurance that fraud loss experience will not become material in
amount. It must be noted that BDC's are required to have in place certain
safeguards which may render these risks 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.
RESTRICTIONS IMPOSED UPON THE RESALE OF OUR CAPITAL STOCK MAY REQUIRE YOU TO
HOLD YOUR COMMON STOCK FOR AN INDEFINITE PERIOD OF TIME.
None of the securities we have issued or will issue in the future, based upon
current plans, will be registered under the Securities Act. The common stock we
have 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, you might
be required to hold your common stock, either until our stock is registered
under the Securities Act, or an exemption from the registration requirements of
the Securities Act, and an exemption from the registration requirements of the
blue-sky laws of your state, is available to you. Unless the certificates are
sold pursuant to exemption, they will bear legends restricting subsequent
transfers pursuant to the restrictions listed above as well as additional
restrictions contained in our by-laws. As a result, you may not be able to
liquidate your investment readily.
21
YOU WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION IN THE VALUE OF YOUR
INVESTMENT, AND IT MAY BE FURTHER DILUTED IN THE FUTURE.
THE PURCHASERS OF OUR COMMON STOCK WILL SUFFER AN IMMEDIATE AND SUBSTANTIAL
DILUTION IN THE BOOK VALUE OF THEIR INVESTMENT. WE MAY SELL ADDITIONAL EQUITY IN
THE FUTURE THAT MAY FURTHER DILUTE THE VALUE OF YOUR INVESTMENT.
Senior management may be granted the right, and other employees and consultants
may have the right, under certain circumstances, to acquire additional shares of
our common stock. If such a grant of a right occurred at a time where the price
of the stock had fallen relative to the current market value and fell below the
price paid by you, management might be given the right to purchase stock at a
price below your cost. Additionally, 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 investors, including management, at prices below
the price paid by you. In either of these cases, the value of your investment
would be further diluted.
YOUR INFLUENCE IN MATTERS REQUIRING SHAREHOLDER ACTION WILL BE LIMITED.
The officers and directors own less than a majority of the issued and
outstanding shares of our voting securities (22.92% at January 31, 2007). While
the number of shares controlled by the officers and directors is less than a
majority, their position of control is material and significant.
PURSUANT TO THE COMPANY'S ARTICLES OF ORGANIZATION, THE COMPANY'S 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.
WE WILL HAVE BROAD DISCRETION IN USING THE PROCEEDS FROM SALES OF OUR COMMON
STOCK.
Although we have identified generally the manner in which we expect to utilize
the proceeds from sales of our common stock, we will have broad discretion in
determining the specific uses of the proceeds. 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. As discussed above, the use of
proceeds may not be inconsistent with our goals and objectives of our operation
as a BDC. However, we have not yet signed any contracts with any professionals
or consultants; including those whose help or assistance is contemplated.
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.
22
ITEM 2: PROPERTIES
We do not own any real estate or other physical properties materially important
to our operation. Our offices are located at 4500 Cameron Valley Parkway,
Charlotte, North Carolina, where we occupy our office space pursuant to our
lease agreement with First Colony, which currently extends through March 31,
2007.
On February 22, 2007, we entered into a lease agreement jointly with Five Oaks
Capital Partners, LLC to lease a total of 5,041 square feet, commencing March
26, 2007 through December 31, 2008. Our allocated share of the space is 2,000
square feet and our monthly base rent is $3,863 for the balance of 2007 and
$3,980 each month in 2008.
Our office facilities are suitable and adequate for our business as it is
presently conducted.
ITEM 3: LEGAL PROCEEDINGS
We are not currently subject to any legal proceedings, nor, to our knowledge, is
any legal proceeding threatened against us. From time to time, we may be a party
to certain legal proceedings in the ordinary course of business, including
proceedings relating to the enforcement of our rights under contracts with our
portfolio companies.
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.
23
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is currently listed on the electronic quotation and reporting
service maintained by the National Association of Securities Dealers ("NASD")
and known as the "OTC Bulletin Board" or "OTCBB" system and trades under the
symbol "CEEH".
The market closing, high and low prices during each quarter since our stock
began trading on July 27, 2005, are as follows:
QUARTER ENDED CLOSING HIGH LOW
September 30, 2005 1.50 1.50 1.50
December 31, 2005 1.30 1.40 1.00
March 31, 2006 1.25 1.25 .90
June 30, 2006 1.25 1.25 1.25
September 30, 2006 .90 1.25 .90
December 31, 2006 1.10 1.25 .50
NUMBER OF SHAREHOLDERS AND TOTAL OUTSTANDING SHARES
As of January 31, 2007, there were 7,689,461 shares of common stock issued and
outstanding, held by approximately 49 shareholders of record, an undetermined
number of which represent more than one individual participant in securities
positions with us.
DIVIDENDS ON COMMON STOCK
We have not previously declared a cash dividend on our common stock and we do
not anticipate the payment of dividends in the near future.
OPTIONS
None.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
None.
24
ITEM 6: SELECTED FINANCIAL DATA
The following table represents our selected financial and other data and has
been derived from our audited financial statements for the years ended December
31, 2006, 2005 and 2004. The information below should be read in conjunction
with Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our financial statements and the notes thereto
included in Item 8 herein.
2006 2005 2004
------------ ------------ ------------
Statements of Operations Data:
Income from operations $ 127,243 $ 4,798 $ -
Expenses 532,186 158,658 18,818
------------ ------------ ------------
Net loss from operations (404,943) (153,860) (18,818)
Net realized and unrealized gains (losses) 205,730 (18,319) 3,500
------------ ------------ ------------
Net decrease in net assets from operations $ (199,213) $ (172,179) $ (15,318)
============ ============ ============
Net decrease in net assets from operations
per share, basic and diluted $ (0.0259) $ (0.0328) $ (0.0049)
============ ============ ============
Weighted average shares, basic and diluted 7,686,657 5,245,319 3,109,290
Statements of Net Assets Data:
Investments at fair value $ 2,345,470 $ 257,000 $ 128,500
Investments at cost 2,137,089 222,819 125,000
Cash and cash equivalents 124,311 2,217,525 500
Total assets 2,577,048 2,537,036 129,000
Total liabilities 163,659 7,684 15,698
------------ ------------ ------------
Net assets $ 2,413,389 $ 2,529,352 $ 113,302
============ ============ ============
Net asset value per share $ 0.3139 $ 0.2939 $ 0.0283
============ ============ ============
Common stock outstanding at year end 7,689,461 8,606,211 4,000,000
============ ============ ============
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ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE COMPANY
Chanticleer filed an election to be treated as a BDC under the 1940 Act on May
23, 2005. In connection with this election, we have adopted corporate
resolutions and are operating as a closed-end, non-diversified management
investment company and as a BDC.
On April 18, 2006, we formed Investors LLC and sold units for $5,000,000, of
which we own $1,150,000 (23%) as of December 31, 2006. Investors LLC's principal
asset is a 6%, convertible note in the amount of $5,000,000 with Hooters
collateralized with 2% of Hooters common stock. One-third of the interest is
paid to us as a management fee and we share pro-rata with the other investors in
the remaining 4% interest, which is distributed to the investors quarterly.
On July 31, 2006, we formed Investors II. Investors II began raising funds in
January 2007 for the purpose of investing in publicly traded value securities.
As of December 31, 2006, we had not commenced any activity in Investors II.
In January 2007, we formed Advisors, as a wholly owned subsidiary to manage
Investors II, as well as, our other investments.
On November 21, 2006, we entered into a 120 day option agreement with Hooters of
America, Inc. to purchase the right to open and operate Hooters restaurants in
the Republic of South Africa. Negotiations are underway regarding a proposed
development plan.
MANAGEMENT'S ANALYSIS OF BUSINESS
We have significant relative flexibility in selecting and structuring our
investments. We are not subject to many of the regulatory limitations that
govern traditional lending institutions such as banks. We seek to structure our
investments so as to take into account the uncertain and potentially variable
financial performance of our portfolio companies. This should enable our
portfolio companies to retain access to committed capital at different stages in
their development and eliminate some of the uncertainty surrounding their
capital allocation decisions. We calculate rates of return on invested capital
based on a combination of up-front commitment fees, current and deferred
interest rates and residual values, which may take the form of common stock,
warrants, equity appreciation rights or future contract payments. We believe
that this flexible approach to structuring investments will facilitate positive,
long-term relationships with our portfolio companies and enable us to become a
preferred source of capital to them. We also believe our approach should enable
debt financing to develop into a viable alternative capital source for funding
the growth of target companies that wish to avoid the dilutive effects of equity
financings for existing equity holders.
Longer Investment Horizon - We are not subject to periodic capital return
requirements. These requirements, which are standard for most private equity and
venture capital funds, typically require that these funds return to investors
the initial capital investment after a pre-agreed time, together with any
capital gains on such capital investment. These provisions often force such
funds to seek the return of their investments in portfolio companies through
mergers, public equity offerings or other liquidity events more quickly than
26
they otherwise might, which can result in a lower overall return to investors
and adversely affect the ultimate viability of the affected portfolio companies.
Because we may invest in the same portfolio companies as these funds, we are
subject to these risks if these funds demand a return on their investments in
the portfolio companies. We believe that our flexibility to take a longer-term
view should help us to maximize returns on our invested capital while still
meeting the needs of our portfolio companies.
Established Deal Sourcing Network - We believe that, through our management and
directors, we have solid contacts and sources from which to generate investment
opportunities. These contacts and sources include:
o public and private companies,
o investment bankers,
o attorneys,
o accountants,
o consultants, and
o commercial bankers.
However, we cannot assure you that such relationships will lead to the
origination of debt or other investments.
INVESTMENT CRITERIA
As a matter of policy, we will not purchase or sell real estate or interests in
real estate or real estate investment trusts except that we may:
o purchase and sell real estate or interests in real estate in
connection with the orderly liquidation of investments, or in
connection with foreclosure on collateral;
o own the securities of companies that are in the business of buying,
selling or developing real estate; or
o finance the purchase of real estate by our portfolio companies.
We limit our investments in more traditional securities (stock and debt
instruments) and will not, as a matter of policy:
o sell securities short except with regard to managing the risks
associated with publicly-traded securities issued by our portfolio
companies;
o purchase securities on margin (except to the extent that we may
purchase securities with borrowed money); or
o engage in the purchase or sale of commodities or commodity contracts,
including futures contracts except where necessary in working out
distressed loans.
Prospective Portfolio Company Characteristics - We have identified several
criteria that we believe prove important in seeking our investment objective
with respect to target companies. These criteria provide general guidelines for
our investment decisions; however, we caution readers that not all of these
criteria are satisfied by each prospective portfolio company in which we choose
to invest.
27
Experienced Management - We generally require that our portfolio companies have
an experienced president or management team. We also require the portfolio
companies to have in place proper incentives to induce management to succeed and
to act in concert with our interests as investors, including having significant
equity interests. We provide assistance in this area by either consulting with
management or by providing management for our portfolio companies.
Products or Services - We seek companies that are involved in products or
services that do not require significant additional capital or research
expenditures. In general, we seek target companies that make innovative use of
proven technologies or methods.
Proprietary Advantage - We favor companies that can demonstrate some kind of
proprietary sustainable advantage with respect to their competition. Proprietary
advantages include, but are not limited to:
o patents or trade secrets with respect to owning or manufacturing its
products, and
o a demonstrable and sustainable marketing advantage over its
competition.
Marketing strategies impose unusual burdens on management to be continuously
ahead of its competition, either through some kind of technological advantage or
by being continuously more creative than its competition.
Profitable or Nearly Profitable Operations Based on Cash Flow from Operations -
We focus on target companies that are profitable or nearly profitable on an
operating cash flow basis. Typically, we would not expect to invest in start-up
companies unless there is a clear exit strategy in place.
Potential for Future Growth - We generally require that a prospective target
company, in addition to generating sufficient cash flow to cover its operating
costs and service its debt, demonstrate an ability to increase its revenues and
operating cash flow over time. The anticipated growth rate of a prospective
target company will be a key factor in determining the value that we ascribe to
any warrants or other equity securities that we may acquire in connection with
an investment in debt securities.
Exit Strategy - Prior to making an investment in a portfolio company, we analyze
the potential for that company to increase the liquidity of its common equity
through a future event that would enable us to realize appreciation, if any, in
the value of our equity interest. Liquidity events may include:
o an initial public offering,
o a private sale of our equity interest to a third party,
o a merger or an acquisition of the portfolio company, or
o a purchase of our equity position by the portfolio company or one of
its stockholders.
28
We may acquire warrants to purchase equity securities and/or convertible
preferred stock of the eligible portfolio companies in connection with providing
financing. The terms of the warrants, including the expiration date, exercise
price and terms of the equity security for which the warrant may be exercised,
will be negotiated individually with each eligible portfolio company, and will
likely be affected by the price and terms of securities issued by the eligible
portfolio company to other venture capitalists and other holders. We anticipate
that most warrants will be for a term of five to ten years, and will have an
exercise price based upon the price at which the eligible portfolio company most
recently issued equity securities or, if a new equity offering is imminent,
equity securities. The equity securities for which the warrant will be exercised
generally will be common stock of which there may be one or more classes of
convertible preferred stock. Substantially all the warrants and underlying
equity securities will be restricted securities under the 1933 Act at the time
of the issuance. We will generally negotiate for registration rights with the
issuer that may provide:
o "piggyback" registration rights, which will permit us under certain
circumstances, to include some or all of the securities owned by us in
a registration statement filed by the eligible portfolio company, or
o in some circumstances, "demand" registration rights permitting us
under certain circumstances, to require the eligible portfolio company
to register the securities under the 1933 Act, in some cases at our
expense. We will generally negotiate net issuance provisions in the
warrants, which will allow us to receive upon exercise of the warrants
without payment of any cash a net amount of shares determined by the
increase in the value of the issuer's stock above the exercise price
stated in the warrant.
Liquidation Value of Assets - Although we do not intend to operate as an
asset-based lender, the prospective liquidation value of the assets, if any,
collateralizing any debt securities that we hold will be an important factor in
our credit analysis. We will emphasize both tangible assets, such as:
o accounts receivable,
o inventory, and
o equipment,
and intangible assets, such as:
o intellectual property,
o customer lists,
o networks, and
o databases.
INVESTMENT PROCESS
Due Diligence - If a target company generally meets the characteristics
described above, we will perform initial due diligence, including:
o company and technology assessments,
29
o existing management team,
o market analysis,
o competitive analysis,
o evaluation of management, risk analysis and transaction size,
o pricing, and
o structure analysis.
Much of this work will be done by management and professionals who are well
known by management. The criteria delineated above provide general parameters
for our investment decisions. We intend to pursue an investment strategy by
further imposing such criteria and reviews that best insures the value of our
investments. As unique circumstances may arise or be uncovered, not all of such
criteria will be satisfied in each instance but the process provides a guideline
by which investments can be prudently made and managed. Upon successful
completion of the preliminary evaluation, we will decide whether to deliver a
non-binding letter of intent and move forward towards the completion of a
transaction.
In our review of the management team, we look at the following:
o Interviews with management and significant shareholders, including any
financial or strategic sponsor;
o Review of financing history;
o Review of management's track record with respect to:
o product development and marketing,
o mergers and acquisitions,
o alliances,
o collaborations, and
o research and development outsourcing and other strategic
activities;
o Assessment of competition; and
o Review of exit strategies.
In our review of the financial conditions, we look at the following:
o Evaluation of future financing needs and plans;
o Detailed analysis of financial performance;
o Development of pro forma financial projections; and
o Review of assets and liabilities, including contingent liabilities, if
any, and legal and regulatory risks.
In our review of the products and services of the portfolio company, we look at
the following:
o Evaluation of intellectual property position;
o Review of existing customer or similar agreements and arrangements;
o Analysis of core technology;
o Assessment of collaborations;
o Review of sales and marketing procedures; and
o Assessment of market and growth potential.
30
Upon completion of these analyses, we will conduct on-site visits with the
target company's management team. Also, in cases in which a target company is at
a mature stage of development and if other matters warrant such an evaluation,
we will obtain an independent appraisal of the target company.
ONGOING RELATIONSHIPS WITH PORTFOLIO COMPANIES
Monitoring - We continuously monitor our portfolio companies in order to
determine whether they are meeting our financing criteria and their respective
business plans. We may decline to make additional investments in portfolio
companies that do not continue to meet our financing criteria. However, we may
choose to make additional investments in portfolio companies that do not do so,
if we believe they will perform well in the future.
We monitor the financial trends of each portfolio company to assess the
appropriate course of action for each company and to evaluate overall portfolio
quality. Our management team and consulting professionals closely monitor the
status and performance of each individual company on at least a quarterly and,
in some cases, a monthly basis.
We use several methods of evaluating and monitoring the performance and fair
value of our debt and equity positions, including but not limited to the
following:
o Assessment of business development success, including product
development, financings, profitability and the portfolio company's
overall adherence to its business plan;
o Periodic and regular contact with portfolio company management to
discuss financial position, requirements and accomplishments;
o Periodic and regular formal update interviews with portfolio company
management and, if appropriate, the financial or strategic sponsor;
o Attendance at and participation in board meetings; and
o Review of monthly and quarterly financial statements and financial
projections for portfolio companies.
Managerial Assistance - As a business development company, we offer, and in many
cases provide, significant managerial assistance to our portfolio companies.
This assistance will typically involve:
o monitoring the operations of our portfolio companies,
o participating in their board and management meetings,
o consulting with and advising their officers, and
o providing other organizational and financial guidance.
31
INVESTMENT AMOUNTS
The amount of funds committed to a portfolio company and the ownership
percentage received will vary depending on the maturity of the portfolio
company, the quality and completeness of the portfolio company's management
team, the perceived business opportunity, the capital required compared to
existing capital, and the potential return. Although investment amounts will
vary considerably, we expect that the average investment, including follow-on
investments, will be between $25,000 and $1,000,000.
COMPETITION
Our primary competitors that provide financing to target companies include
private equity and venture capital funds, other equity and non-equity based
investment funds and investment banks and other sources of financing, including
traditional financial services companies such as commercial banks and specialty
finance companies. Many of these entities have substantially greater financial
and managerial resources than we have. We believe that our competitive advantage
with regard to quality target companies relates to our ability to negotiate
flexible terms and to complete our review process on a timely basis. We cannot
assure you that we will be successful in implementing our strategies.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report that are not historical fact are
"forward-looking statements" as that term is defined in the Private Securities
Litigation Reform Act of 1995. The words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "believes," "estimates,"
"projects" or similar expressions are intended to identify these forward-looking
statements. These statements are subject to risks and uncertainties beyond our
reasonable control that could cause our actual business and results of
operations to differ materially from those reflected in our forward-looking
statements. The safe harbor provisions provided in the Securities Litigation
Reform Act do not apply to forward-looking statements we make in this report.
Forward-looking statements are not guarantees of future performance. Our
forward-looking statements are based on trends which we anticipate in our
industry and our good faith estimate of the effect on these trends of such
factors as industry capacity, product demand and product pricing. The inclusion
of projections and other forward-looking statements should not be regarded a
representation by us or any other person that we will realize our projections or
that any of the forward-looking statements contained in this prospectus will
prove to be accurate.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2006, we had a cash balance of $124,311 and $31,481 in accounts
receivable, a total of $155,792 and accounts payable and accrued expenses of
$12,955, a net of $142,837. We expect to receive $100,000 in management fees
from our management fee agreement with Chanticleer Investors LLC and should
receive $46,000 as our share of the interest on the Chanticleer Investors LLC
loan. In addition, we expect to receive approximately $20,000 during the last
half of 2007 when our oil and gas property investments begin production. While
we will earn other income, this represents the most significant portion with
limited risk and together with our net cash, receivables and payables nets
32
approximately $309,000. During 2006 our cost of operations was approximately
$532,000 and we expect our operations in 2007 to be approximately the same.
Accordingly, we should require approximately $223,000 in additional funding and
income if we maintain the same level of operations.
Our principal sources to fund this deficit include:
o At December 31, 2006, we had investments with a value of approximately
$144,000 which could be sold and converted to cash in a relatively
short period of time. The majority of the other investments is
longer-term and would prove more difficult and time-consuming to
liquidate. However, liquidation of investments to fund operations
should not be considered a viable option, as this would reduce our
income potential in the future.
o A second alternative involves filing an Offering Circular under
Regulation E promulgated under the Securities Act of 1933 and selling
shares of our common stock. This option is the most attractive as it
would raise equity and provides additional funds for investment.
Exclusive of gains realized from sales of investments, and based on
annualizing our income from operations earned during the fourth
quarter of 2006, we estimate a need to have approximately $7,500,000
in additional equity invested to yield returns similar to our existing
portfolio to have earnings sufficient to cover our expenses and have
net earnings from operations. This, of course, assumes we would be
able to invest these funds to yield results similar to our current
portfolio.
o A third alternative is borrowing additional funds on our line of
credit. As of December 31, 2006, we have an available balance of
approximately $99,000 that we could borrow without making other
financing arrangements. This credit reserve should be maintained for
short-term needs and not be considered an option for our long-term
plan.
We are finalizing and expect to file an Offering Circular under Regulation 1-E
early in the second quarter of 2007, from which we expect to raise sufficient
capital to fund our operations for 2007 and provide additional investment
capital.
RESULTS OF OPERATIONS
Revenues - Our income from operations increased by over 2,500%. This is
primarily the result of the majority of the money from our first Offering
Circular under Regulation E being raised late in 2005 and not being available
until 2006 for investment. Our income from operations includes interest and
dividend income from non-affiliated portfolio companies in the amount of $27,843
in 2006 as compared to $4,798 in 2005. This includes interest from both cash
deposits and loans to non-affiliated portfolio companies.
Our income from our controlled affiliated portfolio company includes $35,233 in
interest and $64,167 in management fees in 2006. We anticipate these amounts
will be $46,000 and $100,000 in 2007, assuming the loan remains outstanding for
the full year.
33
Expenses - Our expenses increased 235% in 2006 from 2005 primarily due to the
increased level of operations. Fiscal 2006 was the first full year of operations
and should be representative of the expected expenses of operation for 2007,
assuming there is not a major change in the level of operations.
NET REALIZED AND UNREALIZED GAINS (LOSSES) IN NON-CONTROLLED, NON-AFFILIATED
INVESTMENTS
As an investment company under the Investment Company Act of 1940, all of our
investments must be carried at market value or fair value as determined by
management for investments which do not have readily determinable market values.
Prior to this conversion, only marketable debt and equity securities and certain
derivative securities were required to be carried at market value.
Beginning December 16, 2005, portfolio assets for which market prices are
available are valued at those prices. Securities that are traded in the
over-the-counter market or on a stock exchange generally will be valued at the
prevailing bid price on the valuation date. However, some of our current
investments were acquired in privately negotiated transactions and may have no
readily determinable market values. These securities are carried at fair value
as determined by management and outside professionals as necessary under our
valuation policy. Currently, the valuation policy provides for management's
review of the management team, financial conditions, and products and services
of the portfolio company. In situations that warrant such an evaluation, an
independent business valuation may be obtained.
Value, as defined in Section 2(a)(41) of the 1940 Act, 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 as determined in good faith by
management. 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. We must
determine the fair value of 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 realization of an equity
security is doubtful. Conversely, we will record unrealized appreciation if we
believe that the underlying portfolio company has appreciated in value and,
therefore, its investment has also appreciated in value, where appropriate.
As an investment company, we invest primarily in illiquid securities including
equity securities of private companies. The structure of each equity security is
specifically negotiated to enable us to protect our investment and maximize our
returns. We generally include many terms governing ownership parameters,
dilution parameters, liquidation preferences, voting rights, and put or call
rights. Our investments are generally subject to some 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.
34
Investment activity during the past two years may be summarized as follows:
2006 2005
------------ ------------
Balance at cost, beginning of year $ 222,819 $ 125,000
Acquisition of investments:
For cash 2,327,732 196,819
With our common stock - 6,000
Cost of investments sold:
For cash (413,462) -
For our common stock which was retired - (105,000)
------------ ------------
Balance at cost, end of year 2,137,089 222,819
Unrealized appreciation 208,381 34,181
------------ ------------
Market value, end of year $ 2,345,470 $ 257,000
============ ============
Our valuation process and the results of our individual investments is included
in note 3 to the financial statements. In addition to the unrealized gain from
our investments at the end of 2006 and 2005, we had a realized gain on sale of
investments of $31,530 in 2006 and a realized loss on sale of investments of
$49,000 in 2005.
OFF-BALANCE SHEET ARRANGEMENTS
Our only off-balance sheet arrangement is the operating lease for our office
which has three months remaining at December 31, 2006, with rental of $2,562 per
month.
On February 22, 2007, we entered into a lease agreement jointly with Five Oaks
Capital Partners, LLC to lease a total of 5,041 square feet, commencing March
26, 2007 through December 31, 2008. Our allocated share of the space is 2,000
square feet and our monthly base rent is $3,863 for the balance of 2007 and
$3,980 each month in 2008.
NET ASSET VALUE
As a Business Development Company, certain of our activities and disclosures are
made in reference to Net Asset Value which is the value of our portfolio assets
less debt and preferred stock. This may be viewed, simply and generalized, as
the value of our assets to our common shareholders. As of the date of the
financial information in this report, the value of our portfolio of assets
including investments in equity securities and cash is $2,577,048 and from this,
are subtracted liabilities and debts of $163,659. There are no shares of
preferred stock outstanding but the rights of preferred stockholders would be
included as a deduction if there were. The Net Asset Value is therefore
$2,413,389. The Net Asset Value per Share is $.3139.
35
RECENT ACCOUNTING PRONOUNCEMENTS
There are several new accounting pronouncements issued by the Financial
Accounting Standards Board ("FASB") which are not yet effective. Each of these
pronouncements, as applicable, has been or will be adopted by the Company.
Management does not believe any of these accounting pronouncements has had or
will have a material impact on the Company's financial position or operating
results.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments - an amendment of FASB Statements No. 133 and 140", to
simplify and make more consistent the accounting for certain financial
instruments. SFAS No. 155 amends SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", to permit fair value re-measurement for any
hybrid financial instrument with an embedded derivative that otherwise would
require bifurcation, provided that the whole instrument is accounted for on a
fair value basis. SFAS No. 155 amends SFAS No. 140, "Accounting for the
Impairment or Disposal of Long-Lived Assets", to allow a qualifying
special-purpose entity to hold a derivative financial instrument that pertains
to beneficial interest other than another derivative financial instrument. SFAS
No. 155 applies to all financial instruments acquired or issued after the
beginning of an entity's first fiscal year that begins after September 15, 2006,
with earlier application allowed. This standard is not expected to have a
significant effect on the Company's future reported financial position or
results of operations.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measures". This
Statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles, expands disclosures about fair
value measurements, and applies under other accounting pronouncements that
require or permit fair value measurements. SFAS No. 157 does not require any new
fair value measurements. However, the FASB anticipates that for some entities,
the application of SFAS No. 157 will change current practice. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007, which for the
Company would be its fiscal year beginning January 1, 2008. The Company is
currently evaluating the impact of SFAS No. 157 but does not expect that it will
have a material impact on its financial statements.
CRITICAL ACCOUNTING POLICIES
The SEC issued Financial Reporting Release No. 60, "Cautionary Advice Regarding
Disclosure about Critical Accounting Policies" ("FRR 60"), suggesting companies
provide additional disclosure and commentary on their most critical accounting
policies. In FRR 60, the SEC defined the most critical accounting policies as
the ones that are most important to the portrayal of a company's financial
condition and operating results, and require management to make its most
difficult and subjective judgments, often as a result of the need to make
estimates of matters that are inherently uncertain. Based on this definition our
most critical accounting policy is the valuation of our investments. The
methods, estimates and judgments we use in applying this accounting policy has a
significant impact on the results we report in our financial statements.
36
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
value of our investments for which market quotations are not readily available.
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.
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 price 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 may be 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.
37
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANTICLEER HOLDINGS, INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page
Report of Independent Registered Public Accounting Firm 39
Statements of Net Assets at December 31, 2006 and 2005 40
Statements of Operations for the Years Ended December 31, 2006,
2005 and 2004 41
Statements of Cash Flows for the Years Ended December 31, 2006,
2005 and 2004 42
Statements of Changes in Net Assets for the Years Ended
December 31, 2006, 2005 and 2004 43
Schedules of Investments at December 31, 2006 and 2005 44
Notes to Financial Statements 45
Financial Highlights for the Years Ended December 31, 2006,
2005 and 2004 59
38
CREASON & ASSOCIATES, P.L.L.C.
7170 S. BRADEN AVE., SUITE 100
TULSA, OKLAHOMA 74136
REPORT OF INDEPENDENT REGISTERED PUBLIC ACOUNTING FIRM
------------------------------------------------------
To the Board of Directors and Stockholders
Chanticleer Holdings, Inc.:
We have audited the accompanying statements of net assets, including the
schedules of investments, of Chanticleer Holdings, Inc. (the "Company") as of
December 31, 2006 and 2005, and the related statements of operations, changes in
net assets and cash flows for the years ended December 31, 2006, 2005 and 2004.
These financial statements and schedules of investments are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedules of investments based on our audits.
We conducted our audits 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
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and schedules of investments referred
to above present fairly, in all material respects, the financial position of
Chanticleer Holdings, Inc. as of December 31, 2006 and 2005, and the results of
its operations, cash flows and changes in net assets for the years ended
December 31, 2006, 2005 and 2004, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Creason & Associates, P.L.L.C.
Tulsa, Oklahoma
March 30, 2007
39
CHANTICLEER HOLDINGS, INC.
Statements of Net Assets
As of December 31, 2006 and 2005
2006 2005
------------ ------------
ASSETS
Investments:
Non-affiliate investments (cost 2006 - $987,089; 2005 - $222,819) $ 1,195,470 $ 257,000
Controlled affiliate investment (cost 2006 - $1,150,000; 2005 - $0) 1,150,000 -
------------ ------------
Total investments 2,345,470 257,000
Cash and cash equivalents 124,311 2,217,525
Accounts receivable 31,481 1,048
Prepaid expenses and other assets 19,996 23,898
Fixed assets, net 33,290 35,065
Deposits 22,500 2,500
------------ ------------
TOTAL ASSETS 2,577,048 2,537,036
------------ ------------
LIABILITIES
Accounts payable 12,614 7,684
Accrued expenses 341 -
Note payable 150,704 -
------------ ------------
TOTAL LIABILITIES 163,659 7,684
------------ ------------
NET ASSETS $ 2,413,389 $ 2,529,352
============ ============
Commitments and contingencies
COMPOSITION OF NET ASSETS
Common stock, $.0001 par value. Authorized 200,000,000 shares;
issued and outstanding 7,689,461 shares and 8,606,211 shares at
December 31, 2006 and 2005, respectively $ 769 $ 861
Additional paid in capital 2,799,831 3,716,489
Stock subscription receivable - (1,000,000)
Accumulated deficit:
Accumulated net operating loss (578,122) (173,179)
Net realized loss on investments (17,470) (49,000)
Net unrealized appreciation of investments 208,381 34,181
------------ ------------
NET ASSETS $ 2,413,389 $ 2,529,352
============ ============
NET ASSET VALUE PER SHARE $ 0.3139 $ 0.2939
============ ============
See accompanying notes to financial statements.
40
CHANTICLEER HOLDINGS, INC.
Statements of Operations
For the Years Ended December 31, 2006, 2005 and 2004
2006 2005 2004
------------ ------------ ------------
INCOME FROM OPERATIONS:
Interest and dividend income:
Non-affiliated portfolio companies $ 27,843 $ 4,798 $ -
Controlled affiliated portfolio company 35,233 - -
Management fee from controlled affiliated portfolio
company 64,167 - -
------------ ------------ ------------
127,243 4,798 -
EXPENSES:
Salaries and wages 200,942 72,842 -
Professional fees 64,773 34,858 17,920
Insurance 32,285 7,861 -
Rent 31,198 6,449 -
Travel and entertainment 60,858 4,112 -
Interest expense 8,132 810 898
Other selling, general and administrative expense 133,998 31,726 -
------------ ------------ ------------
532,186 158,658 18,818
------------ ------------ ------------
LOSS BEFORE INCOME TAXES (404,943) (153,860) (18,818)
INCOME TAXES - - -
------------ ------------ ------------
NET LOSS FROM OPERATIONS (404,943) (153,860) (18,818)
------------ ------------ ------------
NET REALIZED AND UNREALIZED GAINS (LOSSES) IN
NON-CONTROLLED NON-AFFILIATED INVESTMENTS:
Net realized gain (loss) on investment, net of income
tax benefit of $0 31,530 (49,000) -
Change in unrealized appreciation of
investments, net of deferred tax expense of $0 174,200 30,681 3,500
------------ ------------ ------------
NET DECREASE IN NET ASSETS FROM OPERATIONS $ (199,213) $ (172,179) $ (15,318)
============ ============ ============
NET DECREASE IN NET ASSETS FROM OPERATIONS PER SHARE,
BASIC AND DILUTED $ (0.0259) $ (0.0328) $ (0.0049)
============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 7,686,657 5,245,319 3,109,290
============ ============ ============
See accompanying notes to financial statements.
41
CHANTICLEER HOLDINGS, INC.
Statements of Cash Flows
For the Years Ended December 31, 2006, 2005 and 2004
2006 2005 2004
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net decrease in net assets from operations $ (199,213) $ (172,179) $ (15,318)
Adjustments to reconcile net decrease in net assets
from operations to net cash used in operating
activities:
Change in unrealized appreciation of investments (174,200) (30,681) (3,500)
Depreciation 7,973 1,394 -
(Gain) loss on sale of investments (31,530) 49,000 -
Increase in accounts receivable (30,433) - -
Increase in prepaid expenses and other assets (16,097) (27,446) -
Increase in accounts payable and accrued expenses 5,270 40,003 15,698
------------ ------------ ------------
Net cash used in operating activities (438,230) (139,909) (3,120)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (2,327,732) (196,819) -
Proceeds from sale of investments 444,992 - -
Purchase of fixed assets (6,198) (36,459) -
------------ ------------ ------------
Net cash used by investing activities (1,888,938) (233,278) -
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 83,250 2,535,212 -
Loan proceeds 150,704 - -
Loan from shareholder - 55,000 -
Contribution by shareholder - - 3,120
------------ ------------ ------------
Net cash provided by financing activities 233,954 2,590,212 3,120
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,093,214) 2,217,025 -
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,217,525 500 500
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 124,311 $ 2,217,525 $ 500
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest and income taxes:
Interest $ 7,791 $ 810 $ 898
Income taxes - - -
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Exchange of investment for common stock which was retired - 56,000 -
Issued common stock in exchange for:
Assumption of accounts payable - 48,017 -
Acquisition of investments - 6,000 125,000
Repayment of loan from shareholder - 55,000 -
Stock subscription receivable - 1,000,000 -
Cancel stock subscription receivable and retire common stock 1,000,000 - -
See accompanying notes to financial statements.
42
CHANTICLEER HOLDINGS, INC.
Statements of Changes in Net Assets
For the Years Ended December 31, 2006, 2005 and 2004
2006 2005 2004
------------ ------------ ------------
CHANGES IN NET ASSETS FROM OPERATIONS:
Net loss from operations $ (404,943) $ (153,860) $ (18,818)
Net realized gain (loss) on sale of investments, net 31,530 (49,000) -
Change in net unrealized appreciation
of investments, net 174,200 30,681 3,500
------------ ------------ ------------
Net decrease in net assets from operations (199,213) (172,179) (15,318)
------------ ------------ ------------
CAPITAL STOCK TRANSACTIONS
Common stock issued for cash 83,250 2,535,212 -
Common stock issued for loan from stockholder - 55,000 -
Common stock issued for accounts payable - 48,017 -
Common stock issued in acquisition of investments - 6,000 125,000
Cash contributed by stockholder - - 3,120
Common stock retired in disposition of investment - (56,000) -
------------ ------------ ------------
Net increase in net assets from stock transactions 83,250 2,588,229 128,120
------------ ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS (115,963) 2,416,050 112,802
NET ASSETS AT BEGINNING OF YEAR 2,529,352 113,302 500
------------ ------------ ------------
NET ASSETS AT END OF YEAR $ 2,413,389 $ 2,529,352 $ 113,302
============ ============ ============
See accompanying notes to financial statements.
43
CHANTICLEER HOLDINGS, INC.
Schedules of Investments
As of December 31, 2006
Percent
Shares/ Quarter Original Fair Net
Interest Acquired Cost Value Assets
-------- -------- ---- ----- ------
NON-AFFILIATE INVESTMENTS
- --------------------------------------------------------------------------------------
NON-INCOME PRODUCING INVESTMENTS
11,000 Sep-05 Tandy Leather Factory, Inc. (AMEX:TLF); specialty $ 52,011 $ 88,770 4%
Dec-05 retailer and wholesale distributor of leather products,
tools and leather finishes and kits
800,000 Sep-05 Special Projects Group (Pink Sheets:SPLJ) 102,403 176,000 8%
distributor and marketer of security and
defense products and training manuals
6,000 Jun-06 SM&A (NASDAQ:WINS); A leading provider of 35,669 34,800 1%
business strategy, proposal development and
program services for winning and delivering
competitive procurements.
800 Jun-06 Professionals Direct, Inc. (OTCBB:PFLD); provides 18,790 20,900 1%
lawyer liability insurance and underwriting and other
services to insurance companies
33.3% Mar-06 LFM Management, LLC, dba 1st Choice Mortgage 250,000 250,000 10%
(Privately held); Direct to consumer brokerage
company
10.27% Mar-06 EE Investors, LLC, whose sole asset is a 16.2% interest 250,000 250,000 10%
in Bouncing Brain Productions, LLC (Privately held);
Inventor promotion company
-------------- -------------- ----------
708,873 820,470 34%
-------------- -------------- ----------
LOAN INVESTMENTS
Loan Jun-06 Lifestyle Innovations, Inc. (OTCBB:LFSI); note and 100,000 100,000 4%
accounts receivable investment of approximately
$1,200,000, non-interest bearing
Loan Sep-06 Special Projects Group (Pink Sheets:SPLJ) 50,000 50,000 2%
distributor and marketer of security and defense
products and training manuals; 12% note due 7/07
-------------- -------------- ----------
150,000 150,000 6%
-------------- -------------- ----------
OIL AND GAS PROPERTY INVESTMENTS
37.5% Mar-06 Signature Energy, Inc; working interest in two 128,216 225,000 9%
oil and gas properties in Washington County, OK
-------------- -------------- ----------
Total non-affiliate investments 987,089 1,195,470 49%
AFFILIATE INVESTMENT
- --------------------------------------------------------------------------------------
23% Mar-06 Chanticleer Investors LLC (Privately held); 1,150,000 1,150,000 48%
Jun-06 Investment LLC with note receivable from Hooters
Dec-06 of America, Inc. in the amount of $5,000,000
-------------- -------------- ----------
Total investments at December 31, 2006 $2,137,089 2,345,470 97%
==============
Cash and other assets, less liabilities 67,919 3%
-------------- ----------
Net assets at December 31, 2006 $2,413,389 100%
============== ==========
See accompanying notes to financial statements.
44
CHANTICLEER HOLDINGS, INC.
Schedules of Investments
As of December 31, 2005
Percent
Date of Original Fair Net
Shares Acquisition Cost Value Assets
------ ----------- ---- ----- ------
NON-INCOME PRODUCING INVESTMENTS
500,000 Jun-04 American Resource Management, Inc. (Pink Sheets: $ 26,000 $ 20,000 1%
Jul-05 ARMM); energy resource-based holding company
20,000 Sep-05 Tandy Leather Factory, Inc. (AMEX:TLF); specialty 96,819 137,000 5%
Oct-05 retailer and wholesale distributor of leather
products, tools and leather finishes and kits
------------- -------------- ---------
122,819 157,000 6%
------------- -------------- ---------
LOAN INVESTMENT
Loan Sep-05 PPCT Holdings, Inc. (Privately held); 100,000 100,000 4%
Oct-05 manufacturer and distributor of security
products and training manuals; 6% note due
September 1, 2006
------------- -------------- ---------
Total investments at December 31, 2005 $ 222,819 257,000 10%
=============
Cash and other assets, less liabilities 2,272,352 90%
-------------- ---------
Net assets at December 31, 2005 $ 2,529,352 100%
============== =========
See accompanying notes to financial statements.
45
CHANTICLEER HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
A. ORGANIZATION
Chanticleer Holdings, Inc. (the "Company") was organized October 21,
1999, under its original name, Tulvine Systems, Inc., under the laws
of the State of Delaware. The Company previously had limited
operations and in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 7, "Accounting and Reporting by Development
Stage Enterprises" was considered a development stage company until
July 2005. The Company was formed to serve as a vehicle to effect a
merger, exchange of capital stock, asset acquisition or other business
combination with a domestic or foreign private business. On April 25,
2005, the Company formed a wholly owned subsidiary, Chanticleer
Holdings, Inc. On May 2, 2005, Tulvine Systems, Inc. merged with and
changed its name to Chanticleer Holdings, Inc.
On April 18, 2006, the Company formed Chanticleer Investors LLC
("Investors LLC") and sold units for $5,000,000, of which the Company
owns $1,150,000 (23%) as of December 31, 2006. Investors LLC's
principal asset is a 6%, convertible note in the amount of $5,000,000
with Hooters of America, Inc. ("Hooters"), collateralized with 2% of
Hooters common stock. One-third of the interest is paid to the Company
as a management fee and the Company shares pro-rata with the other
investors in the remaining 4% interest, which is distributed to the
investors quarterly.
On July 31, 2006, the Company formed Chanticleer Investors II, LLC
("Investors II"). Investors II began raising funds in January 2007 for
the purpose of investing in publicly traded value securities. As of
December 31, 2006, the Company had not commenced any activity in
Investors II.
In January 2007, the Company formed Chanticleer Advisors, LLC
("Advisors"), as a wholly owned subsidiary to manage Investors II, as
well as, the Company's other investments.
B. INVESTMENT COMPANY
On May 23, 2005, the Company filed a notification on Form N54a with
the U.S. Securities and Exchange Commission (the "SEC") indicating its
election to be regulated as a business development company under the
Investment Company Act of 1940 (the "1940 Act"). In connection with
this election, the Company has adopted corporate resolutions and
currently operates as a closed-end management investment company as a
business development company (a "BDC"). Under this recent election,
the Company has been organized to provide investors with an
opportunity to participate, with a modest amount in venture capital,
in investments that are generally not available to the public and that
46
typically require substantially larger financial commitments. In
addition, the Company will provide professional management and
administration that might otherwise be unavailable to investors if
they were to engage directly in venture capital investing. The Company
has decided to be regulated as a business development company under
the 1940 Act, and currently operates as a non-diversified company as
that term is defined in Section 5(b)(2) of the 1940 Act. The Company
will at all times conduct its business so as to retain its status as a
BDC. The Company may not change the nature of its business so as to
cease to be, or withdraw its election as, a BDC without the approval
of the holders of a majority of its outstanding voting stock as
defined under the 1940 Act.
As a BDC, the Company is required to invest at least 70% of its total
assets in qualifying assets, which generally, are securities of
private companies or securities of public companies whose securities
are not eligible for purchase on margin (which includes many companies
with thinly traded securities that are quoted in the pink sheets or
the NASD Electronic Quotation Service.) The Company must also offer to
provide significant managerial assistance to these portfolio
companies. Qualifying assets may also include:
o Cash;
o Cash equivalents;
o U.S. Government securities; or
o High-quality debt investments maturing in one year or less
from the date of investment.
An eligible portfolio company generally is a United States company
that is not an investment company and that:
o Does not have a class of securities registered on an
exchange or included in the Federal Reserve Board's
over-the-counter margin list;
o Is actively controlled by a BDC and has an affiliate of a
BDC on its board of directors; or
o Meets such other criteria as may be established by the SEC.
The Company may invest a portion of the remaining 30% of its total
assets in debt and/or equity securities of companies that may be
larger or more stable than our targeted portfolio companies.
BDC's are required to implement certain accounting provisions that are
different from those to which other reporting companies are required
to comply. These requirements may result in presentation of financial
information in a manner that is more or less favorable than the manner
permitted by other reporting companies. In connection with the
implementation of accounting changes to comply with the required
reporting of financial information, we must also comply with SFAS No.
154, "Accounting Changes and Error Corrections" ("SFAS 154").
47
Prior to May 23, 2005, the date the Company began operating as a BDC,
the Company's only operations included ownership of marketable
investment securities. The Company followed Financial Accounting
Standard No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("FAS 115") for its marketable investment
securities. The Company classified its marketable investment
securities as trading securities, for which FAS 115 provides that
unrealized holding gains and losses for trading securities shall be
included in earnings. Since this method of accounting for investments
is the same as the valuation method required when operating as a BDC,
there is no cumulative effect recognition in the accompanying
fianancial statements upon becoming an investment company. The Company
has prepared its financial statements as if it had been a BDC from
inception.
BDC's, as governed under the 1940 Act may not avail themselves of any
of the provisions of Regulation S-B, including any of the streamlined
reporting permitted thereunder.
2. SIGNIFICANT ACCOUNTING POLICIES
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 amounts
reported in the financial statements and accompanying notes. Significant
estimates include the valuation of the investments in portfolio companies
and deferred tax asset valuation allowances. Actual results could differ
from those estimates.
VALUATION OF INVESTMENTS (AS AN INVESTMENT COMPANY)
As an investment company under the Investment Company Act of 1940, all of
the Company's investments must be carried at market value or fair value as
determined by management for investments which do not have readily
determinable market values. Prior to this conversion, only marketable debt
and equity securities and certain derivative securities were required to be
carried at market value.
Beginning May 23, 2005, portfolio assets for which market prices are
available are valued at those prices. Securities that are traded in the
over-the-counter market or on a stock exchange generally will be valued at
the prevailing bid price on the valuation date. However, some of the
Company's current investments were acquired in privately negotiated
transactions and have no readily determinable market values. These
securities are carried at fair value as determined by management and
outside professionals as necessary under the Company's valuation policy.
Currently, the valuation policy provides for management's review of the
management team, financial conditions, and products and services of the
portfolio company. In situations that warrant such an evaluation, an
independent business valuation may be obtained.
48
Value, as defined in Section 2(a)(41) of 1940 Act, 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 management. 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. The Company must determine the fair value of each
individual investment on a quarterly basis. The Company records unrealized
depreciation on investments when it believes that an investment has become
impaired, including where realization of an equity security is doubtful.
Conversely, the Company records unrealized appreciation if the Company
believes that the underlying portfolio company has appreciated in value
and, therefore, its investment has also appreciated in value, where
appropriate.
As an investment company, the Company invests primarily in illiquid
securities including equity securities of private companies. The structure
of each equity security is specifically negotiated to enable the Company to
protect its investment and maximize its returns. The Company generally
includes many terms governing ownership parameters, dilution parameters,
liquidation preferences, voting rights, and put or call rights. The
Company's investments are generally subject to some restrictions on resale
and generally have no established trading market. Because of the type of
investments that the Company makes and the nature of its business, the
Company's valuation process requires an analysis of various factors. The
Company's fair value methodology includes the examination of, among other
things, the underlying investment performance, financial condition and
market changing events that impact valuation.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents.
REVENUE RECOGNITION
The Company's current sources of revenue include management fees and
interest income earned from cash investments and loans, payment of which is
made in cash. In the future, the Company expects to earn additional revenue
for management and other technical services provided to its portfolio
investment companies. Payment for these services may be in the form of
unregistered shares of common stock of the portfolio company, which will be
recorded based on the fair value determination of our Board of Directors.
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 receivable, accounts payable and notes payable approximate
their estimated fair value due to the short-term maturities of these
financial instruments and because related interest rates offered to the
Company approximate current rates.
49
FIXED ASSETS
Fixed assets are stated at cost, less accumulated depreciation.
Depreciation is recorded using the straight-line method over the estimated
useful lives of the respective assets (generally five and seven years). The
carrying amount of all long-lived assets is evaluated periodically to
determine if adjustment to the depreciation and amortization period or the
unamortized balance is warranted. Based upon its most recent analysis, the
Company believes that no impairment of property and equipment exists at
December 31, 2006. 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.
INCOME TAXES
The Company has not elected to be a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended. Accordingly,
the Company will be subject to U.S. federal income taxes on sales of
investments for which the fair values are in excess of their tax basis.
The Company accounts for income taxes under SFAS 109, "Accounting for
Income Taxes." Under the asset and liability method of SFAS 109, deferred
income taxes are provided on the liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and
their tax basis. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in tax
laws and rates on the date of enactment. Due to its limited operations, the
Company has provided a valuation allowance for the full amount of the
deferred tax assets.
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 complied 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 Financial Accounting Standards
Board ("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.
50
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 APB Opinion No. 25, "Accounting for Stock Issued to Employees."
As originally issued, SFAS 123 established as preferable a fair-value-based
method of 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 adopted 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, 2006 and 2005, there were no options outstanding.
NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS PER SHARE
Basic net increase (decrease) in net assets from operations per share is
computed by dividing the net income (loss) amount adjusted for cumulative
dividends on preferred stock (numerator) by the weighted average number of
common shares outstanding during the period (denominator). Diluted net
increase (decrease) in net assets from operations per share amounts reflect
the maximum dilution that would have resulted from the assumed exercise of
stock options, if any, and from the assumed conversion of convertible
securities, if any. Diluted net increase (decrease) in net assets from
operations per share is computed by dividing the net income (loss) amount
adjusted for cumulative dividends on preferred stock by the weighted
average number of common and potentially dilutive securities outstanding
during the period. For all periods presented there are no potentially
dilutive securities so basic and diluted net increase (decrease) in net
asset from operation per share is the same.
51
COMPREHENSIVE INCOME
SFAS No. 130, REPORTING COMPREHENSIVE INCOME, establishes standards for
reporting and displaying comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. It requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same
prominence as other financial statements. SFAS No. 130 requires that an
enterprise (a) classify items of other comprehensive income by their nature
in financial statements, and (b) display the accumulated balance of other
comprehensive income separately in the equity section of the balance sheet
for all periods presented. The Company's comprehensive income (loss) does
not differ from its reported net income (loss).
As an investment company, the Company must report changes in the fair value
of its investments outside of its operating income on its statement of
operations and reflect the accumulated appreciation or depreciation in the
fair value of its investments as a separate component of its stockholders'
deficit. This treatment is similar to the treatment required by SFAS No.
130.
CONCENTRATION OF CREDIT RISK Cash is maintained at financial institutions.
The Federal Deposit Insurance Corporation ("FDIC") insures accounts at each
institution for up to $100,000. At times, cash balances may exceed the FDIC
insurance limit of $100,000.
RECENT ACCOUNTING PRONOUNCEMENTS
There are several new accounting pronouncements issued by the Financial
Accounting Standards Board ("FASB") which are not yet effective. Each of
these pronouncements, as applicable, has been or will be adopted by the
Company. Management does not believe any of these accounting pronouncements
has had or will have a material impact on the Company's financial position
or operating results.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain
Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and
140", to simplify and make more consistent the accounting for certain
financial instruments. SFAS No. 155 amends SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", to permit fair value
re-measurement for any hybrid financial instrument with an embedded
derivative that otherwise would require bifurcation, provided that the
whole instrument is accounted for on a fair value basis. SFAS No. 155
amends SFAS No. 140, "Accounting for the Impairment or Disposal of
Long-Lived Assets", to allow a qualifying special-purpose entity to hold a
derivative financial instrument that pertains to beneficial interest other
than another derivative financial instrument. SFAS No. 155 applies to all
financial instruments acquired or issued after the beginning of an entity's
first fiscal year that begins after September 15, 2006, with earlier
application allowed. This standard is not expected to have a significant
effect on the Company's future reported financial position or results of
operations.
52
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measures".
This Statement defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles, expands disclosures
about fair value measurements, and applies under other accounting
pronouncements that require or permit fair value measurements. SFAS No. 157
does not require any new fair value measurements. However, the FASB
anticipates that for some entities, the application of SFAS No. 157 will
change current practice. SFAS No. 157 is effective for fiscal years
beginning after November 15, 2007, which for the Company would be its
fiscal year beginning January 1, 2008. The Company is currently evaluating
the impact of SFAS No. 157 but does not expect that it will have a material
impact on its financial statements.
3. INVESTMENTS
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) and Rule 2a-4 under the
Investment Company Act of 1940 (the "1940 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 of Directors may appoint persons to assist them in the
determination of such value and to make the actual calculations pursuant to
the Board of Directors' direction. The Board of Directors 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
established, 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 use 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 Board of Directors should consider in determining a valuation
method for an individual issue of securities include: 1) the fundamental
analytical data relating to the investment, 2) the nature and duration of
restrictions on disposition of the securities, and 3) an evaluation of the
forces which influence the market in which these securities are purchased
and sold. Among the more specific factors which are to be considered are:
type of security, financial statements, cost at date of purchase, size of
holding, discount from market value of unrestricted securities of the same
class at time of purchase, special reports prepared by analysts,
53
information as to any transactions or offers with respect to the security,
existence of merger proposals or tender offers affecting the securities,
price and extent of public trading in similar securities of the issuer or
comparable companies and other relevant matters.
The Board of Directors has arrived at the following valuation method for
its investments. Where there is not a readily available source for
determining the market value of any investment, either because the
investment is not publicly traded or is thinly traded and in absence of a
recent appraisal, the value of the investment shall be based on the
following criteria:
o Total amount of the Company's actual investment. This amount
shall include all loans, purchase price of securities and fair
value of securities given at the time of exchange;
o Total revenues for the preceding twelve months;
o Earnings before interest, taxes and depreciation;
o Estimate of likely sale price of investment;
o Net assets of investment; and
o Likelihood of investment generating positive returns (going
concern).
The estimated value of each investment shall be determined as follows:
o Where no or limited revenues or earnings are present, then the
value shall be the greater of net assets, estimated sales price,
or total cost for each investment;
o Where revenues and/or earnings are present, then the value shall
be the greater of one-times (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; or
o 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.
Utilizing the foregoing method, the Company has valued its investments as
follows:
Tandy Leather Factory, Inc. (AMEX:TLF) is a specialty retailer and
wholesale distributor of leather products, tools and leather finishes
and kits in which the Company currently owns 11,000 shares (less than
1% of the total outstanding shares) with a cost of $52,011. Based on
the closing price on December 31, 2006, the Company has valued its
investment at $88,770.
Special Projects Group (Pink Sheets:SPLJ) is a distributor and
marketer of security and defense products and training manuals. As of
December 31, 2006, the Company has an investment of 800,000 shares
with a cost of $102,403. Based on the closing price on December 31,
2006, the Company has valued its investment at $176,000. In addition,
the Company made a loan to Special Projects in the amount of $50,000
in July 2006, which is due in July 2007. Based on the positive
valuation of the stock and the current maturity the loan is valued at
cost.
54
SM&A (NASDAQ:WINS); is a leading provider of business strategy,
proposal development and program services for winning and delivering
competitive procurements. As of December 31, 2006, the Company has an
investment of $35,669 in 6,000 shares which are valued at $34,800
based on the closing price on December 31, 2006.
Professionals Direct, Inc. (OTCBB:PFLD); provides lawyer liability
insurance and underwriting and other services to insurance companies.
As of December 31, 2006, the Company has an investment of $18,790 in
800 shares which are valued at $20,900 based on the closing price on
December 31, 2006.
LFM Management, LLC, dba 1st Choice Mortgage (Privately held); direct
to consumer brokerage company. The Company owns 33.3% of 1st Choice
with an investment of $250,000 made in March 2006. Based on the
current performance of LFM and its prospects, the Company has valued
its investment at the original cost of $250,000.
EE Investors, LLC - Bouncing Brain Productions, LLC (Privately held);
Bouncing Brain is an inventor promotion company. At December 31, 2006,
the Company owns 10.27% of EE Investors, LLC, which owns 16.2% of
Bouncing Brain. The cost of $250,000 is from an investment made in
March 2006. Based on the current performance of Bouncing Brain and its
prospects, the Company has valued its investment at the original cost
of $250,000.
Lifestyle Innovations, Inc. (OTCBB:LFSI); non-interest bearing note
and accounts receivable investment of approximately $1,200,000 face
value with a cost of $100,000 in June 2006. This is a speculative
investment in a public company with plans to acquire another operating
business. The Company has valued its investment at the original cost
of $100,000.
Signature Energy, Inc. operator of 37.5% working interest in 2 oil and
gas properties in Washington County, Oklahoma. The Company's original
cost was $128,216 and the valuation of $225,000 is based on
engineering estimates provided by the operator.
Chanticleer Investors LLC (Privately held); only asset is a 6%,
convertible, $5,000,000 loan to Hooters of America, Inc. Interest only
is payable quarterly and accrued interest and principal is due May 24,
2009. The Company owns 23% of Chanticleer Investors and receives a
management fee equal to 2% of the interest being paid on the loan. The
remaining 4% of the interest is distributed to the investors
quarterly. The Company values its interest in Chanticleer Investors at
its cost of $1,150,000 based on the assets of Chanticleer Investors.
4. NOTE PAYABLE
The Company has a one-year line-of-credit with a bank in the amount of
$250,000 which matures on June 21, 2007. The loan is guaranteed by the
Chief Executive Officer of the Company and is collateralized by all
inventory, chattel paper, accounts, equipment and general intangibles of
the Company. The loan has a balance of $150,704 at December 31, 2006, and
bears interest at 8.25% per annum.
55
5. INCOME TAXES
During the years ended December 31, 2006, 2005 and 2004, the provision for
income taxes (all deferred) differs from the amounts computed by applying
the U.S. Federal income tax rate of 34% to income before provision for
income taxes as a result of the following:
2006 2005 2004
---------- ---------- ----------
Computed "expected" income tax benefit $ (67,700) $ (58,500) $ (5,200)
State income taxes, net of federal benefit (8,000) (6,900) (600)
Travel and entertainment 4,200 200 -
Valuation allowance 71,500 65,200 5,800
---------- ---------- ----------
Income tax benefit $ - $ - $ -
========== ========== ==========
Significant components of deferred income tax assets are as follows:
2006 2005 2004
---------- ---------- ----------
Net operating loss carryforwards $ 221,700 $ 84,000 $ 7,100
Investments (79,200) (13,000) (1,300)
---------- ---------- ----------
Total deferred tax assets 142,500 71,000 5,800
Valuation allowance (142,500) (71,000) (5,800)
---------- ---------- ----------
Net deferred tax assets $ - $ - $ -
========== ========== ==========
The Company has a net operating loss carryforward of approximately
$582,000, which will expire at various dates beginning in 2024 through
2026, if not utilized.
56
6. COMPOSITION OF NET ASSETS (STOCKHOLDERS' EQUITY)
The Company has 200,000,000 shares of its $0.0001 par value common stock
authorized and 7,689,461 shares issued and outstanding at December 31,
2006. There are no warrants or options outstanding.
2006 TRANSACTIONS
During the year ended December 31, 2006, the Company sold 83,250 shares of
its common stock pursuant to its Offering Circular under Regulation E
promulgated under the Securities Act of 1933 for proceeds of $83,250. In
addition, during the first quarter of 2006, the Company determined they
were not going to be paid on the stock subscription receivable of
$1,000,000 and the related 1,000,000 shares have been returned to counsel
to be cancelled.
2005 TRANSACTIONS
On April 10, 2005, the Company's sole shareholder at the time, Interim
Capital Corporation, returned 2,950,000 shares of the Company's common
stock to us in exchange for our investment in Sanguaro Holdings Corp. At
the time of the exchange the Company had an unrealized loss of $49,000 on
its investment in Sanguaro Holding Corp. Accordingly, the unrealized loss
of $49,000 was reclassified as a realized loss. Simultaneously, nine
individuals assumed certain of the Company's liabilities in the amount of
$48,017 in exchange for 3,950,000 shares of the Company's common stock.
On May 2, 2005, the Company increased its authorized common stock from
100,000,000 shares to 200,000,000 shares.
During the year ended December 31, 2005, the Company sold 2,545,211 shares
of its common stock, pursuant to its Offering Circular under Regulation E
promulgated under the Securities Act of 1933. Proceeds were $2,545,212,
less $10,000 in legal costs associated with the offering. In addition, the
Company issued 55,000 shares of its common stock to a shareholder in
exchange for $55,000 in loans made by the shareholder to the Company.
In July 2005, the Company exchanged 6,000 shares of its common stock for
300,000 additional shares of American Resource Management, Inc.
In October 2005, the Company exchanged 1,000,000 shares of its common stock
for a stock subscription receivable in the amount of $1,000,000.
57
7. RELATED PARTY TRANSACTIONS
On December 13, 2006, the Company completed the acquisition of a $50,000
investment in Chanticleer Investors LLC from Michael D. Pruitt, CEO, at its
original cost and at the estimated market value at the time. This increased
the Company's interest in Chanticleer Investors LLC from $1,100,000 (22%)
to $1,150,000 (23%) at December 31, 2006.
On April 10, 2005, the Company's sole shareholder at the time, Interim
Capital Corporation, returned 2,950,000 shares of the Company's common
stock to us in exchange for our investment in Sanguaro Holdings Corp. At
the time of the exchange the Company had an unrealized loss of $49,000 on
its investment in Sanguaro Holding Corp. Accordingly, the unrealized loss
of $49,000 was reclassified as a realized loss.
Simultaneously, nine individuals assumed certain of the Company's
liabilities in the amount of $48,017 in exchange for 3,950,000 shares of
the Company's common stock. The Company's chief executive officer received
1,625,000 of these shares and the other three members of the Board of
Directors received 25,000 shares each.
8. COMMITMENTS AND CONTINGENCIES
The Company has a lease for its office with monthly payments of $2,562
through March 31, 2007, which is adequate for its current needs.
On February 22, 2007, the Company entered into a lease agreement jointly
with Five Oaks Capital Partners, LLC to lease a total of 5,041 square feet,
commencing March 26, 2007 through December 31, 2008. The Company's
allocated share of the space is 2,000 square feet and its monthly base rent
is $3,863 for the balance of 2007 and $3,980 each month in 2008. Five Oaks
Capital Partners, LLC is the managing member of EE Investors, LLC, in which
the Company is a 3.125% investor.
On November 21, 2006, the Company entered into a 120 day option agreement
with Hooters of America, Inc. to purchase the right to open and operate
Hooters restaurants in the Republic of South Africa. Negotiations are
underway regarding a proposed development plan.
58
CHANTICLEER HOLDINGS, INC.
Financial Highlights
For the Years Ended December 31, 2006, 2005 and 2004
2006 2005 2004
---- ---- ----
PER SHARE INFORMATION
Net asset value, beginning of year $ 0.2939 $ 0.0283 $ 0.0005
Net decrease from operations (0.0527) (0.0293) (0.0061)
Net change in realized gain (loss) and unrealized
appreciation (depreciation) of investments, net 0.0268 (0.0035) 0.0011
Net increase from stock transactions 0.0459 0.2984 0.0328
-------------- ------------- ---------------
Net asset value, end of year $ 0.3139 $ 0.2939 $ 0.0283
============== ============= ===============
Per share market value:
Beginning of period $ 1.3000 $ 0.0001 $ 0.0001
End of period 1.1000 1.3000 0.0001
Investment return, based on market prices
at end of period -15% (a) (a)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year 2,413,389 2,529,352 113,302
Average net assets 2,533,311 358,949 64,112
Annualized ratio of expenses to average net assets 21% 44% 29%
Annualized ratio of net decrease in net assets
from operations to average net assets -8% -48% -24%
Common stock outstanding at end of year 7,689,461 8,606,211 4,000,000
Weighted average shares outstanding during year 7,686,657 5,245,319 3,109,290
(a) The Company began trading on July 27, 2005. Prior to that time, the Company's stock did not trade
accordingly, the market value is assumed to be $.0001, the par value of the common stock.
59
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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"), who also serves as the Company's principal accounting officer,
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, concluded that, as of December
31, 2006, 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 his most recent evaluation as of the Evaluation Date, December 31,
2006, the CEO has also concluded that the other controls and procedures, that
are designed to ensure that information required to be disclosed in our periodic
filings with the SEC, are adequate.
Changes in Internal Control
There were no significant changes made in the Company's internal controls over
financial reporting, during the three months ended December 31, 2006, 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
Not applicable.
60
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 as
of December 31, 2006; 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 four Directors. The Board of Directors does not expect to appoint
additional Directors until a potential acquisition is identified.
NAME AGE POSITION
Michael D. Pruitt 46 President, CEO and Director since June 2005
Michael Carroll 58 Independent Director since June 2005
William Block 68 Independent Director since June 2005
Brian Corbman 31 Independent Director since August 2005
Michael D. Pruitt
- -----------------
Michael Pruitt, a long-time entrepreneur with a proven track record, possesses
the expertise to evaluate potential investments, form key relationships and
recognize a strong management team. Mr. Pruitt founded Avenel Financial Group, a
boutique financial services firm concentrating on emerging technology company
investments. The business succeeded immediately, and in order to grow Avenel
Financial Group to its full potential and better represent the company's ongoing
business model, he formed Avenel Ventures, an innovative technology investment
and business development company. In the late 1980s, Mr. Pruitt owned Southern
Cartridge, Inc., which he eventually sold to MicroMagnetic, Inc., where he
continued working as Executive Vice President and a Board member until Southern
Cartridge was sold to Carolina Ribbon in 1992. From 1992 to 1996, Mr. Pruitt
worked in a trucking firm where he was instrumental in increasing revenues from
$6 million to $30 million. The firm was sold in 1996 to Priority Freight
Systems. Between 1997 and 2000, Mr. Pruitt assisted several public and private
companies in raising capital, recruiting management and preparing companies to
go public or be sold. He was the CEO, President and Chairman of the Board of
Onetravel Holdings, Inc. (formerly RCG Companies), a publicly traded holding
company formerly listed on the AMEX. Mr. Pruitt received a Bachelor of Arts
degree from Coastal Carolina University in Conway, South Carolina, where he sits
on the Board of Visitors of the Wall School of Business. He is also Managing
Director of Cain Capital Advisors. Mr. Pruitt is currently CEO and director of
Double Eagle Holdings, Inc., formerly Onspan Networking, Inc. (ONSP.OB), which
is currently inactive.
61
Michael Carroll
- ---------------
Michael Carroll currently owns and operates a sales and training consulting firm
based in Richmond, Virginia. Mr. Carroll has also served as a director for
OneTravel Holdings, Inc., formerly RCG Companies Incorporated, since January of
2004. Mr. Carroll previously spent 22 years in the distribution business, 19 of
which were in computer products distribution. In 1978, Mr. Carroll founded
MicroMagnetic, Inc., a computer supply distribution company that he sold to
Corporate Express in 1997. From 1997 to 1999, he was a division president at
Corporate Express, a publicly traded business-to-business office products and
service provider. Mr. Carroll holds a Bachelor's Degree in Business Management
from The College of William & Mary in Williamsburg, Virginia, and a Master's
Degree in Business Administration from Virginia Commonwealth University.
William Block
- -------------
William Block has been active in small cap investing for over thirty years, both
on the buy-side and on the sell-side. Mr. Block is well known for discovering
small companies that have become future leaders, such as McDonalds, H&R Block,
Tandy and Hospital Corporation of America (now Columbia HCA). Mr. Block founded
W.A.B. Capital, an investment research boutique that specializes in providing
equity, research and investment advisory to financial institutions. Mr. Block's
niche is identifying rapidly growing, yet undervalued publicly traded companies.
Mr. Block and W.A.B. Capital have been featured or quoted in publications such
as the Wall Street Journal, Buyside Magazine, the Wall Street Transcript and
Business Week. Mr. Block serves as head of our Investment Committee.
Brian Corbman
- -------------
Brian Corbman is the managing director of Ardent Advisors, a consulting company
he co-founded in 2003, that specializes in business strategy and corporate
advisory services for emerging growth companies. Mr. Corbman is in the process
of becoming an Officer of Supervisory Jurisdiction under the Westor Capital
broker dealer umbrella and services buy-side institutional investors via equity
research, institutional trading execution and investment banking activities.
Previously, he was an institutional salesman at Fulcrum Global Partners and Banc
of America Securities. Prior to that, Mr. Corbman gained valuable corporate
experience working for GSI Commerce, a publicly traded company, where he was the
sole corporate development analyst. A Magna Cum Laude graduate of George
Washington University in Washington, DC, he holds a Bachelor's degree in
Business Administration. Mr. Corbman has also attained the NASD general
securities principal Series 24, Series 7 and Series 63 licenses.
AUDIT COMMITTEE
The Board of Directors has determined that Michael Carroll meets the
requirements of a financial expert and serves as Chairman of the Audit
Committee. Mr. Carroll is independent as specified in Item 7 (d)(3)(iv) of
Schedule 14A under the Exchange Act.
62
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. Carroll and Mr. Corbman.
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 the best of our knowledge,
based solely on a review of reports furnished to us, each of the Directors
timely filed any required Form 4's during fiscal 2006.
CODE OF ETHICS
The Board of Directors of the Company adopted a Code of Ethics which was
effective May 23, 2005.
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
which was effective May 23, 2005.
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.
63
NOMINATING COMMITTEE
We do not currently have a standing nominating committee, or a committee
performing similar functions. The full Board of Directors currently serves this
function.
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.
(A) 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, 2006.
ANNUAL COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS TOTAL
- --------------------------- ---- ------ ----- -----
Michael D. Pruitt (CEO since 2006 $ - $ - $ -
June 2005) (1) 2005 - - -
2004 N/A N/A N/A
Ross Silvey (CEO until 2006 N/A N/A N/A
June 2005) (2) 2005 - - -
2004 - - -
(1) Mr. Pruitt did not receive any compensation during 2005 and 2006.
(2) Mr. Silvey did not receive any compensation during his term in office
as CEO.
Required columns for stock awards, option awards, non-entity incentive plan
compensation, change in pension value and nonqualified deferred compensation
earnings and all other compensation are omitted from the table above as the
amounts are all zero.
Mr. Pruitt has not been receiving compensation during our initial start-up phase
as a BDC. Mr. Pruitt will commence receiving compensation of $1,000 per month in
February 2007. Our compensation for Directors is based on comparative
compensation levels for similar positions and time requirements.
64
EMPLOYMENT AGREEMENTS
The Company does not have any current employment agreements with its officers
and directors. The company intends to pay its Executives and Directors salaries,
wages, or fees commensurate with experience and industry standards in
relationship to the success of the company.
(B) GRANTS OF PLAN-BASED AWARDS TABLE
There were no grants of plan-based awards during the year for the named
individuals.
(C) OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE
There were no outstanding equity awards at fiscal year-end for the named
individuals.
(D) OPTION EXERCISES AND STOCK VESTED TABLE
There were no option exercises during the year and no stock vested at fiscal
year-end for the named individuals.
(E) PENSION BENEFITS
There are no pension plans.
(F) NONQUALIFIED DEFINED CONTRIBUTION AND OTHER NONQUALIFIED DEFERRED
COMPENSATION PLANS
There are no nonqualified defined contribution or other nonqualified deferred
compensation plans.
(G) POTENTIAL PAYMENTS UPON TERMINATION OR CHANGES-IN-CONTROL
There are no potential payments upon termination or changes-in-control for the
named individuals.
(H) COMPENSATION OF DIRECTORS
Directors Fee
Earned or Paid
Name In Cash ($)
- ---- -----------
Michael D. Pruitt $ -
Michael Carroll 4,500
William Block 4,500
Brian Corbman -
65
Director compensation was not paid to executive officers.
Directors are generally compensated $1,500 for each meeting during the year.
Although there were no formal meetings during the year, Mr. Carroll and Mr.
Block were paid $4,500 each. Mr. Pruitt and Mr. Corbman do not currently receive
director fees.
The columns for stock awards, option awards, non-equity incentive plan
compensation, change in pension value and nonqualified deferred compensation
earnings and all other compensation are omitted as there was no other form of
compensation for the directors.
(I) COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The outside Directors serve on the compensation committee.
(J) COMPENSATION COMMITTEE REPORT
Based on the Compensation Discussion and Analysis required by Item 402(b)
between the compensation committee and management, the compensation committee
recommended to the Board of Directors that the Compensation Discussion and
Analysis be included in the 10-K.
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 January 31, 2007, 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 January 31, 2007, there were
7,689,461 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 Palisades Master Fund, LP 4,194,800 54.55%
4500 Cameron Valley Parkway, # 270
Charlotte, NC 28211
66
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 January 31,
2007, the most recent practicable date. As of January 31, 2007, there were
7,689,461 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 Michael D. Pruitt (1) 1,686,861 21.94%
4500 Cameron Valley Parkway, # 270
Charlotte, NC 28211
Common Michael Carroll 25,000 *
4500 Cameron Valley Parkway, # 270
Charlotte, NC 28211
Common William Block 25,000 *
4500 Cameron Valley Parkway, # 270
Charlotte, NC 28211
Common Brian Corbman 25,500 *
4500 Cameron Valley Parkway, # 270
Charlotte, NC 28211
Common All officers and directors as a 1,762,361 22.92%
Group (4 persons)
(1) All shares are held by Avenel Foundation for which Mr. Pruitt is Trustee.
* Less than 1%.
EQUITY COMPENSATION PLAN INFORMATION
We do not currently have an equity compensation plan.
67
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 13, 2006, we completed acquisition of a $50,000 investment in
Chanticleer Investors LLC from Michael D. Pruitt, CEO, at its original cost and
at the estimated market value at the time. This increased our interest in
Chanticleer Investors LLC from $1,100,000 (22%) to $1,150,000 (23%) at December
31, 2006.
On April 10, 2005, the Company's sole shareholder at the time, Interim Capital
Corporation, returned 2,950,000 shares of the Company's common stock to us in
exchange for our investment in Sanguaro Holdings Corp. At the time of the
exchange, the Company had an unrealized loss of $49,000 on its investment in
Sanguaro Holding Corp. Accordingly, the unrealized loss of $49,000 was
reclassified as a realized loss.
Simultaneously, nine individuals assumed certain of the Company's liabilities in
the amount of $48,017 in exchange for 3,950,000 shares of the Company's common
stock. The Company's chief executive officer received 1,625,000 of these shares
and the other three members of the Board of Directors received 25,000 shares
each.
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES: For the fiscal years ended December 31, 2006 and 2005, Creason &
Associates, P.L.L.C. ("Creason") billed the Company $23,800 and $15,950,
respectively, for services rendered through February 27, 2007, 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.
AUDIT RELATED FEES: None.
TAX FEES: Not applicable.
OTHER FEES: None.
68
PART IV
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
Chanticleer Holdings, Inc. are contained in Item 8 of this Form
10-K:
o Report of Independent Registered Public Accountant
o Statements of Net Assets at December 31, 2006 and 2005
o Statements of Operations - For the years ended December
31, 2006, 2005 and 2004
o Statements of Cash Flows - For the years ended December
31, 2006, 2005 and 2004
o Statements of Changes in Net Assets - For the years
ended December 31, 2006, 2005 and 2004
o Schedule of Investments - At December 31, 2006 and 2005
o Notes to the Financial Statements
o Financial Highlights - For the years ended December 31,
2006, 2005 and 2004
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 and Chief Financial
Officer pursuant to Rule 13a-14 of the Securities Exchange Act of
1934
32.1 Certification of the Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350
69
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 March 30, 2007.
CHANTICLEER HOLDINGS, INC.
By: /s/ Michael D. Pruitt
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Michael D. Pruitt, Chairman,
Chief Executive Officer and
Chief Financial 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
March 30, 2007 Chairman, Chief Executive Officer /s/ Michael D. Pruitt
and Chief Financial Officer ----------------------
Michael D. Pruitt
March 30, 2007 Director /s/ Michael Carroll
----------------------
Michael Carroll
March 30, 2007 Director /s/ Brian Corbman
----------------------
Brian Corbman
March 30, 2007 Director /s/ William Block
----------------------
William Block
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