SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
000-28027
(Commission File Number)
GLOBAL BEVERAGE SOLUTIONS, INC.
(Exact Name of Registrant as Specified in Charter)
90-0093439
(IRS Employer Identification No.)
NEVADA
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(State or Other Jurisdiction of Incorporation)
2 S. UNIVERSITY DR, SUITE 220, PLANTATION, FL 33324
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(Address of Principal Executive Offices) (Zip Code)
7633 E 63RD PLACE, SUITE 220, TULSA, OK 74133
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(Former Address of Principal Executive Offices) (Zip Code)
954-473-0850
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(Registrant's Telephone Number, Including Area Code)
Securities Registered under Section 12 (b) of the Exchange Act:
NONE
Securities Registered under Section 12 (g) of the Exchange Act:
Common Stock, $0.001 Par Value
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) filed all reports to be filed
by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes [X]
No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Revenues for the twelve months ended December 31, 2006, were $124,698.
The aggregate market value of the voting stock (which consists solely of shares
of common stock) held by non-affiliates of the issuer as of February 28, 2007,
computed by reference to the market value (closing price) of the registrant's
common stock, as reported by the over-the-counter bulletin board, and was
approximately $16,669,000.
As of February 28, 2007, there were 132,610,400 shares of the issuer's common
stock issued and outstanding.
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.
TABLE OF CONTENTS
PAGE
PART I
ITEM 1 Business 4
ITEM 1A Risk Factors 15
ITEM 2 Properties 32
ITEM 3 Legal Proceedings 32
ITEM 4 Submission of Matters to a Vote of Security Holders 32
PART II
ITEM 5 Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 32
ITEM 6 Selected Financial Data 34
ITEM 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 34
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk 41
ITEM 8 Financial Statements and Supplementary Data 42
ITEM 9 Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 65
ITEM 9A Controls and Procedures 66
ITEM 9B Other Information 66
PART III
ITEM 10 Directors, Executive Officers and Corporate Governance 67
ITEM 11 Executive Compensation 69
ITEM 12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 70
ITEM 13 Certain Relationships and Related Transactions, and
Director Independence 71
ITEM 14 Principal Accountant Fees and Services 72
PART IV
ITEM 15 Exhibits and Financial Statement Schedules 72
SIGNATURES 73
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PART I
FORWARD LOOKING STATEMENTS
This Annual Report contains forward-looking statements within the meaning of the
federal securities laws that involve a number of risks and uncertainties. Our
future results may differ materially from our historical results and actual
results could differ materially from those projected in the forward-looking
statements as a result of certain risk factors. These factors are described in
the "Risk Factors" section below. Among the factors that could cause actual
results to differ materially from those expected are the following: business
conditions and general economic conditions; competitive factors, such as pricing
and marketing efforts; and the pace and success of product research and
development. These and other factors may cause expectations to differ.
ITEM 1: BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Global Beverage Solutions, Inc. ("Global," the "Company," "we," "our" or "us"),
a Nevada corporation, was incorporated on January 29, 1997, with the name
Mercury Software.
On June 19, 2003, we became a Business Development Company ("BDC") pursuant to
applicable provisions of the Investment Company Act of 1940 (the "1940 Act").
Global provides equity and debt investment capital to fund growth, acquisitions
and recapitalizations of small market companies primarily located in the United
States. We are looking to invest in companies that are cash-flow positive or are
likely to become cash-flow positive in the foreseeable future based on sound
economic fundamentals. These entities will have the prospect for expansion as a
result of access to capital and/or additional management acumen provided by
Global. As part of this strategic process, we are looking for investment
opportunities in the beverage product categories and/or services that have the
potential for a positive return on investment, both in terms of current income
and capital appreciation. Our investments can take the form of common and
preferred stock and warrants or rights to acquire equity interests, senior and
subordinated loans, or convertible securities. Our common stock is traded in the
over-the-counter market and is quoted on the NASD Over The Counter Bulletin
Board ("OTCBB") under the symbol GBVS.
Effective April 18, 2005, we implemented a 2500-to-1 reverse split of our common
stock. Immediately following this reverse stock split, there were 218,500 of our
common shares issued and outstanding. All share references are restated to give
effect to the reverse stock split.
Pursuant to Regulation S-X, Rule 6, the Company will operate on a
non-consolidated basis. Operations of the portfolio companies will be reported
at the subsidiary level and only the appreciation or impairment of these
investments in portfolio companies will be included in the Company's financial
statements.
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NAME CHANGES
Mercury Software changed its name to MedEx Corp. on June 24, 2002. Aussie
Apparel Group Ltd. ("Aussie Apparel"), a Nevada corporation, was incorporated on
August 26, 2002. In October 2002, MedEx Corp. issued an aggregate of 2,600
shares of its common stock to the shareholders of Aussie Apparel in connection
with the merger of Aussie Apparel with MedEx Corp., whose name was then changed
to "Aussie Apparel Group Ltd" on October 21, 2002. Since the shareholders of
Aussie Apparel became the controlling shareholders of MedEx Corp. after the
exchange, Aussie Apparel was treated as the acquirer for accounting purposes.
Accordingly, the financial statements, as presented herein, are the historical
financial statements of Aussie Apparel and include the transactions of MedEx
Corp. only from the date of acquisition, using reverse merger accounting.
We changed our name to Bluetorch Inc. ("Bluetorch"), effective November 3, 2003.
On April 19, 2005 in accordance with a Mutual Settlement and Release Agreement,
the Company amended its articles of incorporation to implement a name change of
the Company. Effective April 25, 2005 the Company's new name became Pacific
Crest Investments. Following the public announcement of our new name, we
received notice that another corporation had a name similar to Pacific Crest
Investments. In order to avoid potentially prolonged and expensive litigation,
we agreed to change our name again, and effective May 5, 2005, our new name
became Pacific Peak Investments.
On October 10, 2005, we changed our name to Global Beverage Solutions, Inc. to
emphasize our concentration in the beverage industry.
(b) FINANCIAL INFORMATION ABOUT SEGMENTS
We operate in one business segment, as a BDC.
(c) NARRATIVE DESCRIPTION OF BUSINESS
BUSINESS SUMMARY
Under the election to be governed as a business development company under the
1940 Act, we have been organized to provide investors with the opportunity to
participate, with a modest amount in venture capital, in investments that are
generally not available to the public and that typically require substantially
larger financial commitments. In addition, we will provide professional
management and administration that might otherwise be unavailable to investors
if they were to engage directly in venture capital investing. We have decided to
be regulated as a business development company under the 1940 Act, and will
operate as a non-diversified company as that term is defined in Section 5(b)(2)
of the 1940 Act. We will, at all times, conduct our business so as to retain our
status as a BDC. We may not change the nature of our business so as to cease to
be, or withdraw our election as, a BDC without the approval of the holders of a
majority of our outstanding voting stock as defined under the 1940 Act.
As a business development company, we are required to invest at least 70% of our
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.) We 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.
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 stabilized than target
portfolio companies.
NATURE OF A BDC
The 1940 Act defines a BDC as a closed-end management investment company that
provides small businesses that qualify as an eligible portfolio company with
investment capital and also significant managerial assistance. A BDC is required
under the 1940 Act to invest at least 70% of its total assets in qualifying
assets consisting of eligible portfolio companies as defined in the 1940 Act and
certain other assets including cash and cash equivalents.
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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.
Control under the 1940 Act is presumed to exist where a BDC owns more than 25%
of the outstanding voting securities of the eligible portfolio company. We may
or may not control our portfolio companies.
An example of an eligible portfolio company is a new start up company or a
privately owned company that has not yet gone public by selling its shares in
the open market and has not applied for having its shares listed on a nationally
recognized exchange such as the NYSE the American Stock Exchange, National
Association of Securities Dealers' Automated Quotation System, or the National
Market System. An eligible portfolio company can also be one which is subject to
filing, has filed, or has recently emerged from reorganization protection under
Chapter 11 of the Bankruptcy Act.
A BDC may invest the remaining 30% of its total assets in non-qualifying assets,
including companies that are not eligible portfolio companies. The foregoing
percentages will be determined, in the case of financings in which a BDC commits
to provide financing prior to funding the commitment, by the amount of the BDC's
total assets represented by the value of the maximum amount of securities to be
issued by the borrower or lessee to the BDC pursuant to such commitment. As a
BDC, we must invest at least 70% of our total assets in qualifying assets but
may invest more in such qualifying assets.
PRIMARY STRATEGY
We will have significant relative flexibility in selecting and structuring our
investments. We will not be subject to many of the regulatory limitations that
govern traditional lending institutions such as banks. We will 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 will 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 will not be 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
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.
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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 will 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 loan; or
o investment situations or in hedging the risks associated with
interest rate fluctuations, and, in such cases, only after all
necessary registrations or exemptions from registration with the
Commodity Futures Trading Commission have been obtained.
Prospective Portfolio Company Characteristics - We have identified several
criteria that we believe will prove important in seeking our investment
objective with respect to target companies. These criteria will provide general
guidelines for our investment decisions; however, we caution readers that not
all of these criteria will be met by each prospective portfolio company in which
we choose to invest.
Experienced Management - We will generally require that our portfolio companies
have an experienced president or management team. We will 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 intend to provide assistance in this area
either supervising management or providing management for our portfolio
companies.
Products or Services - We will seek companies that are involved in products or
services that do not require significant additional capital or research
expenditures. In general, we will seek target companies that make innovative use
of proven technologies or methods.
Proprietary Advantage - We expect to 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 will 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 will 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.
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Exit Strategy - Prior to making an investment in a portfolio company, we will
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.
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 or
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 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
warrant 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,
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 followed 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.
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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,
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.
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 that warrant such an
evaluation, we will obtain an independent appraisal of the target company.
ONGOING RELATIONSHIPS WITH PORTFOLIO COMPANIES
Monitoring - We will 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,
but we believe that we will nevertheless perform well in the future.
We will 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, who are well known by
our management team, will closely monitor the status and performance of each
individual company on at least a quarterly and, in some cases, a monthly basis.
We will 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;
o Review of monthly and quarterly financial statements and financial
projections for portfolio companies.
Managerial Assistance - As a business development company, we will offer, and in
many cases may 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.
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DIVERSIFICATION
As a BDC, we must invest at least 70% of our total assets in qualifying assets
consisting of investments in eligible portfolio companies and certain other
assets including cash and cash equivalents. In order to receive favorable
pass-through tax treatment on its distributions to our shareholders, we intend
to diversify our pool of investments in such a manner so as to qualify as a
diversified closed end management investment company. However, because of the
limited size of the funding which is likely to be available to us, we will
likely be classified as a non-diversified closed end investment company under
the 1940 Act. Until we qualify as a registered investment company, we will not
be 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. In the future, we will seek to
increase the diversification of our portfolio so as to make it possible to meet
the RIC diversification requirements, as described below. We cannot assure you,
however, that we will ever be able to meet those requirements.
To qualify as a RIC, we must meet the issuer diversification standards under the
Internal Revenue Code that require that, at the close of each quarter of our
taxable year,
o not more than 25% of the market value of our total assets is
invested in the securities of a single issuer, and
o at least 50% of the market value of our total assets is represented
by cash, cash items, government securities, securities of other
RICs, and other securities.
Each investment in these other securities is limited so that not more than 5% of
the market value of our total assets is invested in the securities of a single
issuer and we do not own more than 10% of the outstanding voting securities of a
single issuer. For purposes of the diversification requirements under the
Internal Revenue Code, the percentage of our total assets invested in securities
of a portfolio company will be deemed to refer, in the case of financings in
which we commit to provide financing prior to funding the commitment, to the
amount of our total assets represented by the value of the securities issued by
the eligible portfolio company to us at the time each portion of the commitment
is funded.
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 to provide financing to target companies will 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 will 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.
CURRENT PORTFOLIO COMPANIES
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BEVERAGE NETWORK OF MARYLAND, INC. ("BNM")
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On February 23, 2007, we completed the purchase of BNM from XStream Beverage
Network, Inc. ("XStream"). The transaction was structured as a merger of BNM
into our wholly owned subsidiary Global Merger Corp. pursuant to the Agreement
and Plan of Merger between the parties dated January 31, 2007, and as amended
February 23, 2007.
Based in Jessup, Maryland, BNM engages in the distribution of beverages in the
Mid-Atlantic States. XStream is an emerging brand development company in the new
age beverage industry.
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As a part of the transaction we issued 60,500,000 shares of our common stock and
a $2,000,000 note payable to XStream. At closing, we paid $229,000 on the note
and pursuant to the agreements will pay 40% of any subsequent cash proceeds
received from the February 5, 2007 1-E Offering. The remaining note balance is
to be paid in monthly installments of $25,000 commencing September 1, 2007.
Additionally, if we raise any equity capital while the note is still
outstanding, we are required to apply 35% of the net proceeds to reduce the
note.
BNM had unaudited net revenue of $9,758,000 and a net loss of $149,000 during
2006.
AQUA MAESTRO, INC. ("AM")
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On March 29, 2007, we completed the purchase of AM from its shareholders. The
transaction was structured as a merger of AM into our wholly owned subsidiary,
Global Beverage Acquisition Corp. pursuant to the Agreement and Plan of Merger
and Reorganization between the parties dated March 29, 2007.
With the business office in Boca Raton, Florida and logistics in Fort
Lauderdale, Florida, AM is engaged in the wholesale and retail distribution of
domestic and imported bottled water, comprising forty-four brands and over one
hundred-seventy different items. The wholesale client base is across North
America and the Caribbean, including well-known hotels and resorts. In its
retail home delivery division, AM provides product through its Internet site
aquamaestro.com.
Consideration for the acquisition of AM includes $500,000 in cash, 10,000,000
shares of our common stock and an earn-out. The cash is payable $300,000 at
closing and the balance in equal monthly installments of $22,222 beginning April
15, 2007. The earn-out is a percentage of defined gross profit equal to 10% of
calendar 2008 gross profit, 5% of calendar 2009 gross profit and 3% of calendar
2010 gross profit.
RUDY PARTNERS, LTD. ("PARTNERS")
- --------------------------------
On January 18, 2007, we executed an agreement with Partners wherein we agreed to
sell our 80% interest in Rudy for an 8% secured promissory note in the amount of
$6,000,000 plus assumption of the advances and receivables owed to us by Rudy.
The agreement is expected to close before the end of April 2007. The note will
be collateralized by 11,000,000 shares of our common stock and will be payable
in six annual installments of $1,000,000 commencing January 31, 2008. In
addition, Partners agreed to convert any notes payable by Rudy to us, once
Partners becomes publicly-traded or a subsidiary of a publicly-traded company,
into no more than 20% of the common stock of the publicly traded entity, based
upon the market value of the public entity's common stock.
RUDY BEVERAGE, INC. ("RUDY")
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On November 17, 2005, we executed a Stock Purchase Agreement with the
shareholders ("Sellers") of Rudy, a Nevada corporation, whereby we exchanged
6,000,000 shares of our common stock for 80% of the issued and outstanding
common stock of Rudy. The Sellers were eligible to receive up to 10,000,000
additional shares of our common stock if Rudy achieved certain sales and net
revenue goals by the twelve month periods ending June 30, 2007 and 2008. Rudy
was founded by Rudy Ruettiger and Drew Carver to create a unique line of
beverages higher in nutritional value but lower in sugar than existing brands.
Rudy currently has developed two distinct products: Rudy Flying Colors, catering
to children K1 through 8; and Rudy Revolution, a sport drink aimed at athletes
of all ages. The goal of the Rudy line of beverages is to create flavorful juice
blends which are low in sugar.
We originally valued our investment in Rudy at December 31, 2006, based on the
estimated value of the collateral on the Partners note of $3,375,000, resulting
in an original adjustment of $3,294,760 as unrealized depreciation of our
investment and recorded bad debt expense of $88,218 for our receivable from Rudy
for interest accrued on loans. Subsequent to December 31, 2006, based on the
decline in the collateral on the Partners note, that is, the shares of our
common stock, we recorded an additional adjustment of $1,800,000 under guidance
in FAS 5 for the additional decline in our common stock as of April 24, 2007.
11
EON BEVERAGE GROUP, INC. ("EON")
- --------------------------------
On July 8, 2005, we consummated the transactions contemplated by the Share
Purchase Agreement (dated June 28, 2005) with EON and, as a result, we invested
$400,000 in exchange for 9% of the issued and outstanding common stock of EON.
During the first quarter of 2006, shareholders of the Company contributed their
stock in EON to us, which increased our ownership to 44%. While EON expected to
sell a substantial volume of its structured water to Rudy for use in certain of
its drinks, the Board of Directors has determined that EON will not achieve
profitability without substantial additional investment, which we are unwilling
to provide. Accordingly, we fully reserved our investment of $400,000 and fully
reserved our advances of $611,500 for a total unrealized depreciation expense of
$1,011,500 at September 30, 2006. Accounts receivable in the amount of $50,369
for interest charges and management fees were also fully reserved at September
30, 2006.
TITANIUM DESIGN STUDIO, INC. ("TDS")
- ------------------------------------
On June 6, 2005, we signed a Share Purchase Agreement with TDS, a Nevada
corporation, whereby we invested $200,000 in cash in exchange for 8% of the
issued and outstanding common stock of TDS. TDS has a proprietary manufacturing
process which allows it to cast precision titanium jewelry resulting in a level
of detail not obtainable by milling titanium. TDS can economically produce and
supply jewelry in shapes and patterns which were previously considered to be
impossible or uneconomical to manufacture. TDS believes its technology has
applications in other industries, including aerospace, dentistry, sporting goods
(fishing rods) and commemorative coins. Early in 2006, TDS relocated its
operations to Thailand in order to access cheaper labor. As a result of our
reduced influence on operations, our Board of Directors fully reserved our
investment of $200,000 on December 31, 2005.
FORMER PORTFOLIO COMPANIES
--------------------------
As of December 31, 2006, Global has two wholly owned subsidiary companies,
Unboxed Distribution, Inc. ("Unboxed") and Total Sports Distribution, Inc.
("Total Sports"). The operations of Unboxed and Total Sports were discontinued
early in 2005 when it became evident that they would not be able to attain
profitability within a reasonable period of time. During 2005, we also exchanged
our 51% investment in Island Tribe, Inc. ("Island Tribe") for the 12,000 shares
of our common stock which we had initially issued to acquire Island Tribe.
We signed an acquisition agreement in December 2002 with Australian-based
Federation Group for the Hot Tuna, Xisle and Piranha Boy brands. We then spent
most of 2003 and the early part of 2004 restructuring our portfolio of apparel
brands.
We rescinded our acquisition agreement for Hot Tuna, Xisle and Piranha Boy in
November 2003 and assigned the rights for the three brands to Frontier
International Holdings Pty Ltd. In addition, we changed our name from Aussie
Apparel Group Ltd. to Bluetorch Inc. in recognition of this brand restructuring
and our move away from the original portfolio of Australian brands. We replaced
the intended Australian portfolio of brands with other brands including
Bluetorch, True Skate Apparel (TSABrand), Airwalk and Island Tribe.
UNBOXED
- -------
In September 2003, Unboxed signed a licensing agreement (with option to acquire)
with Gotcha Brands, Inc. for the Bluetorch label.
On March 12, 2005, Global and Unboxed signed a Mutual Settlement and Release
Agreement with Gotcha Brands Inc., the Bluetorch licensor. This agreement
required Unboxed to cease the selling and marketing of Bluetorch apparel and we
also agreed to change our corporate name by April 20, 2005.
This wholly owned subsidiary has been inactive since March 12, 2005.
TOTAL SPORTS
- ------------
On January 10, 2004, Total Sports entered into a license agreement (with an
option to purchase) with Krash Distribution Inc. to license the True Skate
Apparel (TSABrand) name for apparel and accessories.
On February 19, 2004, Total Sports signed a definitive agreement with Collective
Licensing International, LLC to license the Airwalk brand for apparel in the
United States market. On March 22, 2005, Global and Total Sports signed a Mutual
Settlement and Release Agreement with Collective Licensing International, LLC,
the licensor of the Airwalk apparel brand. This agreement required Total Sports
to cease selling and marketing Airwalk apparel. On July 1, 2005, Global and
Total Sports signed a Mutual Settlement and Release Agreement with Krash
Distribution Inc., the licensor of TSABrand apparel. This agreement required
Total Sports to cease selling and marketing of TSABrand apparel.
This wholly owned subsidiary has been inactive since July 1, 2005.
12
ISLAND TRIBE
- ------------
In accordance with a Stock Purchase Agreement dated August 20, 2004, we
purchased for 12,000 restricted shares of our common stock, a 51% interest in
Island Tribe, a surf apparel company. This transaction was effective August 1,
2004 and the investment was valued at $372,000, based upon the trading price of
our common stock at the time of the transaction. Over the next 4 years, the
purchase agreement provided for us to receive an additional 24% ownership of
Island Tribe. On November 20, 2005, we returned our 51% interest in Island Tribe
in exchange for the 12,000 restricted shares we had originally issued for the
acquisition and cancelled the shares.
VALUATION METHODOLOGY - We determine the value of each investment in our
portfolio on a quarterly basis, and changes in value result in unrealized gains
or losses being recognized. At December 31, 2006, approximately 99.94% of our
total assets represented portfolio investments recorded at fair value. Value, as
defined in Section 2(a)(41) of the Investment Company Act of 1940, is (i) the
market price for those securities for which a market quotation is readily
available and (ii) for all other securities and assets, fair value is as
determined in good faith by the board of directors. Since there is typically no
readily ascertainable market value for the investments in our portfolio, we
value substantially all of our portfolio investments at fair value as determined
in good faith by the board of directors pursuant to a valuation policy and a
consistently applied valuation process. Because of the inherent uncertainty of
determining the fair value of investments that do not have a readily
ascertainable market value, the fair value of our investments determined in good
faith by the board of directors may differ significantly from the values that
would have been used had a ready market existed for the investments, and the
differences could be material.
There is no single standard for determining fair value in good faith. As a
result, determining fair value requires that judgment be applied to the specific
facts and circumstances of each portfolio investment while employing a
consistently applied valuation process for the types of investments we make.
Unlike banks, we are not permitted to provide a general reserve for anticipated
loan losses. Instead, we are required to specifically value each individual
investment on a quarterly basis. We will record unrealized depreciation on
investments when we believe that an investment has become impaired, including
where collection of a loan or realization of an equity security is doubtful, or
when the enterprise value of the company does not currently support the cost of
our debt or equity investment. Conversely, we will record unrealized
appreciation if we believe that the underlying portfolio company has appreciated
in value and, therefore, our equity security has also appreciated in value.
Changes in fair value are recorded in the statements of operations as "Change in
unrealized depreciation of non-controlled affiliate investments."
As a business development company, we plan to invest in liquid securities
including debt and equity securities of primarily private companies. The
structure of each private finance debt and equity security will be specifically
negotiated to enable us to protect our investment and maximize our returns. We
include many terms governing interest rate, repayment terms, prepayment
penalties, financial covenants, operating covenants, ownership parameters,
dilution parameters, liquidation preferences, voting rights, and put or call
rights. Our investments are generally subject to restrictions on resale and
generally have no established trading market. Because of the type of investments
that we make and the nature of our business, our valuation process requires an
analysis of various factors. Our fair value methodology includes the examination
of, among other things, the underlying investment performance, financial
condition and market changing events that impact valuation.
Valuation Methodology - Private Finance. Our process for determining the fair
value of a private finance investment begins with determining the enterprise
value of the portfolio company. The fair value of our investment is based on the
enterprise value at which the portfolio company could be sold in an orderly
disposition over a reasonable period of time between willing parties other than
in a forced or liquidation sale. The liquidity event whereby we exit a private
finance investment is generally the sale, the recapitalization or, in some
cases, the initial public offering of the portfolio company.
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There is no one methodology to determine enterprise value and, in fact, for any
one-portfolio company, enterprise value is best expressed as a range of fair
values, from which we derive a single estimate of enterprise value. To determine
the enterprise value of a portfolio company, we analyze its historical and
projected financial results. We generally require portfolio companies to provide
monthly unaudited financial statements, as well as annual projections for the
upcoming fiscal year. Typically in the private equity business, companies are
bought and sold based upon multiples of EBITDA, cash flows, net income, revenues
or, in limited instances, book value. The private equity industry uses financial
measures such as EBITDA or EBITAM (Earnings Before Interest, Taxes,
Depreciation, Amortization and, in some instances, Management fees) in order to
assess a portfolio company's financial performance and to value a portfolio
company. EBITDA and EBITAM are not intended to represent cash flow from
operations as defined by accounting principles generally accepted in the United
States of America and such information should not be considered as an
alternative to net income, cash flow from operations, or any other measure of
performance prescribed by accounting principles generally accepted in the United
States of America. When using EBITDA to determine enterprise value, we may
adjust EBITDA for non-recurring items. Such adjustments are intended to
normalize EBITDA to reflect the portfolio company's earnings power. Adjustments
to EBITDA may include compensation to previous owners, acquisition,
recapitalization, or restructuring related items or one-time non-recurring
income or expense items.
In determining a multiple to use for valuation purposes, we look to private
merger and acquisition statistics, discounted publicly trading multiples or
industry practices. In estimating a reasonable multiple, we consider not only
the fact that our portfolio company may be a private company relative to a peer
group of public comparables, but we also consider the size and scope of our
portfolio company and its specific strengths and weaknesses. In some cases, the
best valuation methodology may be a discounted cash flow analysis based on
future projections. If a portfolio company is distressed, a liquidation analysis
may provide the best indication of enterprise value.
COMPLIANCE WITH THE SARBANES-OXLEY ACT OF 2002 AND NYSE CORPORATE GOVERNANCE
REGULATIONS. On July 30, 2002, President Bush signed into law the Sarbanes-Oxley
Act of 2002 (the "Sarbanes-Oxley Act"). The Sarbanes-Oxley Act imposes a wide
variety of new regulatory requirements on publicly-held companies and their
insiders. Many of these requirements will affect us. For example:
- - Our chief executive officer and chief financial officer must now certify the
accuracy of the financial statements contained in our periodic reports;
- - Our periodic reports must disclose our conclusions about the effectiveness of
our disclosure controls and procedures;
- - Our periodic reports must disclose whether there were significant changes in
our internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses; and
- - We may not make any loan to any director or executive officer and we may not
materially modify any existing loans.
The Sarbanes-Oxley Act has required us to review our current policies and
procedures to determine whether we comply with the Sarbanes-Oxley Act and the
new regulations promulgated thereunder. We will continue to monitor our
compliance with all future regulations that are adopted under the Sarbanes-Oxley
Act and will take actions necessary to ensure that we are in compliance
therewith.
CODE OF ETHICS, AUDIT COMMITTEE CHARTER AND INVESTMENT COMMITTEE CHARTER
The board of directors of the Company adopted a Code of Ethics, an Audit
Committee Charter and an Investment Committee Charter, all effective as of
August 27, 2003.
The Code of Ethics in general prohibits any officer, director or advisory person
(collectively, "Access Person") of the Company from acquiring any interest in
any security which the Company (i) is considering a purchase or sale thereof,
(ii) is being purchased or sold by the Company, or (iii) is being sold short by
the Company. The Access Person is required to advise us in writing of his or her
acquisition or sale of any such security.
14
The primary responsibility of the Audit Committee is to oversee our financial
reporting process on behalf of our Board of Directors and report the result of
their activities to 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. Terry Turner, an independent director, had
been designated the Audit Committee's "financial expert."
The Investment Committee shall have oversight responsibility with respect to
reviewing and overseeing our contemplated investments in portfolio companies and
other investments on behalf of the Board and shall report the results of their
activities to the Board. Such Investment Committee shall (i) have the ultimate
authority for and responsibility to evaluate and recommend investments, and (ii)
review and discuss with management (a) the performance of portfolio companies,
(b) the diversity and risk of our investment portfolio, and, where appropriate,
make recommendations respecting the role or addition of portfolio investments
and (c) all solicited and unsolicited offers to purchase portfolio companies.
The member of the Audit Committee is Terry Turner, an independent director of
the Company. The members of the Investment Committee include the full Board of
Directors.
ITEM 1A: RISK FACTORS
The purchase of securities offered hereby involves significant risks and is
suitable only for investors of adequate financial means which have no need for
liquidity in this investment and who can afford to lose their entire investment.
Investing in common stock involves a high degree of risk. Certain risks relate
to investments generally, others to us and our investments and others arise due
to our present status but each investor should carefully consider all of the
risks described below, together with all of the other information included in
this prospectus, before you decide whether to make an investment in our common
stock. The risks set out below are not the only risks we face. If any of the
following risks occur, our business, financial condition and results of
operations could be materially adversely affected. In such case, our net asset
value and the trading price of our common stock could decline, and you may lose
all or part of your investment. The following risks affect us and our business:
GENERAL RISK FACTORS
INVESTMENTS IN OUR STOCK BY NEW SHAREHOLDERS WILL BE DILUTED IMMEDIATELY.
Due, in part, to increases in our share price, some of our present shareholders
have acquired an interest in us at a total cost substantially less than the
total cost that newer investors will likely pay for their shares. Therefore, the
newer investors will bear a greater proportion of the risk of loss (measured by
the cost of shares). As of February 28, 2007, there were 950,000,000 shares of
common stock authorized and 132,610,400 common shares outstanding. All shares
were considered issued at their par value.
WE MAY SELL ADDITIONAL EQUITY IN THE FUTURE THAT MAY FURTHER DILUTE THE VALUE OF
YOUR INVESTMENT.
Reductions in the price of our stock resulting from the performance of our
portfolio or other market conditions might result in stock being sold to new
investors, including management, at prices below the price paid by you. Senior
management may be granted the right, and others may have the right, under
certain circumstances, to acquire additional shares of our stock at a price
equal to the market price as it exists at a point in the future. If such a grant
of a right occurred at a time where the price of the stock has fallen relative
to the current market value and falls below the price paid by you, management
might be given the right to purchase stock at a price below your cost. In either
of these cases, the value of your investment would be further diluted.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF MANAGEMENT.
While limitations of liability and indemnification are themselves limited, we
have instituted provisions in our bylaws indemnifying, to the extent permitted,
against and not making management liable for, any loss or liability incurred in
connection with our affairs, so long as such loss or liability arose from acts
performed in good faith and not involving any fraud, gross negligence or willful
misconduct. Therefore, to the extent that these provisions provide any
protection to management, that protection may limit the right of a shareholder
to collect damages from members of management. Management is accountable to the
shareholder as a fiduciary and, consequently, members of management are required
to exercise good faith and integrity in handling our affairs.
15
OUR BUSINESS MAY BECOME SUBJECT TO EXTENSIVE ADDITIONAL REGULATION AT THE
FEDERAL AND STATE LEVELS. THE VALUE OF SECURITIES OWNED BY US MAY BE ADVERSELY
IMPACTED BY SUBSEQUENT REGULATORY CHANGES.
Our operations are and will be affected by current and future legislation and by
the policies established from time to time by various federal and state
regulatory authorities. It is not possible to predict what changes, if any, will
be made to existing federal and state legislation and regulations or the effect
that such changes may have on our future business and earnings prospects. Our
current investment strategy includes purchase of unregistered securities in both
private companies as well as private placements offered by public companies. We
are able to purchase securities pursuant to exemptions to the registration
requirements of United States Federal securities laws. Changes in such laws or
their interpretation could adversely impact our ability to resell such
securities which would have a negative effect on the value of such securities as
well as impact our overall investment strategy and the liquidity of our
investments. In such an event, we may need to reformulate our investment
strategy or we may choose to liquidate.
WE CANNOT GUARANTEE PAYING DIVIDENDS TO OUR STOCKHOLDERS.
We are allowed by our articles of incorporation and/or by-laws to pay dividends
to our stockholders. However, there can be no guarantee we will have sufficient
revenues to pay dividends during any period. We intend to make distributions on
a quarterly basis to our stockholders out of assets legally available for
distribution. We cannot assure you that we will achieve investment results or
maintain a tax status that will allow or require any specified level of cash
distributions or year-to-year increases in cash distributions. In addition, due
to the asset coverage test applicable to us as a business development company,
we may be limited in our ability to make distributions. Investors in need of
liquidity through the payment of dividends should refrain from common stock
which does not have a dividend requirement.
INVESTING IN OUR SHARES MAY INVOLVE A HIGH DEGREE OF RISK.
The investments we make in accordance with our investment objective may result
in a higher amount of risk than alternative investment options and volatility or
loss of principal. Our investments in portfolio companies may be speculative and
aggressive, and therefore, an investment in our shares may not be suitable for
someone with low risk tolerance.
THE MARKET PRICE OF OUR COMMON STOCK MAY FLUCTUATE SIGNIFICANTLY.
The market price and liquidity of the market for shares of our common stock may
be significantly affected by numerous factors, some of which are beyond our
control and may not be directly related to our operating performance. These
factors, may adversely affect our ability to raise capital through future equity
financings. These factors include:
o significant volatility in the market price and trading volume of
securities of business development companies or other companies in
the beverage industry, which are not necessarily related to the
operating performance of these companies;
o changes in regulatory policies or tax guidelines, particularly with
respect to RICs or business development companies;
o our common stock is unlikely to be followed by any market analysts,
and there may be few institutions acting as market makers for the
common stock which can adversely affect its price;
o loss of or inability to qualify for RIC status or BDC status;
o changes in earnings or variations in operating results;
o changes in the value of our portfolio of investments;
o any shortfall in revenue or net income or any increase in losses
from levels expected by investors or securities analysts;
o departure of one or more of our key personnel;
o operating performance of companies comparable to us;
o potential legal and regulatory matters;
o changes in prevailing interest rates;
o general economic trends and other external factors; and
o loss of a major funding source.
SALES OF SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK IN THE PUBLIC MARKET MAY HAVE
AN ADVERSE EFFECT ON THE MARKET PRICE OF OUR COMMON STOCK.
We filed an Offering Circular under Regulation E promulgated under the
Securities Act of 1933 with the Securities and Exchange Commission on January 3,
2007 and filed an Amended Offering Circular on February 5, 2007, to raise up to
$3,200,000 via sale of our common shares for a price of not less than $.15 per
share. Upon consummation of this offering, we will issue from 9,142,857 to
21,333,333 additional shares of common stock. Following this offering, 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.
16
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,
subject to the regulations pertaining to the minimum prices for which shares may
be sold, further dilute the book value of the common stock. These issuances may
also serve to enhance existing management's ability to maintain control of the
Company.
WE HAVE INDICATED THAT, WHILE WE HAVE THE RIGHT, WE DO NOT INTEND TO ISSUE
ADDITIONAL SENIOR SECURITIES, INCLUDING DEBT. IF WE WERE TO REVERSE THAT
DECISION AND OFFER FOR SALE AND/OR ISSUE SENIOR SECURITIES, YOU WILL BE EXPOSED
TO ADDITIONAL RISKS, INCLUDING THE TYPICAL RISKS ASSOCIATED WITH LEVERAGE.
You will be exposed to increased risk of loss if we incur debt to make
investments. If we do incur debt, a decrease in the value of our investments
would have a greater negative impact on the value of our common stock than if we
did not use debt.
o Our ability to pay dividends would be restricted if our asset
coverage ratio were not at least 200% and any amounts that we use to
service our indebtedness would not be available for dividends to our
common stockholders.
o It is likely that any debt we incur will be governed by an indenture
or other instrument containing covenants restricting our operating
flexibility.
o The Company and you will bear the cost of issuing and servicing our
senior securities.
o Any convertible or exchangeable securities that we issue in the
future may have rights, preferences and privileges more favorable
than those of our common stock.
OUR INVESTMENTS MAY REQUIRE US TO RAISE ADDITIONAL CAPITAL ON DIFFERENT TERMS.
WHILE WE DO NOT PRESENTLY INTEND TO ISSUE ADDITIONAL SENIOR SECURITIES OR
CONVERTIBLE DEBT SECURITIES, MARKET CONDITIONS MAY REQUIRE US TO ISSUE NEW
SECURITIES ON DIFFERENT TERMS.
There is no minimum amount of the Amended Offering Circular under Regulation E
that must be sold. Even if all of the shares of the Offering are sold, we may
require additional capital in the future. For additional requirements, while we
have no present intention to do so, we may raise capital by issuing equity or
convertible debt securities, and when we do, the percentage ownership of our
existing stockholders will be diluted. In addition, any new securities we issue
could have rights, preferences and privileges senior to the shares offered
herein (although we have indicated that we do not intend to sell debt or
preferred equity interests).
Our ability to raise capital as a BDC is limited by the requirement that we not
sell shares below the NAV/S without approval of a majority of our shareholders.
While we do not anticipate that the NAV/S calculation will ever result in a
negative number or a nominally positive number, the Company would be severely
limited in its ability to sell shares if such a negative number or a nominally
positive number were to be the result of a NAV/S calculation.
INCREASES IN MARKET INTEREST RATES MAY BOTH REDUCE THE VALUE OF OUR PORTFOLIO
INVESTMENTS AND INCREASE OUR COST OF CAPITAL.
We expect that we may offer loans to our portfolio companies with interest at
fixed rates and the value of these investments could be negatively affected by
increases in market interest rates. In addition, an increase in interest rates
would make it more expensive to use debt to finance our investments. As a
result, a significant increase in market interest rates could both reduce the
value of our portfolio investments and increase our cost of capital, which would
reduce our net investment income.
THE LACK OF LIQUIDITY IN OUR INVESTMENTS MAY ADVERSELY AFFECT OUR BUSINESS.
We will generally make investments in private companies. Substantially all of
these securities will be subject to legal and other restrictions on resale or
will otherwise be less liquid than publicly traded securities. The illiquidity
of our investments may make it difficult for us to sell such investments if the
need arises. In addition, if we are required to liquidate all or a portion of
our portfolio quickly, due to changes in or capital needs or otherwise, we may
realize significantly less than the value at which we have previously recorded
our investments. In addition, we may face other restrictions on our ability to
liquidate an investment in a portfolio company to the extent that we or our
investment adviser has material non-public information regarding such portfolio
company.
17
WE MAY EXPERIENCE FLUCTUATIONS IN OUR QUARTERLY AND ANNUAL RESULTS.
We could experience fluctuations in our quarterly and annual operating results
due to a number of factors, including the interest or dividend rates payable on
the debt or equity securities we acquire, performance and/or default rate on
securities we acquire, the level of our expenses, variations in and the timing
of the recognition of realized and unrealized gains or losses, the degree to
which we encounter competition in our markets, changes in the beverage industry,
and general economic conditions. As a result of these factors, results for any
period should not be relied upon as being indicative of performance in future
periods.
WE MAY NOT REALIZE GAINS OR INCOME FROM OUR INVESTMENTS.
We seek to generate both current income and capital appreciation. However, the
securities, in which we invest, may not appreciate and, in fact, may decline in
value, and the issuers of debt securities, in which we invest, may default on
interest and/or principal payments. Accordingly, we may not be able to realize
gains from our investments, and any gains that we do realize may not be
sufficient to offset any losses we experience.
YOUR INFLUENCE IN MATTERS REQUIRING SHAREHOLDER ACTION WILL BE SUBJECT TO THE
PROBABILITY THAT MOST SHAREHOLDERS WILL FOLLOW MANAGEMENT'S DIRECTION.
While no officer or director holds a large percentage of the issued and
outstanding shares of our voting securities (and, while there are presently no
other securities that can be exchanged therefore, there are no classes of
outstanding stock which would affect the percentages of voting securities),
there are no major shareholders with a controlling and no consortium of
shareholders has been identified with block of control or who would likely
exercise voting control over all matters that may be submitted for approval by
our shareholders. Without such a controlling block, management positions will be
the most likely to be presented to shareholders and more likely to influence
shareholder decisions (assuming a fact that shareholders will likely "vote with"
management). Therefore, while the number of shares controlled by the officers
and directors is less that a majority, their position of control is material and
significant.
PURSUANT TO OUR ARTICLES OF INCORPORATION, OUR BOARD OF DIRECTORS HAS THE
AUTHORITY TO ISSUE SHARES OF STOCK WITHOUT ANY FURTHER VOTE OR ACTION BY THE
STOCKHOLDERS. THE ISSUANCE OF STOCK UNDER CERTAIN CIRCUMSTANCES COULD HAVE THE
EFFECT OF DELAYING OR PREVENTING A CHANGE IN CONTROL OF THE COMPANY OR MAY DETER
TAKEOVER ATTEMPTS.
Our Articles of Incorporation contain provisions that may have the effect of
discouraging, delaying or making more difficult a change in control and
preventing the removal of incumbent directors. The existence of these provisions
may reduce any premiums over market price that a potential acquirer would offer
to shareholders for their shares of our common stock. Furthermore, we are
subject to provisions of the Nevada Revised Statutes that may make it difficult
for a potential acquirer to exert control over our Board of Directors and may
discourage attempts to gain control without the consent of the Board of
Directors.
RISKS ASSOCIATED WITH BUSINESS DEVELOPMENT COMPANIES GENERALLY
BDCS GENERALLY REQUIRE SUBSTANTIAL AMOUNTS OF TIME TO REALIZE THE BENEFITS FROM
INVESTMENTS.
Venture capital investments typically take from four to eight years from the
date of initial investment to reach a state of maturity at which liquidation can
be considered practical. We have not completed funding of some of our portfolio
companies and we anticipate that there may be an additional period of time
ranging from three to six months before we have obtained funding and completed
investing that funding in our portfolio companies for our first round of equity
investments. In light of the foregoing, it is unlikely that any significant
distributions of the proceeds from the liquidation of equity investments will be
made for several years after inception, if at all.
18
OUR PRESENT SENIOR MANAGEMENT TEAM HAS LIMITED EXPERIENCE MANAGING A BUSINESS
DEVELOPMENT COMPANY UNDER THE INVESTMENT COMPANY ACT OF 1940.
The 1940 Act imposes numerous constraints on the operations of business
development companies. For example, business development companies are required
to invest at least 70% of their total assets primarily in securities of
privately held or thinly traded U.S. public companies, cash, cash equivalents,
U.S. government securities and other high quality debt investments that mature
in one year or less. The lack of experience of our senior management team in
managing a portfolio of assets under such constraints may hinder their ability
to take advantage of attractive investment opportunities and, as a result,
achieve our investment objective. Within the BDC format, the information about
deals and deal flow generated by our senior management in connection with their
investment and portfolio management activities will have a significant impact on
our future success as a BDC. The senior management team will evaluate,
structure, negotiate terms and close investments on those terms, monitor and
service our investments and their abilities to perform these functions as
members of a BDC will also have a significant impact on our future success as a
BDC.
We will be wholly dependent for the selection, structuring, closing and
monitoring of all of our investments on the diligence and skill of our
management, acting under the supervision of our board of directors. None of
these individuals has substantial experience, within or under a BDC investment
and management format, in acquiring and investing in growth stage companies, the
negotiation of the terms of such investments and the monitoring of such
investments after they are made. In addition, we will engage outside consultants
and professionals known to management to assist in evaluating and monitoring
portfolio companies and maintaining regulatory compliance.
While we believe that our management possesses certain fundamental business
skills that will increase the likelihood, on our part, 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 we gain the expertise to manage a
BDC.
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.
Additionally, to the extent that we invest in other investment companies, while
this may be limited to the extent that such investment companies are not
"qualifying assets" limiting the percentage of our assets which may be invested
in such investment companies, an investment in another investment company might
result in duplication of services, including management and administration
relating to holding of assets, which duplication could result in expenditures
and costs incurred without any value to the portfolio companies, the result of
which would be reduced value to our shareholders.
OUR INVESTMENTS MAY NOT GENERATE SUFFICIENT INCOME TO COVER OUR OPERATIONS.
While we intend to make investments into those qualified companies that will
provide the greatest overall return on our investment, we are required to make
investments into those companies which, whether due to lack of experience or
financial instability (including insolvency), may present the greatest risk.
This is in conformity with the Small Business Investment Incentive Act of 1980
which amended the 1940 Act and permitted the creation of BDC's. However, certain
of those investments may fail, in which case we will not receive any return on
our investment. In addition, our investments may not generate income, either in
the immediate future, or at all. As a result, we may have to sell additional
stock, or borrow money, to cover our operating expenses. The effect of such
actions could cause our stock price to decline or, if we are not successful in
raising additional capital, we could cease to continue as a going concern. It
should be noted that our operational costs are higher as a result of our having
elected to be governed as a BDC.
SHARES IN A BDC WILL LIKELY TRADE AT A DISCOUNT.
Shares of many closed-end investment companies and most BDC's frequently trade
at a discount to their net asset value. This characteristic is separate and
distinct from the risk that our net asset value could decrease as a result of
investment activities. This likely discount in share pricing in the market may
pose a greater risk to investors expecting to sell their shares in a relatively
short period following completion of this offering. We cannot predict whether
our shares will trade at prices above, at or below our net asset value.
19
REGULATIONS GOVERNING OUR OPERATION AS A BUSINESS DEVELOPMENT COMPANY AFFECT OUR
ABILITY TO RAISE, AND THE WAY IN WHICH WE RAISE, ADDITIONAL CAPITAL.
We have the right to issue debt securities or preferred stock and/or borrow
money from banks or other financial institutions, which we refer to collectively
as "senior securities," only in amounts such that our asset coverage, as defined
in the 1940 Act, equals at least 200% after each issuance of senior securities,
the maximum amount permitted by the 1940 Act. If the value of our assets
declines, we may be unable to satisfy this test. If that happens, we may be
required to sell a portion of our investments or sell additional shares of
common stock and, depending on the nature of our leverage, to repay a portion of
our indebtedness at a time when such sales may be disadvantageous. In addition,
any future issuance of additional shares of our common stock could dilute the
percentage ownership of our current stockholders in us.
As a business development company regulated under provisions of the 1940 Act, we
are not generally able to issue and sell our common stock at a price below net
asset value per share. We may, however, sell our common stock, or warrants,
options or rights to acquire our common stock, at a price below the current net
asset value of our common stock (1) if our board of directors determines that
such sale is in the best interests of us and our stockholders, and (2) our
stockholders approve such sale. In any such case, the price at which our
securities are to be issued and sold may not be less than a price which, in the
determination of our board of directors, closely approximates the market value
of such securities (less any sales load).
In addition, we may in the future seek to securitize or hypothecate loans we
previously made to generate cash for funding new investments. To securitize or
hypothecate these loans, we may contribute a pool of such loans to a
wholly-owned subsidiary. This could include the sale of interests in the
subsidiary on a non-recourse basis to purchasers who we would expect to be
willing to accept a lower interest rate to invest in investment grade loan pools
although we would expect to retain a portion of the equity in the securitized
pool of loans. An inability to successfully securitize and sell all of part of
such a loan portfolio could limit our ability to grow our business, fully
execute our business strategy and decrease our earnings, if any. Moreover, the
successful securitization of our loan portfolio might expose us to losses
because the residual loans in which we do not sell interests will tend to be
those that are riskier and more likely to generate losses.
OUR ELECTION TO BE GOVERNED AS A BDC WILL REQUIRE US TO COMPLY WITH SIGNIFICANT
REGULATORY REQUIREMENTS.
We elected to be regulated as a Business Development Company under the 1940 Act
and be subject to Sections 54 through 65 of said Act. As a result of this
election, we are subject to the provisions of 1940 Act as it applies to BDCs as
of the date of such election. Being subject to the BDC provisions requires us to
meet significant numbers of regulatory and financial requirements. Compliance
with these regulations is expensive and may create financial problems for us in
the future. These laws and regulations, as well as their interpretation, may be
changed from time to time. Accordingly, any change in these laws or regulations
could have a material adverse effect on our business.
Specifically, it must be noted that there are increased costs associated with
compliance with the 1940 Act as a result of our election to become a BDC. These
costs include costs associated with the increased demand for compliance
including oversight by our Chief Compliance Officer and counsel to the Company
as well as increased costs due to accounting methodology and valuations which
increase the time and work required of both our accounting service providers and
independent auditors. These costs require us to expend capital and resources
that might otherwise be used to meet the needs or opportunities relating to
investments and/or our portfolio companies or other income-producing assets.
If we do not remain a business development company, we might continue to be
regulated as a closed-end investment company under the 1940 Act, which would
decrease our operating flexibility. We cannot assure you that we will
successfully retain our BDC status.
IF OUR PRIMARY INVESTMENTS ARE DEEMED NOT TO BE QUALIFYING ASSETS, WE COULD LOSE
OUR STATUS AS A BUSINESS DEVELOPMENT COMPANY OR BE PRECLUDED FROM INVESTING
ACCORDING TO OUR CURRENT BUSINESS PLAN.
Under the 1940 Act, in order to maintain our status as a business development
company, we must not acquire any assets other than "qualifying assets" unless,
at the time of and after giving effect to such acquisition, at least 70% of our
total assets are qualifying assets. If we acquire mezzanine loans or
dividend-paying equity securities from an issuer that has outstanding marginable
securities at the time we make an investment, these acquired assets cannot be
treated as qualifying assets since the issuer might not be consider an "eligible
portfolio company" under the 1940 Act. "Marginable securities" include any
non-equity security, pursuant to certain 1998 amendments to Regulation T under
the Securities Exchange Act of 1934, as amended, which raises the question as to
whether a private company that has outstanding debt securities would qualify as
an eligible portfolio company.
20
WE OPERATE IN A HIGHLY COMPETITIVE MARKET FOR INVESTMENT OPPORTUNITIES.
A large number of entities will compete with us to make the types of investments
that we plan to make in target portfolio companies in the beverage industry and
in other industries. We will compete with other business development companies,
public and private funds, commercial and investment banks and commercial
financing companies. Many of our competitors are substantially larger and have
considerably greater financial, technical and marketing resources than we do.
For example, some competitors may have a lower cost of funds and access to
funding sources that are not available to us. In addition, some of our
competitors may have higher risk tolerances or different risk assessments, which
could allow them to consider a wider variety of investments and establish more
relationships than us. Furthermore, many of our competitors are not subject to
the regulatory restrictions that the 1940 Act imposes on us as a business
development company. We cannot assure you that the competitive pressures we face
will not have a material adverse effect on our business, financial condition and
results of operations. Also, as a result of this competition, we may not be able
to take advantage of attractive investment opportunities from time to time, and
we can offer no assurance that we will be able to identify and make investments
that are consistent with our investment objective.
WE MAY NEVER BE ABLE TO QUALIFY FOR THE INCOME TAX BENEFITS OFFERED TO RICS.
We will be classified as a non-diversified investment company under the 1940
Act. Until we achieve a threshold level of diversification, we will not be
subject to the applicable provisions for RICs under the Internal Revenue Code.
Therefore, we will not receive favorable pass through tax treatment on
distributions to our shareholders. This means that we will be taxed as an
ordinary corporation on our taxable income even if that income is distributed to
shareholders, and all distributions out of our earnings and profits will be
taxable to shareholders as dividends. Thus, this income will be subject to a
double layer of taxation.
RISKS ASSOCIATED WITH INVESTMENTS AND PORTFOLIO COMPANIES
THERE ARE COSTS ASSOCIATED WITH THE PURCHASE AND SALE OF SECURITIES.
While the general approach of a BDC may suggest a long-term holding position of
the securities of its portfolio companies, some of our strategies may include
purchases of different classes of securities or frequent trading to maximize
profits and, as a consequence, risks related to turnover and costs such as
brokerage commissions may be greater than for an investment in a single entity
for a single class of security held for a longer period of time. Our operating
expenses, including, but not limited to, fees paid to accountants, attorneys,
fees to execute trades, manage investments and fees paid to any investment
advisor may, in the aggregate, constitute a high percentage relative to the
expenses and fees than for an investment in a single entity for a single class
of security held for a longer period of time.
THERE ARE NUMEROUS RISKS ARISING FROM INVESTING IN SECURITIES.
The securities industry is generally competitive and methods of investment
strategy involve a degree of risk. We will compete with firms, including many of
the larger securities and investment banking firms, which have substantially
greater financial resources and research staffs. Where we purchase securities in
portfolio companies for appreciation, our profitability substantially depends
upon our ability to correctly assess the future price movements of stocks. There
can be no assurance that we will be able to accurately predict price movements
of securities purchased.
Security investments generally involve a high degree of risk. The performance of
securities in which we may invest are subject to numerous factors which are
neither within the control of nor predictable by us. Such factors can include a
wide range of economic, political, competitive and other conditions which may
affect investments in general or specific industries or companies. In recent
years, the securities markets have become increasingly volatile and this
volatility has increased the degree of risk.
OUR INVESTMENTS IN PROSPECTIVE PORTFOLIO COMPANIES MAY BE RISKY AND YOU COULD
LOSE ALL OR PART OF YOUR INVESTMENT.
We will invest primarily in companies in the beverage industry, most of which
have relatively short or no operating histories. These companies will be subject
to all of the business risk and uncertainties associated with any new business
enterprise, including the risk that these companies may not reach their
investment objective and the value of our investment in them may decline
substantially or fall to zero. Most of the portfolio companies into which we
intend to invest will be considered "growth stage" companies.
21
Investments in growth stage companies offer the opportunity for significant
gains. However, each investment involves a high degree of business and financial
risk that can result in substantial losses. Among these are the risks associated
with:
o these companies may have limited financial resources and may be
unable to meet their obligations under their securities that we
hold, which may be accompanied by a deterioration in the value of
their equity securities or of any collateral with respect to debt
securities and a reduction in the likelihood of us realizing on any
guarantees we may have obtained in connection with our investment;
o they may have shorter operating histories, narrower product lines
and smaller market shares than larger businesses, which tend to
render them more vulnerable to competitors' actions and market
conditions, as well as general economic downturns;
o because many of these companies are privately held companies, public
information is generally not available about these companies. As a
result, we will depend on the ability of our investment adviser to
obtain adequate information to evaluate these companies in making
investment decisions. If our investment adviser is unable to uncover
all material information about these companies, it may not make a
fully informed investment decision, and we may lose money on our
investments.
o they are more likely to depend on the management talents and efforts
of a small group of persons; therefore, the death, disability,
resignation or termination of one or more of these persons could
have a material adverse impact on our portfolio company and, in
turn, on us;
o companies operating at a loss or with substantial variations in
operating results from period to period, with the need for, but
generally limited ability to provide for internally, substantial
additional capital to support expansion or to achieve or maintain a
competitive position;
o these companies may face intense competition, including competition
from companies with greater financial resources, more extensive
development, manufacturing, marketing, and service capabilities, and
larger number of qualified managerial and technical personnel; and
o they may have less predictable operating results, may from time to
time be parties to litigation, may be engaged in changing businesses
with products subject to a risk of obsolescence and may require
substantial additional capital to support their operations, finance
expansion or maintain their competitive position. In addition, our
executive officers, directors and our investment adviser could, in
the ordinary course of business, be named as defendants in
litigation arising from our investments in the portfolio companies.
ECONOMIC RECESSIONS OR DOWNTURNS COULD IMPAIR OUR PORTFOLIO COMPANIES AND HARM
OUR OPERATING RESULTS.
Our portfolio companies will generally be affected by the conditions and overall
strength of the national, regional and local economies, including interest rate
fluctuations, changes in markets and changes in the prices of their primary
commodities and products. These factors also impact the amount of growth in the
beverage industry. Additionally, these factors could adversely impact the
customer base of our portfolio companies. As a result, many of our portfolio
companies may be susceptible to economic slowdowns or recessions and may be
unable to repay loans or meet other obligations during these periods. Therefore,
our non-performing assets are likely to increase, and the value of our portfolio
is likely to decrease, during these periods. Adverse economic conditions also
may decrease the value of collateral securing some of our loans and the value of
our equity investments. Economic slowdowns or recessions could lead to financial
losses in our portfolio and a decrease in revenues, net income and assets.
Unfavorable economic conditions also could increase our funding costs, limit our
access to the capital markets or result in a decision by lenders not to extend
credit to us. These events could prevent us from increasing investments and harm
our operating results.
A portfolio company's failure to satisfy financial or operating covenants
imposed by us or other investors or lenders could lead to defaults and,
potentially, termination of loans and foreclosure on secured assets, which could
trigger cross-defaults under other agreements and jeopardize our portfolio
company's ability to meet its obligations under the debt or equity securities
that we hold. We may incur expenses to the extent necessary to seek recovery
upon default or to negotiate new terms, which may include the waiver of certain
financial covenants, with a defaulting portfolio company. In addition, if one of
our portfolio companies were to go bankrupt, even though we may have structured
our interest as senior debt or preferred equity, depending on the facts and
circumstances, including the extent to which we actually provided managerial
assistance to that portfolio company, a bankruptcy court might recharacterize
our debt or equity holding and subordinate all or a portion of our claim to
those of other creditors.
22
OUR PORTFOLIO COMPANIES MAY INCUR DEBT OR ISSUE EQUITY SECURITIES THAT RANK
EQUALLY WITH, OR SENIOR TO, OUR INVESTMENTS IN SUCH COMPANIES.
We intend to invest primarily in mezzanine debt and dividend-paying equity
securities issued by our portfolio companies. Our portfolio companies usually
will have, or may be permitted to incur, other debt, or issue other equity
securities, that rank equally with, or senior to, the securities in which we
invest. By their terms, such instruments may provide that the holders are
entitled to receive payment of dividends, interest or principal on or before the
dates on which we are entitled to receive payments in respect of the securities
in which we invest. Also, in the event of insolvency, liquidation, dissolution,
reorganization or bankruptcy of a portfolio company, holders of securities
ranking senior to our investment in that portfolio company would typically be
entitled to receive payment in full before we receive any distribution in
respect of our investment. After repaying the senior security holders, the
portfolio company may not have any remaining assets to use for repaying its
obligation to us. In the case of securities ranking equally with securities in
which we invest, we would have to share on an equal basis any distributions with
other security holders in the event of an insolvency, liquidation, dissolution,
reorganization or bankruptcy of the relevant portfolio company. In addition, we
may not be in a position to control any portfolio company in which we invest. As
a result, we are subject to the risk that a portfolio company in which we invest
may make business decisions with which we disagree and the management of such
company, as representatives of the holders of their common equity, may take
risks or otherwise act in ways that do not serve our interests as debt or
preferred equity investors.
WE MAY NOT BE ABLE TO FULLY REALIZE THE VALUE OF ANY COLLATERAL SECURING ANY
DEBT INVESTMENTS MADE INTO PORTFOLIO COMPANIES.
Although we expect that a substantial amount of our debt investments will be
protected by holding security interests in the assets of the portfolio
companies, we may not be able to fully realize the value of the collateral
securing any such investments due to one or more of the following factors:
o since these debt investments will be primarily made in the form of
unsecured or wrap-loans, the liens on the collateral, if any, will
be subordinated to those of the senior secured debt of the portfolio
companies, if any. As a result, we may not be able to control
remedies with respect to the collateral;
o the collateral may not be valuable enough to satisfy all of the
obligations under our secured loan, particularly after giving effect
to the repayment of secured debt of the portfolio company that ranks
senior to our loan;
o bankruptcy laws may limit our ability to realize value from the
collateral and may delay the realization process;
o our rights in the collateral may be adversely affected by the
failure to perfect security interests in the collateral;
o how effectively the collateral would be liquidated and the value
received could be impaired or impeded by the need to obtain
regulatory and contractual consents; and
o by its nature, some or all of the collateral may be illiquid and may
have no readily ascertainable market value. The liquidity and value
of the collateral could be impaired as a result of changing economic
conditions, competition, and other factors, including the
availability of suitable buyers.
OUR SUCCESS WILL DEPEND UPON THE SUCCESS OF THE PORTFOLIO COMPANIES AND, IN
GREAT PART, UPON THE ABILITIES OF THEIR MANAGEMENT.
Although our management expects to provide portfolio companies with assistance
(particularly with regard to capital formation, major personnel decisions, and
strategic planning), the day-to-day operations will be controlled by the
management of the portfolio companies. As the portfolio companies have yet to be
identified, investors must rely upon our management to select portfolio
companies that have, or can obtain, the necessary management resources. We will
depend on the diligence, skill and network of business contacts of the senior
management of each of the portfolio companies in which we invest and the
professionals chosen by them, subject to the oversight of our senior management,
and the information and interaction with management of the portfolio companies.
Our future success will depend to a significant extent on the continued service
of the senior management team of each portfolio company, the departure of any of
whom, could have a material adverse effect on our ability to achieve our
investment objective. Problems may arise at portfolio companies that local
management do not recognize or cannot resolve. In addition, the management of
portfolio companies may conceal the existence of problems from us.
23
MANY OF OUR PORTFOLIO INVESTMENTS WILL BE RECORDED AT FAIR VALUE AS DETERMINED
IN GOOD FAITH BY OUR BOARD OF DIRECTORS AND, AS A RESULT, THERE WILL BE
UNCERTAINTY AS TO THE VALUE OF OUR PORTFOLIO INVESTMENTS.
A large percentage of our portfolio investments will consist of securities of
privately held or thinly traded public companies. The fair value of these
securities may not be readily determinable. We will value these securities
quarterly at fair value as determined in good faith by our board of directors
based on input from our audit committee with or without the benefit of an
opinion from a third party independent valuation firm. We may also be required
to value any publicly traded securities at fair value as determined in good
faith by our board of directors to the extent necessary to reflect significant
events affecting the value of those securities. Our board of directors may, to
the extent circumstances warrant it, utilize the services of an independent
valuation firm to aid it in determining the fair value of any securities. The
types of factors that may be considered in fair value pricing of our investments
include the nature and realizable value of any collateral, the portfolio
company's ability to make payments and its earnings, the markets in which the
portfolio company does business, comparison to publicly traded companies,
discounted cash flow and other relevant factors. Because such valuations, and
particularly valuations of private securities and private companies, are
inherently uncertain, may fluctuate over short periods of time and may be based
on estimates, the determinations of fair value by our board of directors may
differ materially from the values that would have been used if a ready market
for these securities existed. Our net asset value could be adversely affected if
the determinations regarding the fair value of our investments were materially
higher than the values that we ultimately realize upon the disposal of such
securities.
LIMITATIONS ON AVAILABILITY OF INVESTMENT CAPITAL MAY ADVERSELY AFFECT OTHER
INVESTMENTS.
We may be reliant on the availability of capital to generate profits under our
investment strategy and such availability will depend, in part, on our ability
to timely liquidate existing positions in order to reinvest the proceeds
thereof. To the extent that we own securities which are not subject to a valid
registration statement or otherwise available for trading under applicable
securities laws, our ability to liquidate our position in such securities may be
limited. We intend to require some of our portfolio companies to use their best
efforts to cause a registration statement covering the resale of the securities
we purchased to be filed and declared effective by the SEC or become otherwise
freely tradeable. However, there can be no guarantee that the SEC or other
regulating body will declare such a registration statement effective or permit
such security to become free of restrictions within such period and, until such
securities become freely tradable, we will likely be unable to freely liquidate
such interests in restricted securities in the manner and at the prices desired.
This resulting lack of liquidity could impair our ability to generate the cash
flow from these positions to timely pay our liabilities or obtain funds for the
purpose of reinvestment. Although we intend to maintain adequate liquidity to
achieve our future investment objectives, there can be no assurance this can be
accomplished in all circumstances.
PORTFOLIO COMPANIES ARE LIKELY TO NEED ADDITIONAL FUNDING.
We expect that many portfolio companies will require additional financing to
satisfy their working capital requirements. The amount of additional financing
needed will depend upon the maturity and objectives of the particular company.
Each round of venture financing, whether from us or other investors is typically
intended to provide a portfolio company with enough capital to reach the next
major valuation milestone. If the funds provided are not sufficient, a portfolio
company may have to raise additional capital at a price unfavorable to the
existing investors, including us. The availability of capital is generally a
function of capital market conditions that are beyond our control or any
portfolio company. We cannot assure you that our management or the managements
of portfolio companies will be able to predict accurately the future capital
requirements necessary for success or that additional funds will be available to
portfolio companies from any source. If funding is not available, some portfolio
companies may be forced to cease operations.
BDC INVESTMENTS ARE GENERALLY ILLIQUID.
We anticipate that most of our holdings in portfolio companies will be
securities that are subject to restrictions on resale. Generally, unless the
securities are subsequently registered under the 1933 Act, we will not be able
to sell these securities unless we meet all of the conditions of Rule 144 or
another rule under the 1933 Act that permits limited sales under specified
conditions. When restricted securities are sold to the public, we may be deemed
an underwriter, or possibly a controlling person, with respect thereto for the
purpose of the Securities Act and may be subject to liability as such under the
1933 Act. These restrictions could require us to hold securities or refrain from
sale and be unable to liquidate a position even at a loss.
24
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
qualify to rely on such exemptions or to use a registration statement. In such
event, we would end up owning "restricted" securities subject to resale under
Rule 144.
THERE ARE RISKS WHICH RESULT FROM THE INHERENT CONCENTRATION OF INVESTMENTS
PRIOR TO DIVERSIFICATION.
While we intend to allocate our investments among different portfolio companies,
it is possible that, prior to our achieving diversification, a significant
amount of or all of our investments and, hence, our Net Asset Value could, at
any one time, be invested in the securities of just a few portfolio companies.
Thus, our success and our Net Asset Value would be dependent on the success of
just a few portfolio companies and all of the risks associated with ownership of
such portfolio companies including success dependent on management, success
dependent on market conditions within the industry or field of such portfolio
companies, success dependent on achieving the business objectives of such
portfolio companies and success dependent on economic conditions and other
conditions relative to the operation of such portfolio companies, would become
risks borne by us.
THERE ARE RISKS ASSOCIATED WITH INVESTMENTS IN COMPANIES WITH SMALL
CAPITALIZATION.
The portfolio companies that we expect to trade in are thinly capitalized and
generally will have a market capitalization below $100 million (and frequently
below $25 million). These companies generally do not have experience, market
awareness, tracking by analysts, institutional investors and other benefits of
larger companies that result in more marketability and more stability pricing of
their securities. This impacts the liquidity of securities issued by those
portfolio companies. It is expected that the securities of most, if not all, of
the portfolio companies will be thinly traded. This could present a problem when
we determine to liquidate its position if it determines that it is in our best
interest to liquidate such investment. We may not be able to sell the securities
in the time frame and at the price we would like. Furthermore, in certain
situations, as a result of a security being thinly traded, we could experience a
significant loss in value should we be forced to liquidate our investments as a
result of rapidly changing market conditions or other factors.
THERE ARE RISKS ASSOCIATED WITH INVESTMENTS IN COMPANIES WITH SECURITIES THAT
ARE NOT READILY MARKETABLE.
We may invest in securities that are initially, or that later become, not
readily marketable. For example, we may acquire restricted securities of an
issuer in a private placement pursuant to an arrangement whereby the issuer
agrees to register the resale of those securities, or, in the case of an
investment in convertible or exchangeable securities, the securities underlying
such securities, within a certain period of time. Such registration requires
compliance with United States Federal and state securities laws and the approval
of the SEC. Unless and until such registration or compliance with applicable
regulation occurs, there is likely to be no market for the restricted
securities. No assurance can be given that issuers will not breach their
obligation to obtain or meet such registration or other compliance obligation.
Similarly, securities that are at one time marketable may become unmarketable
(or more difficult to market) for a number of reasons. For example, securities
traded on a securities exchange or quotation system may become unmarketable if
delisted from such exchange or quotation system for among other reasons, failing
to satisfy the requirements for continued listing, which may include minimum
price requirements. In addition, we may acquire restricted securities, for which
no market exists, which are convertible or exchangeable into common stock of the
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.
25
Portfolio companies in which investments are made may have publicly-traded
securities but those companies or their securities may become subject to
restrictions due to non-compliance. Our ability to generate profits from our
investment activities may be adversely affected by a failure of portfolio
companies to comply with registration, conversion, exchange or other obligations
under the agreements pursuant to which such securities have been sold to us. The
failure of an issuer to register the resale of its securities sold to us may
decrease the amount of available capital with which we may pursue other
investment opportunities or meet current liabilities, such as the timely payment
of redemptions. We may invest in securities that are convertible into or
exchangeable for common stock of the issuer, the resale of which by us is (or is
to be) registered. If an issuer refuses, is unable to, or delays in timely
honoring its obligation to issue conversion or exchange securities, our ability
to liquidate our position will be adversely affected, and our profits may be
adversely affected.
WE HAVE NOT YET IDENTIFIED ALL OF THE POTENTIAL INVESTMENTS FOR OUR PORTFOLIO.
We have not yet identified all of the potential investments for our portfolio,
and, thus, you will not be able to evaluate all of our potential investments
prior to purchasing shares of our common stock. This factor will increase the
uncertainty, and thus the risk, of investing in our shares.
WE MAY SUSTAIN LOSSES FROM FRAUD WITHIN OUR PORTFOLIO COMPANIES.
The risk of fraud losses on our assets varies with, among other things, the
effectiveness of security procedures utilized. Management anticipates that fraud
losses, if any, will be unlikely as controls and other security measures will
have been adopted by each portfolio company as a condition to our investment to
protect against fraudulent misappropriation of cash and other assets. However,
although our management believes that any loss due to fraud will be unlikely,
there can be no assurance that fraud loss experience will not become material in
amount. Fraud at the BDC level is far less likely and BDC's are required to have
and to have tested controls to limit this possibility. It must be noted that, in
addition to basic controls as to financial data, BDC's are required to have in
place certain safeguards which may render risks to investment assets from fraud
to be nominal but these risks do exist and even requirements such as holding
physical certificates of shares in portfolio companies in a safe do not, in and
of themselves, eliminate the possibility of fraud. We maintain a fidelity bond
relating to securities and assets in our possession.
WE DO NOT INTEND TO MAKE ANY INVESTMENTS IN NON-US ENTITIES AND SUCH INVESTMENTS
MAY BE LIMITED BY THE ACT. IF A PORTFOLIO INVESTMENT WAS TO RE-DOMICILE OR
OTHERWISE BECOME A FOREIGN INVESTMENT, WE WOULD BE FACED WITH ADDITIONAL RISKS.
OUR INVESTMENTS IN FOREIGN SECURITIES MAY INVOLVE SIGNIFICANT RISKS IN ADDITION
TO THE RISKS INHERENT IN U.S. INVESTMENTS.
Our investment strategy does not contemplate potential investments in securities
of foreign companies. Nevertheless, we may acquire assets or investments that
are or become foreign investments (such as a result of a merger or spin-off of a
portfolio company). Investing in foreign companies may expose us to additional
risks not typically associated with investing in U.S. companies. These risks
include changes in exchange control regulations, political and social
instability, expropriation, imposition of foreign taxes, less liquid markets and
less available information than is generally the case in the U.S., higher
transaction costs, less government supervision of exchanges, brokers and
issuers, less developed bankruptcy laws, difficulty in enforcing contractual
obligations, lack of uniform accounting and auditing standards and greater price
volatility. Although we expect that most of our investments will be U.S.
dollar-denominated, our investments that are denominated in a foreign currency
will be subject to the risk that the value of a particular currency will change
in relation to one or more other currencies. Among the factors that may affect
currency values are trade balances, the level of short-term interest rates,
differences in relative values of similar assets in different currencies,
long-term opportunities for investment and capital appreciation, and political
developments.
26
We may employ hedging techniques to minimize these risks, but we can offer no
assurance that such strategies will be effective. If we engage in hedging
transactions, we may expose ourselves to risks associated with such
transactions. We may utilize instruments such as forward contracts, currency
options and interest rate swaps, caps, collars and floors to seek to hedge
against fluctuations in the relative values of our portfolio positions from
changes in currency exchange rates and market interest rates. Hedging against a
decline in the values of our portfolio positions does not eliminate the
possibility of fluctuations in the values of such positions or prevent losses if
the values of such positions decline. However, such hedging can establish other
positions designed to gain from those same developments, thereby offsetting the
decline in the value of such portfolio positions. Such hedging transaction may
also limit the opportunity for gain if the values of the portfolio positions
should increase. Moreover, it may not be possible to hedge against an exchange
rate or interest rate fluctuation that is so generally anticipated that we are
not able to enter into a hedging transaction at an acceptable price. The success
of our hedging transactions will depend on our ability to correctly predict
movements, currencies and interest rates. Therefore, while we may enter into
such transactions to seek to reduce currency exchange rate and interest rate
risks, unanticipated changes in currency exchange rates or interest rates may
result in poorer overall investment performance than if we had not engaged in
any such hedging transactions. In addition, the degree of correlation between
price movements of the instruments used in a hedging strategy and price
movements in the portfolio positions being hedged may vary. Moreover, for a
variety of reasons, we may not seek to establish a perfect correlation between
such hedging instruments and the portfolio holdings being hedged. Any such
imperfect correlation may prevent us from achieving the intended hedge and
expose us to risk of loss. In addition, it may not be possible to hedge fully or
perfectly against currency fluctuations affecting the value of securities
denominated in non-U.S. currencies because the value of those securities is
likely to fluctuate as a result of factors not related to currency fluctuations.
RISKS RELATING TO FOCUSING OUR INVESTMENTS IN A SPECIFIC INDUSTRY
OUR PORTFOLIO WILL BE CONCENTRATED INITIALLY IN A LIMITED NUMBER OF PORTFOLIO
COMPANIES IN THE BEVERAGE INDUSTRY, WHICH WILL SUBJECT US TO A RISK OF
SIGNIFICANT LOSS IF ANY OF THESE COMPANIES DEFAULTS ON ITS OBLIGATIONS UNDER ANY
OF THE SECURITIES THAT WE HOLD OR IF THE BEVERAGE INDUSTRY EXPERIENCES A
DOWNTURN.
We intend to specialize our investments primarily in a single industry, there
are risks associated with this specialization. This risk is different than that
associated with merely investing in a limited number of companies. One
consequence of this lack of diversification is that the aggregate returns we
realize may be significantly adversely affected by industry factors which may
cause a number of such portfolio companies to perform poorly and require us to
write down the value of any one or more of these investments. We intend to
concentrate on making investments in the beverage industry and to invest, under
normal circumstances, at least 80% of the value of our net assets (including the
amount of any borrowings for investment purposes) in companies in this industry.
As a result, a downturn in the beverage industry could materially adversely
affect a number of the portfolio companies and, consequently, affect our net
asset value.
The beverage industry is subject to many risks. Our definition of beverage, as
used in the context of the beverage industry, is broad, includes both alcoholic
and non-alcoholic beverages and waters and flavored water and different sectors
in the beverage industry may be subject to variable risks and economic
pressures. As a result, it will be difficult to anticipate the impact of
changing economic and political conditions on our portfolio companies and, as a
result, our financial results. The revenues, income (or losses) and valuations
of beverage companies can fluctuate suddenly and dramatically due to any one or
more of the following factors:
o Demand Risk. Beverages have sustained growth as more people opt for
higher-priced alternatives to "tap-water" but this is an industry
phenomenon and may be reversed. A decline in consumer demand for
such higher-priced alternatives to tap water, including bottled
water, flavored water, sports drinks and other drinks would affect
many of the companies in the beverage industry including those which
are presently portfolio investments and those which might be in the
future.
o Regulatory Risk. The profitability of beverage companies could be
adversely affected by changes in the regulatory environment. The
businesses of beverage companies are heavily regulated by federal,
state and local governments in diverse manners, both as to quality
and health factors and claims for benefits. Such regulation can
change over time in scope and intensity.
27
o Costs of Production Risk. The profitability of beverage companies
may be materially impacted by costs associated with production
including raw materials and political factors where some raw
materials originate across national or even state boundaries. Where
raw materials may include fruits and vegetables, unseasonable
extreme weather patterns could affect production and hence, costs.
o Operational Risk. Like most industries, beverage companies are
subject to various operational costs and risks arise in the
unforeseen increase in cost increases within the industry.
o Competition Risk. Like most industries, there is potential for
increased competition in the beverage industry. This competition is
reflected in risks associated with marketing and selling beverage in
the evolving beverage market and a competitor's development of a
lower-cost or better-marketed beverage might affect a number of
portfolio companies at the same time.
LACK OF DIVERSITY OF INVESTMENTS BY A BDC PRESENTS RISKS ASSOCIATED WITH
SPECIFIC INDUSTRIES.
We have indicated that our intent for the foreseeable future will be to focus
our investments in a specific industry. Additionally, we do not anticipate that
we will be able to diversify our investments within the industry during the
early years of our pursuit of this investment strategy and, as a result, we will
not gain the benefit of diversification which is the balancing of adverse
economic conditions on most of our holdings in portfolio companies. Because our
investments will be limited to a few portfolio companies primarily within a
single industry, we will be subjected to the specific risks associated with
operating a business in that industry.
THE BUSINESSES IN WHICH WE PLAN TO INVEST ARE MATERIALLY AFFECTED BY
COMPETITION.
Our portfolio companies will face competition on a nationwide basis. Competition
for their products will come primarily from companies with widespread
distribution and established brands. We believe that our ability to compete
successfully depends upon a number of factors, including: market presence;
customer service and satisfaction; the capacity, reliability and security of our
delivery network; convenience; the pricing policies of our competitors; and, the
introduction of new products and services by our competitors and us. There are
risks associated with the beverage industry relating to competition due to the
fact that many of the competitive products are controlled by and marketed by the
largest competitors in the industry.
RISKS OF THE COMPANY AT ITS PRESENT STAGE
ALTHOUGH WE HAVE BEEN IN EXISTENCE FOR A NUMBER OF YEARS, WE MAY STILL BE
CONSIDERED TO HAVE A LIMITED OPERATING HISTORY AS A BDC. WE ARE A RELATIVELY NEW
BUSINESS DEVELOPMENT COMPANY WITH LIMITED RESOURCES AND SOURCES OF REVENUES.
We were incorporated in January 29, 1997 and we commenced investment operations
on June 19, 2003, but the extent of our investment activities may characterize
us as a newer investment company. While we have owned some portfolio companies,
we have not realized any significant revenues from the sale or other liquidity
events involving our past or present portfolio companies. As we have made
investments only in two portfolio companies within our targeted industry, we
have limited experience relating to the identification, evaluation and
acquisition of target businesses and, accordingly, there is only a limited basis
upon which to evaluate our prospects for achieving our intended business
objectives. We have limited resources and have realized limited revenues to
date. In addition, we will not achieve any revenues until, at the earliest, we
are able to obtain funding, make investments and sell our position of securities
in an underlying portfolio company for a profit. We will be wholly dependent for
the selection, structuring, closing and monitoring of all of our investments on
the diligence and skill of our management, acting under the supervision of our
board of directors. None of these individuals has substantial experience, within
the BDC business format, in acquiring and investing in growth stage companies,
the negotiation of the terms of such investments and the monitoring of such
investments after they are made. We cannot assure you that we will attain our
investment objective.
We are subject to all of the business risks and uncertainties associated with
any new business enterprise, including the risk that we will not achieve our
investment objective and that the value of your investment in us could decline
substantially or fall to zero. If we do not realize yields in excess of our
expenses, we may incur operating losses and the market price of our shares may
decline.
28
WE WILL BE CONFRONTED BY COMPETITION FROM ENTITIES HAVING SUBSTANTIALLY GREATER
RESOURCES AND EXPERIENCE.
Other entities and individuals compete for investments similar to those proposed
to be made by us, many of whom will have greater financial and management
resources than we do. Furthermore, we must comply with provisions of the 1940
Act pertaining to BDCs and, if we qualify as a RIC, provisions of the Internal
Revenue Code pertaining to RICs might restrict our flexibility as compared with
our competitors. The need to compete for investment opportunities may make it
necessary for us to offer portfolio companies more attractive transaction terms
than otherwise might be the case. These factors may prevent us from ever
becoming profitable.
WE HAVE HISTORICALLY INCURRED LOSSES AND LOSSES MAY CONTINUE IN THE FUTURE.
We have historically lost money. Accordingly, we may experience significant
liquidity and cash flow problems if we are not able to raise additional capital
as needed and on acceptable terms. No assurances can be given that we will be
successful in reaching or maintaining profitable operations.
DISTRIBUTIONS TO SHAREHOLDERS MAY NEVER EQUAL THE AMOUNT INVESTED BY THE
SHAREHOLDERS.
We cannot assure you that 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 a principal source of
distributable cash to shareholders. The directors have absolute discretion in
the timing of distributions to shareholders. Securities acquired by us through
equity investments will be held by us and will be sold or distributed at the
sole discretion of the directors.
THERE ARE SIGNIFICANT POTENTIAL CONFLICTS OF INTEREST, WHICH COULD IMPACT OUR
INVESTMENT RETURNS
Our executive officer(s) and director(s) serve or may serve as officers and
directors of entities who operate in the same or related line of business as we
do. Accordingly, they may have obligations to investors in those entities, the
fulfillment of which might not be in the best interests of us or our
stockholders. It is possible that new investment opportunities that would
otherwise meet our investment objective may come to the attention of one of
these entities, and, if so, such opportunity might not be offered, or otherwise
made available, to us. However, Our executive officer(s) and director(s) do have
fiduciary obligations to act in our best interests and must, in such a
circumstance or conflict, endeavor to allocate investment opportunities in a
fair and equitable manner over time so as not to discriminate one company
against another, where equal fiduciary obligations are owed. In addition, they
may not be available to us if there are time conflicts involving other entities.
OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE
TRADING MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR
STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK.
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes
the definition of a "penny stock," for the purposes relevant to us, as any
equity security that has a market price of less than $5.00 per share or option
to acquire any equity security with an exercise price of less than $5.00 per
share, subject to certain exceptions. For any transaction involving a penny
stock, unless exempt, the rules require:
o that a broker or dealer approve a person's account for transactions
in penny stocks; and
o the broker or dealer receive from the investor a written agreement
to the transaction, setting forth the identity and quantity of the
penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Commission relating to the penny
stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
29
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 started operations as of January 29, 1997, we did not elect to become a
BDC until June 19, 2003, so 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.
WE CANNOT ASSURE YOU THAT WE WILL BE SUCCESSFUL IN SELLING OUR COMMON SHARES OR,
IF SOLD, AT WHAT PRICE. WE HAVE LIMITED ASSETS WITHOUT THE SALE OF THESE COMMON
SHARES AND WE CANNOT ASSURE YOU THAT WE WILL ATTAIN OUR INVESTMENT OBJECTIVE.
We have minimal cash or other assets and net worth from which to invest in
successful portfolio companies to insure our success. Our success will depend,
in part, upon raising the necessary funds to fund investments. The Offering
described above is made on a "best efforts" basis; no one has made a commitment
to purchase any shares of the Offering.
RESTRICTIONS IMPOSED UPON THE RESALE OF OUR CAPITAL STOCK MAY REQUIRE YOU TO
HOLD YOUR STOCK FOR AN INDEFINITE PERIOD OF TIME.
None of the securities to be issued in this Offering will be registered under
the Securities Act. The common stock being sold pursuant to this Offering is
intended to be exempt from registration pursuant to Regulation E which permits,
in conformity therewith, issuance of shares without restriction on further
transfer. While we do not anticipate such an adverse decision or determination
on the part of the Securities and Exchange Commission, the SEC has the right,
even after permitting the offering to become effective, to enjoin the sale of
securities or determine that such sales are not exempt under Regulation E. While
we will make every effort to insure our compliance with the requirements under
Regulation E, there can be no assurance of such exemption as the SEC does not,
as a matter of policy, affirmatively indicate the effectiveness of the
notification under Regulation E.
CERTAIN GOVERNMENT REGULATIONS
We operate in a highly regulated environment. The following discussion generally
summarizes certain government regulations.
BUSINESS DEVELOPMENT COMPANY. A business development company is defined and
regulated by the 1940 Act. A business development company must be organized in
the United States for the purpose of investing in or lending to primarily
private companies and making managerial assistance available to them. A business
development company may use capital provided by public shareholders and from
other sources to invest in long-term, private investments in businesses.
30
As a business development company, we may not acquire any asset other than
"qualifying assets" unless, at the time we make the acquisition, the value of
our qualifying assets represent at least 70% of the value of our total assets.
The principal categories of qualifying assets relevant to our business are:
(1) Securities purchased in transactions not involving any public offering from
the issuer of such securities, which issuer (subject to certain limited
exceptions) is an eligible portfolio company, or from any person who is, or has
been during the preceding 13 months, an affiliated person of an eligible
portfolio company, or from any other person, subject to such rules as may be
prescribed by the SEC. An "eligible portfolio company" is defined in the 1940
Act as any issuer which:
(a) is organized under the laws of, and has its principal place of
business in, the United States;
(b) is not an investment company (other than a small business investment
company wholly owned by the business development company) or a
company that would be an investment company but for certain
exclusions under the 1940 Act; and
(c) satisfies any of the following:
o does not have any class of securities with respect to which a
broker or dealer may extend margin credit;
o is controlled by a business development company or a group of
companies including a business development company and the
business development company has an affiliated person who is a
director of the eligible portfolio company; or
o is a small and solvent company having total assets of not more
than $4 million and capital and surplus of not less than $2
million.
(2) Securities of any eligible portfolio company which we control.
(3) Securities purchased in a private transaction from a U.S. issuer that is not
an investment company or from an affiliated person of the issuer, or in
transactions incident thereto, if the issuer is in bankruptcy and subject to
reorganization or if the issuer, immediately prior to the purchase of its
securities was unable to meet its obligations as they came due without material
assistance other than conventional lending or financing arrangements.
(4) Securities of an eligible portfolio company purchased from any person in a
private transaction if there is no ready market for such securities and we
already own 60% of the outstanding equity of the eligible portfolio company.
(5) Securities received in exchange for or distributed on or with respect to
securities described in (1) through (4) above, or pursuant to the exercise of
warrants or rights relating to such securities.
(6) Cash, cash equivalents, U.S. Government securities or high-quality debt
maturing in one year or less from the time of investment.
To include certain securities described above as qualifying assets for the
purpose of the 70% test, a business development company must make available to
the issuer of those securities significant managerial assistance such as
providing significant guidance and counsel concerning the management,
operations, or business objectives and policies of a portfolio company, or
making loans to a portfolio company. We offer to provide managerial assistance
to each of our portfolio companies.
As a business development company, we are entitled to issue senior securities in
the form of stock or senior securities representing indebtedness, including debt
securities and preferred stock, as long as each class of senior security has an
asset coverage ratio of at least 200% immediately after each such issuance. See
"Risk Factors." We may also be prohibited under the 1940 Act from knowingly
participating in certain transactions with our affiliates without the prior
approval of our Independent Directors and, in some cases, prior approval by the
SEC.
As with other companies regulated by the 1940 Act, a business development
company must adhere to certain other substantive ongoing regulatory
requirements. A majority of our directors must be persons who are not
"interested persons," as that term is defined in the 1940 Act. Additionally, we
are required to provide and maintain a bond issued by a reputable fidelity
insurance company to protect the business development company. Furthermore, as a
business development company, we are prohibited from protecting any director or
officer against any liability to the company or our shareholders arising from
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of such person's office.
31
We maintain a code of ethics that establishes procedures for personal investment
and restricts certain transactions by our personnel. Our code of ethics
generally does not permit investment by our employees in securities that may be
purchased or held by us. You may read and copy our code of ethics at the SEC's
Public Reference Room in Washington, D.C. You may obtain information on
operations of the Public Reference Room by calling the SEC at (202) 942-8090. In
addition, our code of ethics is available on the EDGAR Database on the SEC
Internet site at http://www.sec.gov. You may obtain copies of our code of
ethics, after paying a duplicating fee, by electronic request at the following
email address: publicinfo@sec.gov, or by writing to the SEC's Public Reference
Section, 100 F Street, NE, Washington, D.C. 20549.
We may not change the nature of our business so as to cease to be, or withdraw
our election as, a business development company unless authorized by vote of a
"majority of the outstanding voting securities," as defined in the 1940 Act, of
our shares. A majority of the outstanding voting securities of a company is
defined by the 1940 Act as the lesser of: (i) 67% or more of such company's
shares present at a meeting if more than 50% of the outstanding shares of such
company are present and represented by proxy, or (ii) more than 50% of the
outstanding shares of such company.
We are periodically examined by the SEC for compliance with the 1940 Act.
ITEM 2: PROPERTIES
We maintained our corporate office at 7633 East 63rd Place, Suite 220, Tulsa,
Oklahoma, on a month-to-month basis, at a cost of $1,000 per month until
February 2007. Our new corporate office is located at 2 S. University Drive,
Suite 220, Plantation, Florida 33324.
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. While the
outcome of these legal proceedings, if any, cannot be predicted with certainty,
we do not expect that these proceedings will have a material effect upon our
financial condition or results of operations.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the over-the-counter bulletin board
stock market under the symbol "GBVS.OB".
The market closing and the high and low prices at the end of each quarter for
the years ended December 31, 2006 and 2005 are as follows:
QUARTER ENDED CLOSING HIGH LOW
March 31, 2005 1.25 1.75 1.25
June 30, 2005 .64 3.00 .10
September 30, 2005 .68 .86 .51
December 31, 2005 1.67 1.67 .40
March 31, 2006 1.15 2.04 .92
June 30, 2006 .94 1.59 .83
September 30, 2006 .60 1.13 .46
December 31, 2006 .42 .61 .28
HOLDERS
As of February 28, 2007, there were 132,610,400 shares of common stock issued
and outstanding, held by approximately 11,669 shareholders of record.
DIVIDENDS ON COMMON STOCK
We have not declared a cash dividend on our common stock in the last three
fiscal years and we do not anticipate the payment of dividends in the near
future. We may not pay dividends on our common stock without first paying
dividends on our preferred stock. There are no other legal restrictions that
currently limit our ability to pay dividends on our common stock other than
those generally imposed by applicable state law.
32
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
We do not currently have any equity compensation plans.
We granted options to the three owners of an advertising vendor used by Rudy to
acquire 150,000 shares, each, of our common stock at an exercise price of $1.05
per share, the average price on the date of the grant, June 14, 2006. The stock
option agreements expire on June 14, 2011, are fully vested and allow for
payment of the exercise price in either cash or as an offset to their monthly
billing of a minimum of 20%. During the year ended December 31, 2006, these
individuals exercised options and acquired 25,962 shares of our common stock,
through offset to their monthly billing, leaving a balance of options to acquire
424,038 shares.
RECENT SALES OF UNREGISTERED SECURITIES
o Securities sold - Sales during the first three quarters of the
fiscal year were reported in Item 2 of Part II of the Form 10-Q
filed for each quarter. During the fourth quarter of 2006, 3,552
restricted shares of our common stock were issued to a vendor of
Rudy in exchange for notes and other debts in the amount of $3,729.
The shares issued were sold pursuant to an exemption from
registration under Section 4(2) promulgated under the Securities Act
of 1933, as amended.
o Use of proceeds - not applicable.
PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
None during the year ended December 31, 2006.
ITEM 6: SELECTED FINANCIAL DATA
The following table sets forth selected financial data as of and for each of the
four fiscal years ended December 31, 2006, 2005, 2004 and 2003 and is derived
from our audited financial statements. The data set forth below should be read
in conjunction with "Item 8: Financial Statements" and related Notes to
Financial Statements appearing elsewhere herein and "Item 7: "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
2006 2005 2004 2003
------------ ------------ ------------ ------------
Revenues $ 124,698 $ 13,889 $ -- $ --
Expenses 1,324,876 1,053,032 1,171,186 5,232,485
------------ ------------ ------------ ------------
Net loss from operations (1,200,178) (1,039,143) (1,171,186) (5,232,485)
Net realized and unrealized losses (6,106,260) (666,603) (1,411,812) --
------------ ------------ ------------ ------------
Net decrease in net assets from
operations $ (7,306,438) $ (1,705,746) $ (2,582,998) $ (5,232,485)
============ ============ ============ ============
Net decrease in net assets from
operations per share, basic and
diluted $ (0.1697) $ (0.0926) $ (23.1130) $ (72.3408)
============ ============ ============ ============
Weighted average shares outstanding 43,052,471 18,418,649 111,755 72,331
============ ============ ============ ============
Statements of Net Assets Data:
Investments at fair value $ 1,575,000 $ 5,715,000 $ 377,478 $ 559,405
Investments at cost 7,881,260 5,915,000 377,478 559,405
Cash and cash equivalents 472 245,370 43,466 517
Total assets 1,575,946 5,987,331 523,795 559,922
Total liabilities 1,486,550 160,207 127,794 132,156
Net assets 89,396 5,827,124 396,001 427,766
Net asset value per share $ 0.0020 $ 0.1411 $ 2.1302 $ 5.6175
============ ============ ============ ============
Common stock outstanding at
year end 43,665,067 41,312,391 185,896 76,149
The revenue from sales by the subsidiary portfolio companies is recorded on the
books of the relevant portfolio companies and is not included in our revenues.
33
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S ANALYSIS OF BUSINESS
We will have significant relative flexibility in selecting and structuring our
investments. We will not be subject to many of the regulatory limitations that
govern traditional lending institutions such as banks. We will 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 will 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 will not be 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
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 will 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 loan; or
o investment situations or in hedging the risks associated with
interest rate fluctuations, and, in such cases, only after all
necessary registrations or exemptions from registration with the
Commodity Futures Trading Commission have been obtained.
34
Prospective Portfolio Company Characteristics - We have identified several
criteria that we believe will prove important in seeking our investment
objective with respect to target companies. These criteria will provide general
guidelines for our investment decisions; however, we caution readers that not
all of these criteria will be met by each prospective portfolio company in which
we choose to invest.
Experienced Management - We will generally require that our portfolio companies
have an experienced president or management team. We will 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 intend to provide assistance in this area
either supervising management or providing management for our portfolio
companies.
Products or Services - We will seek companies that are involved in products or
services that do not require significant additional capital or research
expenditures. In general, we will seek target companies that make innovative use
of proven technologies or methods.
Proprietary Advantage - We expect to 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 will 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 will 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 will
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.
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 or
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 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
warrant 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.
35
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,
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 followed 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,
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.
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 that warrant such an
evaluation, we will obtain an independent appraisal of the target company.
36
ONGOING RELATIONSHIPS WITH PORTFOLIO COMPANIES
Monitoring - We will 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,
but we believe that we will nevertheless perform well in the future.
We will 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, who are well known by
our management team, will closely monitor the status and performance of each
individual company on at least a quarterly and, in some cases, a monthly basis.
We will 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;
o Review of monthly and quarterly financial statements and financial
projections for portfolio companies.
Managerial Assistance - As a business development company, we will offer, and in
many cases may 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.
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 to provide financing to target companies will 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 will 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.
37
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 our 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 our future reported financial position or results of
operations.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". 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 us would
be our fiscal year beginning January 1, 2008. We are currently evaluating the
impact of SFAS No. 157 but do not expect that it will have a material impact on
our financial statements.
FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes -- an
interpretation of FASB Statement No. 109" (FIN 48) prescribes guidance for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. To recognize a tax position, the
enterprise determines whether it is more likely than not that the tax position
will be sustained upon examination, including resolution of any related appeals
or litigation processes, based on the technical merits of the position. A tax
position that meets the more likely than not recognition threshold is measured
to determine the amount of benefit to recognize in the financial statements. The
tax position is measured at the largest amount of benefit, determined on a
cumulative probability basis that is greater than 50 percent likely of being
realized upon ultimate settlement. We adopted FIN 48 as of January 1, 2007. The
cumulative effect of applying the Interpretation will be reported as an
adjustment to the opening balance of retained earnings. The cumulative effect of
adopting FIN 48 is expected to have no effect on the financial statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements.
Critical accounting policies are those that are both important to the
presentation of our financial condition and results of operations and require
management's most difficult, complex, or subjective judgments. Our most critical
accounting policy relates to the valuation of our investments.
Pursuant to the requirements of the 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. At the current time, none of
our investments has a market quotation.
We determine fair value to be the amount for which an investment could be
exchanged in an orderly disposition over a reasonable period of time between
willing parties other than in a forced or liquidation sale. Our valuation
process is intended to provide a consistent basis for determining the fair value
of the portfolio. We will record unrealized depreciation on investments when we
believe that an investment has become impaired, including where realization of
an equity security is doubtful. We will record unrealized appreciation if we
believe that the underlying portfolio company has appreciated in value and,
therefore, our equity security has also appreciated in value.
38
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.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2006, we had exhausted all of our liquidity. On January 3,
2007, we filed an Offering Circular under Regulation E, which was amended on
February 5, 2007, to raise up to $3,200,000 at prices between $.15 and $.35 per
share.
As of March 27, 2007, the offering had been completed with cash proceeds of
$2,152,183 and notes of $1,141,517. From the proceeds, $692,796 has been paid to
Xstream on our note payable to them, $310,807 was used in the acquisition of AM
and $580,444 has been advanced to BNM.
We currently estimate total requirements for funds of approximately $2,500,000
to meet our operating cash flow requirements and our currently estimated
follow-on investments in 2007. This requirement includes $300,000 in loan
payments required by acquisitions; $830,000 in loan payments required by one of
the acquired portfolio companies; $670,000 in follow-on investments for working
capital in the acquired portfolio companies; and an estimated $700,000 to fund
operating overhead for 2007. Of these amounts, approximately $700,000 has been
raised as of March 27, 2007.
RESULTS OF OPERATIONS
REVENUES -
We accrued revenues from Rudy for interest income on loans in the amounts of
$86,721 in 2006 and $1,497 in 2005. This entire amount was written off to bad
debt expense when the valuation adjustment to our investment in Rudy was
recorded, since it was unlikely to be collected. We accrued interest income of
$19,977 and $2,392 and management fee income of $18,000 and $10,000, in 2006 and
2005, respectively, from EON. These amounts were written off as a bad debt in
the amount of $50,369 at September 30, 2006, when it was determined that EON
would require more funding than we wished to risk.
There were no revenues in 2004.
EXPENSES -
Total expenses as detailed in the Statements of Operations for the three years
ended December 31, 2006, 2005 and 2004 have remained relatively stable in total
with a decrease in 2005 from 2004 of 10% and an increase of 26% in 2006 from
2005.
Expenses in 2006 include $538,000 of interest expense which is the calculated
value of the beneficial conversion feature of the secured convertible promissory
notes payable issued during 2006. Other 2006 expenses which have been reduced
from the prior year include compensation and benefits decreased $104,000;
investment advisory services decreased $134,000; and other selling, general and
administrative expenses decreased $63,000. These decreases were partially offset
by increases in bad debts of $138,000; legal services of $100,000; and public
relations, transfer agent and other professional services of $40,000.
Expenses in 2005 include increases from the 2004 amounts of $60,000 for a legal
settlement and increases of $164,000 in total interest cost. Expenses in 2005
include declines from the 2004 amounts of $40,000 for legal services, $74,000
for investment advisory services, $58,000 for public relations, transfer agent
and other professional services and a decline of $173,000 in other selling,
general and administrative expenses.
It is anticipated that we should be able to operate within a budget of
approximately $700,000 for 2007, excluding any bad debt expense and assuming
only nominal continuing legal services.
NET REALIZED AND UNREALIZED LOSSES -
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.
39
Beginning June 19, 2003, 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, 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 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. 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.
The net realized and unrealized losses may be summarized as follows:
2006 2005 2004
---------- ---------- ----------
Realized losses:
Unboxed and Total Sports $ -- $ 69,826 $1,411,812
Island Tribe -- 396,777 --
---------- ---------- ----------
$ -- $ 466,603 $1,411,812
========== ========== ==========
Unrealized losses:
EON $1,011,500 $ -- $ --
Rudy 5,094,760 -- --
TDS -- 200,000 --
---------- ---------- ----------
$6,106,260 $ 200,000 $ --
========== ========== ==========
Following an initial investment in a portfolio company, we may make additional
investments in such portfolio company in order to: (1) increase our ownership
percentage; (2) exercise warrants or options that were acquired in a prior
financing; (3) preserve our proportionate ownership in a subsequent financing;
or (4) attempt to preserve or enhance the value of our investment. Such
additional investments are referred to as "follow-on" investments. There can be
no assurance that we will make follow-on investments or have sufficient funds to
made additional investments. The failure to make such follow-on investments
could jeopardize the viability of the portfolio company and our investment or
could result in a missed opportunity for us to participate to a greater extent
in a portfolio company's successful operations. We attempt to maintain adequate
liquid capital to make follow-on investments in our private portfolio companies.
However, there can be no assurance that we will have sufficient liquid capital.
We may elect not to make a follow-on investment either because we do not want to
increase our concentration of risk, because we prefer other opportunities, or
because we are inhibited by compliance with BDC requirements, even though the
follow-on investment opportunity appears attractive.
40
Our investment activity during the two years ended December 31, 2006, is
summarized as follows:
Island Unboxed &
Rudy EON TDS Tribe Total Sports Total
----------- ----------- ----------- ----------- ----------- -----------
Fair market value at December 31, 2004 $ -- $ -- $ -- $ 377,478 $ -- $ 377,478
Initial investment 4,860,000 400,000 200,000 -- -- 5,460,000
Follow-on investments 270,000 185,000 -- 19,299 69,826 544,125
Dispositions -- -- -- (396,777) (69,826) (466,603)
----------- ----------- ----------- ----------- ----------- -----------
5,130,000 585,000 200,000 -- -- 5,915,000
Unrealized loss -- -- (200,000) -- -- (200,000)
----------- ----------- ----------- ----------- ----------- -----------
Fair market value at December 31, 2005 5,130,000 585,000 -- -- -- 5,715,000
Follow-on investments 1,539,760 426,500 -- -- -- 1,966,260
----------- ----------- ----------- ----------- ----------- -----------
6,669,760 1,011,500 -- -- -- 7,681,260
Unrealized loss (5,094,760) (1,011,500) -- -- -- (6,106,260)
----------- ----------- ----------- ----------- ----------- -----------
Fair market value at December 31, 2006 $ 1,575,000 $ -- $ -- $ -- $ -- $ 1,575,000
=========== =========== =========== =========== =========== ===========
OFF BALANCE SHEET ARRANGEMENTS
We do not have any significant off balance sheet arrangements.
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, accounts receivable from portfolio
companies and cash is $1,575,946 and from this, are subtracted liabilities and
debts of $1,486,550. There are no shares of preferred stock outstanding but the
rights of preferred stockholders would be included if there were. The Net Asset
Value is therefore $89,396. The Net Asset Value per Share is $.0020.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market rates and
prices. We are primarily exposed to equity price risk. The following is a
discussion of our equity market risk.
Equity price risk arises from exposure to securities that represent an ownership
interest in our portfolio companies. The value of our equity securities and our
other investments are based on quoted market prices or our Board of Directors'
good faith determination of their fair value (which is based, in part, on quoted
market prices). Market prices of common equity securities, in general, are
subject to fluctuations, which could cause the amount to be realized upon sale
or exercise of the instruments to differ significantly from the current reported
value. The fluctuations may result from perceived changes in the underlying
economic characteristics of our portfolio companies, the relative price of
alternative investments, general market conditions and supply and demand
imbalances for a particular security.
41
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
GLOBAL BEVERAGE SOLUTIONS, INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page
Report of Independent Registered Public Accounting Firm -
Turner, Stone & Company, LLP 43
Report of Independent Registered Public Accounting Firm -
Squar, Milner, Peterson, Miranda & Williamson, LLP
(formerly Squar, Milner, Reehl & Williamson, LLP) 44
Statements of Net Assets at December 31, 2006 and 2005 45
Statements of Operations for the years ended
December 31, 2006, 2005 and 2004 46
Statements of Cash Flows for the years ended
December 31, 2006, 2005 and 2004 47-48
Statements of Changes in Net Assets for the years ended
December 31, 2006, 2005 and 2004 49
Schedules of Investments at December 31, 2006 and 2005 50-51
Notes to Financial Statements 52-64
Schedules of Financial Ratios for the years ended
December 31, 2006, 2005 and 2004 65
42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
GLOBAL BEVERAGE SOLUTIONS, INC.
We have audited the accompanying statements of net assets, including the
schedule of investments, of Global Beverage Solutions, 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 and 2005.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our 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 audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Global Beverage Solutions, Inc.
as of December 31, 2006 and 2005, and the results of its operations and cash
flows for the years ended December 31, 2006 and 2005 in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 9 to the
financial statements, the Company has generated limited revenues and has
incurred losses totaling $16,963,728 for the period from August 26, 2002
(inception) through December 31, 2006. These factors, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans regarding these matters are also described in Note 9. The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/Turner, Stone & Company, LLP
APRIL 24, 2007
DALLAS, TEXAS
43
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
GLOBAL BEVERAGE SOLUTIONS, INC.
We have audited the accompanying statements of operations, changes in net assets
and cash flows of Global Beverage Solutions, Inc. (formerly, Bluetorch Inc.)
(the "Company") for the year ended December 31, 2004. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Global
Beverage Solutions, Inc. (formerly, Bluetorch Inc.) for the year ended December
31, 2004 in conformity with accounting principles generally accepted in the
United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 9 to the
financial statements, the Company has generated no revenues and has incurred
recurring losses from its inception. These factors, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans regarding these matters are also described in Note 9. The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Squar, Milner, Peterson, Miranda & Williamson, LLP
APRIL 13, 2005
NEWPORT BEACH, CALIFORNIA
44
GLOBAL BEVERAGE SOLUTIONS, INC.
Statements of Net Assets
December 31, 2006 and December 31, 2005
2006 2005
------------ ------------
ASSETS
Investments in portfolio companies:
Unaffiliated issuers (Cost $200,000 at December 31, 2006 and 2005) $ -- $ --
Controlled affiliate (Cost $6,669,760 at December 31, 2006
and $5,130,000 at December 31, 2005) 1,575,000 5,130,000
Non-controlled affiliate (Cost $1,011,500 at December 31, 2006
and $585,000 at December 31, 2005) -- 585,000
------------ ------------
Total investments in portfolio companies 1,575,000 5,715,000
Cash and cash equivalents 472 245,370
Interest and fees receivable from portfolio companies -- 13,889
Deposits and prepaid expenses 474 13,072
------------ ------------
TOTAL ASSETS 1,575,946 5,987,331
------------ ------------
LIABILITIES
Accounts payable 103,486 25,857
Accrued expenses 48,064 134,350
Secured convertible promissory notes payable 1,335,000 --
------------ ------------
TOTAL LIABILITIES 1,486,550 160,207
------------ ------------
NET ASSETS $ 89,396 $ 5,827,124
============ ============
Commitments and contingencies (Note 8)
Composition of net assets:
Convertible preferred stock, $.001 par value; 50,000,000 shares
authorized; no shares issued and outstanding $ -- $ --
Common stock, $.001 par value, authorized 950,000,000 shares;
43,665,067 and 41,312,391 shares issued and outstanding at
December 31, 2006 and 2005, respectively 43,665 41,312
Additional paid in capital 17,130,808 15,443,102
Deferred option compensation (121,349) --
Accumulated deficit:
Accumulated net operating loss (8,779,053) (7,578,875)
Net realized loss on investments (1,878,415) (1,878,415)
Net unrealized depreciation of investments (6,306,260) (200,000)
------------ ------------
NET ASSETS $ 89,396 $ 5,827,124
============ ============
NET ASSET VALUE PER SHARE $ 0.0020 $ 0.1411
============ ============
See accompanying notes to financial statements.
45
GLOBAL BEVERAGE SOLUTIONS, INC.
Statements of Operations
Three Years Ended December 31, 2006, 2005 and 2004
2006 2005 2004
------------ ------------ ------------
INCOME FROM OPERATIONS:
Interest income
Controlled affiliated portfolio company $ 86,721 $ 1,497 $ --
Non-controlled affiliated portfolio company 19,977 2,392 --
Management income - non-controlled affiliated
portfolio company 18,000 10,000 --
------------ ------------ ------------
124,698 13,889 --
EXPENSES:
Compensation and benefits 160,437 264,533 257,347
Non-cash option compensation 40,450 -- --
Bad debt expense 138,587 -- --
Legal settlements 78,000 60,000 --
Accounting services 54,819 43,727 52,063
Legal services 169,090 69,652 109,884
Investment advisory services -- 134,964 209,412
Board of director fees 1,500 13,800 22,100
Public relations, transfer agent and other professional
services 74,503 34,651 92,633
Other selling, general and administrative expenses 21,426 84,831 257,833
Interest expense 586,064 334,000 169,914
Loss on sale of furniture and fixtures -- 12,874 --
------------ ------------ ------------
1,324,876 1,053,032 1,171,186
------------ ------------ ------------
LOSS BEFORE INCOME TAXES (1,200,178) (1,039,143) (1,171,186)
INCOME TAXES -- -- --
------------ ------------ ------------
NET LOSS FROM OPERATIONS (1,200,178) (1,039,143) (1,171,186)
------------ ------------ ------------
NET REALIZED AND UNREALIZED LOSSES:
Net realized loss on controlled affiliated investments,
net of income tax benefit of $0 -- (466,603) (1,411,812)
Change in unrealized depreciation of non-controlled
affiliate investments, net of deferred tax expense of $0 (6,106,260) (200,000) --
------------ ------------ ------------
NET DECREASE IN NET ASSETS FROM OPERATIONS $ (7,306,438) $ (1,705,746) $ (2,582,998)
============ ============ ============
NET DECREASE IN NET ASSETS FROM OPERATIONS PER COMMON
SHARE, BASIC AND DILUTED $ (0.1697) $ (0.0926) $ (23.1130)
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 43,052,471 18,418,649 111,755
============ ============ ============
See accompanying notes to financial statements.
46
GLOBAL BEVERAGE SOLUTIONS, INC.
Statements of Cash Flows
Three Years Ended December 31, 2006, 2005 and 2004
2006 2005 2004
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net decrease in net assets from operations $(7,306,438) $(1,705,746) $(2,582,998)
Adjustments to reconcile net decrease in net assets from
operations to net cash used in operating activities:
Change in unrealized depreciation of investments 6,106,260 200,000 --
Non-cash option compensation 40,450 -- --
Bad debts 138,587 -- --
Realized loss on investments in portfolio investment companies -- 458,203 1,411,812
Depreciation -- 12,546 10,813
Amortization of deferred financing costs -- 28,125 28,125
Amortization of beneficial conversion feature:
Secured convertible promissory notes payable 538,000 -- --
Convertible debentures -- 234,926 140,074
Loss on sale of furniture and fixtures -- 12,874 --
Proceeds from sale of furniture and fixtures -- 300 --
Accrued investment income (124,698) (13,889) --
Penalties related to conversion of Preferred Series B -- -- 60,000
Changes in operating assets and liabilities:
Deposits and prepaid expenses 12,597 35,935 (3,843)
Accounts payable and accrued expenses 156,604 41,235 12,814
----------- ----------- -----------
Net cash used in operating activities (438,638) (695,491) (923,203)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment -- -- (36,533)
Investments in and advances to portfolio investment companies (1,966,260) (1,144,124) (857,886)
----------- ----------- -----------
Net cash used in investing activities (1,966,260) (1,144,124) (894,419)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common and preferred stock 825,000 1,991,519 1,666,445
Proceeds from:
Secured convertible promissory notes payable 1,335,000 -- --
Convertible debentures -- 50,000 250,126
Loans payable -- -- (26,000)
Redemption of Preferred Series B -- -- (30,000)
----------- ----------- -----------
Net cash provided by financing activities 2,160,000 2,041,519 1,860,571
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (244,898) 201,904 42,949
Cash and cash equivalents, beginning of year 245,370 43,466 517
----------- ----------- -----------
Cash and cash equivalents, end of year $ 472 $ 245,370 $ 43,466
=========== =========== ===========
See accompanying notes to financial statements.
Continued
47
GLOBAL BEVERAGE SOLUTIONS, INC.
Statements of Cash Flows, Continued
Three Years Ended December 31, 2006, 2005 and 2004
2006 2005 2004
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
CASH PAID FOR INTEREST AND INCOME TAXES:
Interest (1) $ 538,000 $ 306,500 $ 124,874
Income taxes -- -- --
(1) The 2006 amount is the beneficial conversion feature of convertible notes payable.
The 2005 interest was prepaid in 2004 as part of a convertible debenture financing.
The 2004 amount includes deferred financing costs and prepaid interest paid in 2004.
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for legal settlements $ 138,000 $ -- $ --
Common stock issued for liability of portfolio company 27,260 -- --
Shares issued for acquisition of 80% of Rudy Beverage, Inc. -- 4,860,000 --
Deferred financing costs and prepaid interest for issuance of
convertible debentures -- 306,500 124,874
Stock subscription written off -- (9,600) (112,500)
Common stock subscribed -- -- 142,600
Shares issued in connection with conversion of convertible debentures -- -- 131,250
Common shares issued for acquisition of 51% of Island Tribe, Inc. -- -- 372,000
See accompanying notes to financial statements.
48
GLOBAL BEVERAGE SOLUTIONS, INC.
Statements of Changes in Net Assets
Three Years Ended December 31, 2006, 2005 and 2004
2006 2005 2004
----------- ----------- -----------
CHANGES IN NET ASSETS FROM OPERATIONS:
Net loss from operations $(1,200,178) $(1,039,143) $(1,171,186)
Net realized loss on sale of investments, net -- (466,603) (1,411,812)
Change in net unrealized depreciation of investments, net (6,106,260) (200,000) --
----------- ----------- -----------
Net decrease in net assets from operations (7,306,438) (1,705,746) (2,582,998)
----------- ----------- -----------
CAPITAL STOCK TRANSACTIONS:
Common stock issued for cash 825,000 1,991,519 1,656,444
Common stock issued for conversion of convertible debentures -- 293,750 131,250
Common stock issued in acquisition of investments -- 4,860,000 372,000
Common shares cancelled in connection with recission of
acquisition -- (8,400) --
Series B preferred stock transactions -- -- 30,000
Debt discount related to beneficial conversion feature 538,000 -- 375,000
Common stock issued for legal settlements 138,000 -- --
Common stock issued for liability of portfolio company 27,260 -- --
Amortization of deferred option compensation 40,450 -- --
Reclassification of interest receivable on convertible debentures -- -- (23,461)
Shares issued in connection with combination financing -- -- 10,000
----------- ----------- -----------
Net increase in net assets from stock transactions 1,568,710 7,136,869 2,551,233
----------- ----------- -----------
Net increase (decrease) in net assets (5,737,728) 5,431,123 (31,765)
Net assets, beginning of year 5,827,124 396,001 427,766
----------- ----------- -----------
Net assets, end of year $ 89,396 $ 5,827,124 $ 396,001
=========== =========== ===========
See accompanying notes to financial statements.
49
GLOBAL BEVERAGE SOLUTIONS, INC.
Schedule of Investments
December 31, 2006
Date of Historical Fair
Shares Acquisition Cost Value
------------- -------------
COMMON STOCK IN UNAFFILIATED ISSUERS
- ------------------------------------
8% Jun-05 Titanium Design Studio, Inc., privately held;
a titanium jewelry manufacturer $ 200,000 $ --
COMMON STOCK IN CONTROLLED AFFILIATED PORTFOLIO COMPANIES
- ---------------------------------------------------------
80% Nov-05 Rudy Beverage, Inc., privately held; 17 times net
assets; manufactures and sells beverages higher
in nutritional value and lower in sugar than
existing brands 6,669,760 1,575,000
COMMON STOCK IN NON-CONTROLLED AFFILIATED PORTFOLIO COMPANIES
- -------------------------------------------------------------
44% Jul-05 EON Beverage Group, Inc., privately held;
manufactures structured water pursuant to
proprietary process 1,011,500 --
------------- -------------
Total investments at December 31, 2006 $ 7,881,260 1,575,000
=============
Cash and other assets, less liabilities (1,485,604)
-------------
Net assets at December 31, 2006 $ 89,396
=============
See accompanying notes to financial statements.
50
GLOBAL BEVERAGE SOLUTIONS, INC.
Schedule of Investments
December 31, 2005
Date of Historical Fair
Shares Acquisition Cost Value
------------- -------------
COMMON STOCK IN UNAFFILIATED ISSUERS
- ------------------------------------
8% Jun-05 Titanium Design Studio, Inc., privately held;
a titanium jewelry manufacturer $ 200,000 $ --
COMMON STOCK IN CONTROLLED AFFILIATED PORTFOLIO COMPANIES
- ---------------------------------------------------------
80% Nov-05 Rudy Beverage, Inc., privately held; 88% of net
assets; manufactures and sells beverages higher
in nutritional value and lower in sugar than
existing brands 5,130,000 5,130,000
Investments with $0 value, below -- --
COMMON STOCK IN NON-CONTROLLED AFFILIATED PORTFOLIO COMPANIES
- -------------------------------------------------------------
9% Jul-05 EON Beverage Group, Inc., privately held; 10% of
net assets; manufactures structured water
pursuant to proprietary process 585,000 585,000
------------- -------------
Total investments at December 31, 2005 $ 5,915,000 5,715,000
=============
Cash and other assets, less liabilities 112,124
-------------
Net assets at December 31, 2005 $ 5,827,124
=============
See accompanying notes to financial statements.
51
GLOBAL BEVERAGE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Mercury Software, a Nevada corporation, was incorporated on January 29, 1997 and
its name was changed to MedEx Corp. on June 24, 2002. Aussie Apparel Group, Ltd.
("Aussie Apparel" or the "Company"), a Nevada corporation, was incorporated on
August 26, 2002. In October 2002, MedEx Corp. issued an aggregate of 6,500,000
(pre-stock split) shares of its common stock to the shareholders of Aussie
Apparel in connection with the merger of Aussie Apparel with MedEx Corp., whose
name was then changed to "Aussie Apparel Group, Ltd" on October 21, 2002. Since
the shareholders of the Company became the controlling shareholders of MedEx
after the exchange, the Company was treated as the acquirer for accounting
purposes. Accordingly, the financial statements, as presented herein, are the
historical financial statements of the Company and include the transactions of
MedEx only from the date of acquisition, using reverse merger accounting.
The Company's name was changed to Bluetorch Inc. ("Bluetorch") effective
November 3, 2003. On April 25, 2005, the Company changed its name to Pacific
Crest Investments and as a result of a conflict in name with an existing company
changed its name to Pacific Peak Investments on May 5, 2005. On October 10,
2005, the Company changed its name to Global Beverage Solutions, Inc. ("Global"
or the "Company") and began trading on the OTC Bulletin Board under the symbol
GBVS.OB.
On June 19, 2003, the Company became a business development company ("BDC")
pursuant to applicable provisions of the Investment Company Act of 1940.
Until June 19, 2003 the Company was a development stage enterprise under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 7,
"Accounting and Reporting by Development Stage Enterprises." Upon commencing
their operations as a BDC, the Company no longer qualified under the guidelines
of SFAS No. 7.
On April 7, 2003 the Company completed a 3-to-1 stock split, followed on May 27,
2003 by an additional 5-to-1 stock split. On April 18, 2005, the Company
completed a 2,500-to-1 reverse stock split. The accompanying financial
statements have been restated to reflect these stock splits for all periods
presented.
Pursuant to Regulation S-X Rule 6, the Company will operate on a
non-consolidated basis. Operations of the portfolio companies will be reported
at the subsidiary level and only the appreciation or impairment of these
investments in portfolio companies will be included in the Company's financial
statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting periods. Significant estimates include the valuation of the
investments in portfolio companies and deferred tax asset valuation allowances.
Actual results could differ from those estimates.
CASH & CASH EQUIVALENTS
Cash equivalents include all highly liquid unencumbered debt instruments with
original maturities of three months or less when purchased.
CONCENTRATIONS OF CREDIT RISK
Cash is maintained at a financial institution. The Federal Deposit Insurance
Corporation ("FDIC") insures accounts at each institution for up to $100,000. At
times, cash may be in excess of the FDIC insurance limit of $100,000.
REVENUE RECOGNITION
The Company has accrued interest income from its follow-on investments in
portfolio companies and has accrued management fees from one its portfolio
companies in 2006 and 2005. The Company did not recognize any revenues for the
year ended December 31, 2004, and will in the future also recognize revenue
based upon the appreciation of the investments in its portfolio companies.
52
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,
interest and fees receivable from portfolio companies, accounts payable and
accrued expenses, and convertible debentures approximate their estimated fair
values due to the short-term maturities of these financial instruments and
because related interest rates offered to the Company approximate current
offered rates.
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.
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, 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.
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 will record 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 will record 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.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is recorded using the straight-line method over the estimated
useful lives of the respective assets (two to five years). Maintenance and
repairs are charged to operations when incurred. Betterments and renewals are
capitalized. When property and equipment are sold or otherwise disposed of, the
asset account and related accumulated depreciation account are relieved, and any
gain or loss is included in operations.
INCOME TAXES
The Company accounts for income taxes under SFAS 109, "Accounting for Income
Taxes." Under the asset and liability method of SFAS 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statements carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period the
enactment occurs. A valuation allowance is provided for certain deferred tax
assets if it is more likely than not that the Company will not realize tax
assets through future operations.
53
SEGMENT REPORTING
Pursuant to Regulation S-X Rule 6, the Company will operate on a
non-consolidated basis. Operations of the portfolio companies will be reported
at the subsidiary level and only the appreciation or impairment will be included
in the Company's financial statements.
STOCK-BASED COMPENSATION
Until December 31, 2005, the Company accounted for stock-based employee
compensation arrangements in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" and complies with the disclosure provisions of SFAS No.123,
"Accounting for Stock-Based Compensation." Under APB No. 25, employee
compensation cost is recognized over the vesting period based on the excess, if
any, on the date of grant of the fair value of the Company's shares over the
employee's exercise price. When the exercise price of the employee share options
is less than the fair value price of the underlying shares on the grant date,
deferred stock compensation is recognized and amortized to expense in accordance
with FASB Interpretation No. 44 over the vesting period of the individual
options. Accordingly, if the exercise price of the Company's employee options
equals or exceeds the market price of the underlying shares on the date of
grant, no compensation expense was recognized. Options or shares awards issued
to non-employees are valued using the fair value method and expensed over the
period services are provided.
In December 2004, the FASB issued SFAS 123(R), "Share-Based Payment," which
requires that the compensation cost relating to share-based payment transactions
(including the cost of all employee stock options) be recognized in the
financial statements. That cost will be measured based on the estimated fair
value of the equity or liability instruments issued. SFAS 123(R) covers a wide
range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. SFAS 123(R) replaces SFAS 123, "Accounting for
Stock-Based Compensation," and supersedes Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." As originally
issued, SFAS 123 established as preferable a fair-value-based method of
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. 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. As of December 31, 2005, there were no options
outstanding.
BASIC AND DILUTED NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS PER
SHARE
Basic net increase (decrease) in net assets from operations per share is
determined by dividing the net increase (decrease) in net assets from operations
by the weighted average shares of common stock outstanding during the period.
Diluted increase (decrease) in net assets from operations per share is
determined by dividing the net increase (decrease) in net assets from operations
by the weighted average shares of common stock outstanding plus the dilutive
effects of stock options, warrants and other convertible securities. 3,094,038,
none and 10,095 common stock equivalents, representing common shares eligible to
be converted in relation to convertible secured promissory notes payable,
preferred stock and warrants, calculated using the market price on December 31,
2006, 2005 and 2004, respectively, have been excluded from the calculation of
diluted increase (decrease) in net assets from operations per share for the
years ended December 31, 2006, 2005 and 2004, respectively, as their effect
would be anti-dilutive.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the current
year presentation.
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.
54
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 Measurements". 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.
(2) INVESTMENTS
BEVERAGE NETWORK OF MARYLAND, INC. ("BNM")
- ------------------------------------------
On February 23, 2007, we completed the purchase of BNM from XStream Beverage
Network, Inc. ("XStream"). The transaction was structured as a merger of BNM
into our wholly owned subsidiary Global Merger Corp., a Nevada corporation,
pursuant to the Agreement and Plan of Merger between the parties dated January
31, 2007, and as amended February 23, 2007.
Based in Jessup, Maryland, BNM engages in the distribution of beverages in the
Mid-Atlantic States. XStream is an emerging brand development company in the new
age beverage industry.
As a part of the transaction we issued 60,500,000 shares of our common stock and
a $2,000,000 note payable to XStream. At closing, we paid $229,000 on the note
and pursuant to the agreements will pay 40% of any subsequent cash proceeds
received from the February 5, 2007 1-E Offering. The remaining note balance is
to be paid in monthly installments of $25,000 commencing September 1, 2007.
Additionally, if we raise any equity capital while the note is still
outstanding, we are required to apply 35% of the net proceeds to reduce the
note.
Management has reviewed the accounting guidance related to this transaction,
which includes EITF 90-13 and has concluded that in future financial statements
of the Company this transaction will be reported as a "reverse merger."
BNM had unaudited net revenue of $9,758,000 and a net loss of $149,000 during
2006.
AQUA MAESTRO, INC. ("AM")
- -------------------------
On March 29, 2007, we completed the purchase of AM from its shareholders. The
transaction was structured as a merger of AM into our wholly owned subsidiary,
Global Beverage Acquisition Corp., a Florida corporation, pursuant to the
Agreement and Plan of Merger and Reorganization between the parties dated March
29, 2007.
With the business office in Boca Raton, Florida and logistics in Fort
Lauderdale, Florida, AM is engaged in the wholesale and retail distribution of
domestic and imported bottled water, comprising forty-four brands and over one
hundred-seventy different items. The wholesale client base is across North
America and the Caribbean, including well-known hotels and resorts. In its
retail home delivery division, AM provides product through its Internet site
aquamaestro.com.
Consideration for the acquisition of AM includes $500,000 in cash, 10,000,000
shares of our common stock and an earn-out. The cash is payable $300,000 at
closing and the balance in equal monthly installments of $22,222 beginning April
15, 2007. The earn-out is a percentage of defined gross profit equal to 10% of
calendar 2008 gross profit, 5% of calendar 2009 gross profit and 3% of calendar
2010 gross profit.
55
RUDY PARTNERS, LTD. ("PARTNERS")
- --------------------------------
On January 18, 2007, we executed an agreement with Partners wherein the Company
agreed to sell its 80% interest in Rudy for an 8% secured promissory note in the
amount of $6,000,000 plus assumption of the advances and receivables owed to the
Company by Rudy. The agreement is expected to close before the end of May 2007.
The note will be collateralized by 11,000,000 shares of the Company's common
stock and will be payable in six annual installments of $1,000,000 commencing
January 31, 2008. In addition, Partners agreed to convert any notes payable by
Rudy to the Company, once Partners becomes publicly-traded or a subsidiary of a
publicly-traded company, into no more than 20% of the common stock of the
publicly traded entity, based upon the market value of the public entity's
common stock.
RUDY BEVERAGE, INC. ("RUDY")
- ----------------------------
On November 17, 2005, we executed a Stock Purchase Agreement with the
shareholders ("Sellers") of Rudy, a Nevada corporation, whereby we exchanged
6,000,000 shares of the Company's common stock for 80% of the issued and
outstanding common stock of Rudy. The Company's investment was valued at
$4,860,000 based upon the trading price of the Company's common stock on the
date of the transaction. The Sellers were eligible to receive up to 10,000,000
additional shares of the Company's common stock if Rudy achieved certain sales
and net revenue goals by the twelve month periods ending June 30, 2007 and 2008.
Rudy was founded by Rudy Ruettiger and Drew Carver to create a unique line of
beverages higher in nutritional value but lower in sugar than existing brands.
Rudy currently has developed two distinct products: Rudy Flying Colors, catering
to children K1 through 8; and Rudy Revolution, a sport drink aimed at athletes
of all ages. The goal of the Rudy line of beverages is to create flavorful juice
blends lower in sugar than existing brands.
We originally valued our investment in Rudy at December 31, 2006, based on the
estimated value of the collateral on the Partners note of $3,375,000, resulting
in an original adjustment of $3,294,760 as unrealized depreciation of our
investment and recorded bad debt expense of $88,218 for our receivable from Rudy
for interest accrued on loans. Subsequent to December 31, 2006, based on the
decline in the collateral on the Partners note, that is, the shares of the
Company's common stock, we recorded an additional adjustment of $1,800,000 under
guidance in FAS 5 for the additional decline in the Company's common stock as of
April 24, 2007.
EON BEVERAGE GROUP, INC. ("EON")
- --------------------------------
On July 8, 2005, we consummated the transactions contemplated by the Share
Purchase Agreement (dated June 28, 2005) with EON and, as a result, the Company
invested $400,000 in exchange for 9% of the issued and outstanding common stock
of EON. During the first quarter of 2006, shareholders of the Company
contributed their stock in EON to the Company, which increased its ownership to
44%.
EON manufactures structured water through a proprietary process (patent pending)
which alters the molecular structure of purified water. Structured water is a
relatively new concept which is generally defined as water molecules organized
through hydrogen bonding into distinct molecular structures. This allows the
users of EON water to achieve enhanced intra-cellular hydration through
significant absorption capability that is crucial for maximum biological
activity and improved athletic performance, based on the representations of EON.
While EON expected to sell a substantial volume of its structured water to Rudy
for use in certain of its drinks, the Board of Directors has determined that EON
will not achieve profitability without substantial additional investment, which
the Company was unwilling to provide. Accordingly, the Company fully reserved
its investment of $400,000 and fully reserved its advances of $611,500 for a
total unrealized depreciation expense of $1,011,500 at September 30, 2006.
Accounts receivable in the amount of $50,369 for interest charges and management
fees were also fully reserved at September 30, 2006.
TITANIUM DESIGN STUDIO, INC. ("TDS")
- ------------------------------------
On June 6, 2005, we signed a Share Purchase Agreement with TDS, a Nevada
corporation, whereby we invested $200,000 in cash in exchange for 8% of the
issued and outstanding common stock of TDS. TDS has a proprietary manufacturing
process which allows it to cast precision titanium jewelry resulting in a level
of detail not obtainable by milling titanium. TDS can economically produce and
supply jewelry in shapes and patterns which were previously considered to be
impossible or uneconomical to manufacture. TDS believes its technology has
applications in other industries, including aerospace, dentistry, sporting goods
(fishing rods) and commemorative coins. Early in 2006, TDS relocated its
operations to Thailand in order to access cheaper labor. The Board of Directors
of the Company recorded a reserve in the amount of $200,000 relating to this
investment.
56
UNBOXED DISTRIBUTION, INC.
- --------------------------
On August 21, 2003, the Company formed Unboxed Distribution, Inc. ("Unboxed")
for the purpose of owning and operating the Bluetorch license agreement.
On March 12, 2005, the Company and its wholly-owned subsidiary, Unboxed
Distribution, Inc., signed a Mutual Settlement and Release Agreement with Gotcha
Brands Inc., the Bluetorch licensor, and this agreement requires the Company's
subsidiary, Unboxed Distribution, Inc., to cease the selling and marketing of
Bluetorch apparel. In keeping with this agreement, the Company also agreed to
change its corporate name by April 20, 2005.
This wholly owned subsidiary has been inactive since March 12, 2005.
TOTAL SPORTS DISTRIBUTION, INC.
- -------------------------------
On October 21, 2003, the Company formed Total Sports Distribution, Inc. ("Total
Sports") for the purpose of owning and operating the True Skate Apparel brand
("TSABrand)". Furthermore, on February 19, 2004 Total Sports signed a definitive
agreement with Collective Licensing International, LLC to license the Airwalk
brand for apparel in the United States market.
On March 22, 2005, the Company and its wholly-owned subsidiary, Total Sports
Distribution, Inc., signed a Mutual Settlement and Release Agreement with
Collective Licensing International, LLC, the licensor of the Airwalk apparel
brand, and this agreement requires the Company's subsidiary, Total Sports
Distribution, Inc., to cease the selling and marketing of Airwalk apparel. On
July 1, 2005, Global and Total Sports signed a Mutual Settlement and Release
Agreement with Krash Distributors Inc., the licensor of TSABrand apparel. This
agreement required Total Sports to cease selling and marketing TSABrand apparel.
This wholly owned subsidiary has been inactive since July 1, 2005.
ISLAND TRIBE, INC.
- ------------------
Effective August 1, 2004, the Company acquired a 51% interest in Island Tribe,
Inc., ("Island Tribe") a surf apparel company in exchange for 12,000 shares of
the restricted common stock of the Company, which was valued at $372,000, based
on the trading price of the Company's common stock at the time. Over the next 4
years, this purchase agreement provided for the Company to receive an additional
24% ownership of Island Tribe, Inc. Effective November 20, 2005, the Company
exchanged its 51% ownership in Island Tribe for the 12,000 restricted common
shares originally issued to acquire Island Tribe and cancelled the shares.
VALUATION OF INVESTMENTS
- ------------------------
As required by the SEC's Accounting Series Release ("ASR") 118, the investment
committee of the Company is required to assign a fair value to all investments.
To comply with Section 2(a) (41) of the Investment Company Act and Rule 2a-4
under the Investment Company Act, it is incumbent upon the board of directors to
satisfy themselves that all appropriate factors relevant to the value of
securities for which market quotations are not readily available have been
considered and to determine the method of arriving at the fair value of each
such security. To the extent considered necessary, the board may appoint persons
to assist them in the determination of such value and to make the actual
calculations pursuant to the board's direction. The board must also, consistent
with this responsibility, continuously review the appropriateness of the method
used in valuing each issue of security in the Company's portfolio. The directors
must recognize their responsibilities in this matter and whenever technical
assistance is requested from individuals who are not directors, the findings of
such individuals must be carefully reviewed by the directors in order to satisfy
themselves that the resulting valuations are fair.
No single standard for determining "fair value in good faith" can be laid down,
since fair value depends upon the circumstances of each individual case. As a
general principle, the current "fair value" of an issue of securities being
valued by the board of directors would appear to be the amount that the owner
might reasonably expect to receive for them upon their current sale. Methods
that are in accord with this principle may, for example, be based on a multiple
of earnings, or a discount from market of a similar freely traded security, or
yield to maturity with respect to debt issues, or a combination of these and
other methods. Some of the general factors that the directors should consider in
determining a valuation method for an individual issue of securities include: 1)
the fundamental analytical data relating to the investment, 2) the nature and
duration of restrictions on disposition of the securities, and 3) an evaluation
of the forces which influence the market in which these securities are purchased
and sold. Among the more specific factors which are to be considered are: type
of security, financial statements, cost at date of purchase, size of holding,
discount from market value of unrestricted securities of the same class at time
of purchase, special reports prepared by analysts, information as to any
transactions or offers with respect to the security, existence of merger
proposals or tender offers affecting the securities, price and extent of public
trading in similar securities of the issuer or comparable companies and other
relevant matters.
57
The board has arrived at the following valuation method for its investments.
Where there is not a readily available source for determining the market value
of any investment, either because the investment is not publicly traded or is
thinly traded and in absence of a recent appraisal, the value of the investment
shall be based on the following criteria:
1. Total amount of the Company's actual investment ("AI"). This amount
shall include all loans, purchase price of securities and fair value
of securities given at the time of exchange.
2. Total revenues for the preceding twelve months ("R").
3. Earnings before interest, taxes and depreciation ("EBITD")
4. Estimate of likely sale price of investment ("ESP")
5. Net assets of investment ("NA")
6. Likelihood of investment generating positive returns (going
concern).
The estimated value of each investment shall be determined as follows:
- - Where no or limited revenues or earnings are present, then the value shall be
the greater of the investment's a) net assets, b) estimated sales price, or c)
total amount of actual investment.
- - Where revenues and/or earnings are present, then the value shall be the
greater of one-time (1x) revenues or three times (3x) earnings, plus the greater
of the net assets of the investment or the total amount of the actual
investment.
- - Under both scenarios, the value of the investment shall be adjusted down if
there is a reasonable expectation that the Company will not be able to recoup
the investment or if there is reasonable doubt about the investment's ability to
continue as a going concern.
Based on the previous methodology, the Company determined that its investments
in its portfolio companies should be valued at December 31, 2006 as follows:
o RUDY BEVERAGE, INC.
Rudy has not yet developed revenues and was testing its products and
developing marketing plans during 2006. As noted above, the Company
sold its interest in Rudy, effective March 22, 2007. The Company valued
its investment in Rudy at December 31, 2006, based on the estimated
value of the collateral on the Partners note of $1,575,000. We recorded
an adjustment of $5,094,760 as unrealized depreciation of our
investment and recorded bad debt expense of $88,218 for our receivable
from Rudy for interest accrued on loans.
o EON BEVERAGE GROUP, INC.
EON has been involved in test marketing its structured water product
and has had limited revenues during this testing phase. During the
first quarter of 2006, shareholders of the Company contributed their
stock in EON to the Company, which increased its ownership to 44%.
While EON expected to sell a substantial volume of its structured water
to Rudy for use in certain of its drinks, the Board of Directors has
determined that EON will not achieve profitability without substantial
additional investment, which the Company was unwilling to provide.
Accordingly, the Company fully reserved its investment of $400,000 and
fully reserved its advances of $611,500 for a total unrealized
depreciation expense of $1,011,500 at September 30, 2006. Accounts
receivable in the amount of $50,369 for interest charges and management
fees were also fully reserved at September 30, 2006.
o TITANIUM DESIGN STUDIO, INC.
Early in 2006, TDS relocated its operations to Thailand in order to
access cheaper labor. As a result, the Company fully reserved its
investment of $200,000 at December 31, 2005.
INVESTMENTS DISCONTINUED IN PRIOR YEARS
o ISLAND TRIBE, INC.
As noted above, the Company sold its interest in Island Tribe on
November 20, 2005.
o UNBOXED DISTRIBUTION, INC.
Unboxed was valued at $0, due to the Company's decision to discontinue
the flow of capital to this entity at December 31, 2004. The write down
in the investment in Unboxed for the year ended December 31, 2004
totaled $927,154.
o TOTAL SPORTS DISTRIBUTION, INC.
Total Sports was valued at $0, due to the Company's decision to
discontinue the flow of capital to this entity at December 31, 2004.
The write down in the investment in Total Sports for the year ended
December 31, 2004 totaled $484,658.
58
(3) SECURED CONVERTIBLE PROMISSORY NOTES PAYABLE
During the year ended December 31, 2006, the Company issued 8%, one-year secured
convertible promissory notes payable ("Secured Notes") to a group of investors
in the aggregate amount of $1,335,000. The notes are convertible into common
shares at an initial rate of $.50 per share. Management has determined that
these notes qualify as conventional convertible debt pursuant to APB No. 14,
"Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants"
and EITF 98-5, "Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios," accordingly the embedded
conversion option is not a derivative. The Company computed an intrinsic value
of the beneficial conversion of $538,000 based on the quoted stock price on the
grant dates. The beneficial conversion feature was credited to additional
paid-in capital and charged to interest expense when the agreement commenced
since the Secured Notes can be converted when issued.
The Secured Notes include certain anti-dilutive provisions, such as an
adjustment for stock splits and business combinations, adjustment for common
stock dividends and distributions, adjustment for issuance of additional shares
of common stock at a price per share less than the initial conversion price, and
issuance of common stock equivalents at a price per share less than the initial
conversion price.
As of December 31, 2006, Secured Notes in the aggregate principal amount of
$1,185,000 are in default as the interest due on November 1, 2006, was not paid.
The default rate of interest of 12% is in effect for these Secured Notes.
As of December 31, 2006, the Secured Notes were convertible into common stock at
the rate of $.50 per share. In January 2007, the Company sold 700,000 shares of
its common stock pursuant to its Offering Circular dated January 3, 2007, for
$87,500 ($.125/share). Accordingly, pursuant to the Secured Note agreement, the
conversion rate for the Secured Notes became $.125 on that date.
(4) CONVERTIBLE DEBENTURES
On April 1, 2003 the Company issued a $25,000 convertible debenture, convertible
at the holder's option into common shares at a price equal to the lesser of 75%
of the lowest closing bid price over the 15 trading days prior to conversion or
100% of the average closing prices bid over the 20 trading days prior to
conversion. The debenture was repaid during the quarter ended September 30, 2003
and unamortized debt issue costs were charged to expense.
On November 8, 2004, the Company issued a convertible debenture in the amount of
$187,500, convertible at the holder's option into common shares at a price of
$0.0035 per share. All principal is due on the maturity date of November 8, 2006
and the interest rate is 9.15%. The Company received net proceeds totaling
$125,063, net of deferred financing costs of $28,125 and prepaid interest
totaling $34,312. As of December 31, 2004, the debenture holder had converted
$131,250 of the debenture into 15,000 shares of common stock. Subsequent to
December 31, 2004, the debenture holder converted the balance of $56,250 of the
debenture into 6,429 shares of common stock.
On December 14, 2004, the Company issued a convertible debenture in the amount
of $187,500, convertible at the holder's option into common shares at a price of
$0.0035 per share. All principal is due on the maturity date of December 14,
2006 and the interest rate is 9.15%. The Company received net proceeds totaling
$125,063, net of deferred financing costs of $28,125 and prepaid interest
totaling $34,312. As of December 31, 2004, the debenture holder had not
converted any of this debenture into shares of common stock. Subsequent to
December 31, 2004, the debenture holder converted $187,500 of the debenture into
21,429 shares of common stock.
The convertible feature of the above convertible debentures provides for a rate
of conversion that is below market value. Such feature is normally characterized
as a "beneficial conversion feature" ("BCF"). Pursuant to Emerging Issues Task
Force ("EITF") Issue No. 98-5, "Accounting For Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratio" and
EITF Issue No. 00-27, "Application of EITF Issue No. 98-5 To Certain Convertible
Instruments," the Company has estimated the fair value of such BCF to be
approximately $375,000 related to these debentures and recorded such amount as a
debt discount. Such discount is being amortized to interest expense over the
term of the notes. Amortization expense was $234,926 in 2005 and $140,074 in
2004.
Amortization expense of deferred financing costs for these convertible
debentures totaled $28,125 for both 2005 and 2004.
59
(5) INCOME TAXES
During the years ended December 31, 2006, 2005 and 2004 the provision for taxes
(all deferred) differs from the amounts computed by applying the U.S. Federal
income tax rate of 34% to income before provision for taxes as a result of the
following:
2006 2005 2004
----------- ----------- -----------
Computed "expected" tax benefit $(2,484,000) $ (580,000) $ (878,000)
(Addition to) reduction in income taxes resulting from:
State income taxes, net of federal benefit (292,000) (68,000) (103,000)
Non-deductible expenses 224,000 -- --
----------- ----------- -----------
(2,552,000) (648,000) (981,000)
Change in valuation allowance 2,552,000 648,000 981,000
----------- ----------- -----------
Total $ -- $ -- $ --
=========== =========== ===========
The effects of temporary differences, that give rise to significant portions of
deferred tax assets and liabilities at December 31, 2006 and 2005, are presented
below:
2006 2005
----------- -----------
Deferred tax assets:
Tax net operating loss carryforwards 3,101,000 2,164,000
Investments 1,691,000 76,000
----------- -----------
Total net deferred tax asset 4,792,000 2,240,000
Valuation allowance (4,792,000) (2,240,000)
----------- -----------
Total net deferred tax asset $ -- $ --
=========== ===========
At December 31, 2006, the Company had net tax operating loss carryforwards of
approximately $8,162,000 available to offset future taxable federal and state
income. If not utilized to offset future taxable income, the carryforwards will
expire in various years from 2022 through 2026. In the event the Company was to
experience a greater than 50% change in ownership as defined in Section 382 of
the Internal Revenue Code, the utilization of the Company's tax net operating
loss carryforwards could be severely restricted.
(6) STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company is authorized to issue up to 50,000,000 shares of preferred stock at
$0.001 par value. As of December 31, 2006 and 2005 there are no issued or
outstanding preferred shares.
During the years ended December 31, 2005 and 2004, 190,000 and 290,000 Series B
preferred shares were converted into 392,092 and 4,866 shares of common stock,
respectively. In addition, during 2005, the 10,000,000 shares of Series C
preferred shares were converted into 1,632,234 shares of common stock.
COMMON STOCK
The Company is authorized to issue up to 950,000,000 shares of common stock, par
value $.001. At December 31, 2006 and 2005, there were 43,665,067 and 41,312,391
shares issued and outstanding, respectively.
EQUITY TRANSACTIONS
YEAR ENDED DECEMBER 31, 2006:
During the year ended December 31, 2006, the Company sold 1,409,571 shares of
its common stock for cash in the amount of $825,000.
During the year ended December 31, 2006, the Company issued 917,143 shares of
its common stock valued at $138,000 for resolution of legal matters.
During the year ended December 31, 2006, the Company granted options to acquire
a total of 450,000 shares of its common stock at an exercise price of $1.05 per
share to the three individual owners of an advertising agency used by Rudy. The
terms of the options provide that the exercise price could be paid either in
cash or as an offset to their monthly billing of a minimum of 20%. Options for
25,962 shares were exercised with an offset to their monthly billing of $27,260
during 2006.
60
YEAR ENDED DECEMBER 31, 2005:
During the year ended December 31, 2005, 190,000 Series B preferred shares were
converted into 392,092 shares of common stock.
During the year ended December 31, 2005, 20,000 shares of common stock were
issued in exchange for convertible debentures in the amount of $50,000. In
addition, 27,858 shares were released from the December 31, 2004, escrow in
satisfaction of $243,750 in convertible debentures which were outstanding at
December 31, 2004.
On April 18, 2005, the Company completed a 2,500-to-1 stock split, which reduced
issued and outstanding common shares to 218,500 shares.
During the year ended December 31, 2005, the Company issued 1,632,234 common
shares in exchange for all 10,000,000 shares of the Series C preferred stock.
During the year ended December 31, 2005, the Company sold 33,092,854 common
shares in exchange for cash in the amount of $1,900,500 in private placement
transactions.
On November 17, 2005, the Company issued 6,000,000 common shares in exchange for
an 80% interest in Rudy Beverage, Inc.
On November 20, 2005, the Company exchanged its 51% interest in Island Tribe,
Inc. for 12,000 shares of its common stock. The Company retired the shares.
YEAR ENDED DECEMBER 31, 2004:
During the year ended December 31, 2004, the Company issued 51,220 common shares
in exchange for which it received cash proceeds totaling $1,533,945.
The Company also issued 12,000 restricted common shares for the purchase of a
51% interest in Island Tribe, Inc., valued at $372,000. The number of shares
issued was based on a formula whereby the shareholders of Island Tribe received
$372,000 of the Company's restricted common stock.
During the year ended December 31, 2004, 2,308 common shares and 10,000 Series C
preferred shares were returned to the Company.
During September 2004, 10,000 shares of Series CPS stock were issued in
connection with the issuance of 445 shares of common stock for total proceeds of
$10,000.
On November 8, 2004, the Company issued a convertible debenture in the principal
amount of $187,500, convertible at the holder's option into common shares at a
price of $0.0035 per share. As of December 31, 2004, the debenture holder had
converted $131,250 of the debenture into 15,000 shares of common stock.
Subsequent to December 31, 2004, the debenture holder converted the remaining
$56,250 of the debenture into 6,429 shares of common stock.
On December 14, 2004, the Company issued an additional convertible debenture in
the principal amount of $187,500, convertible into 21,429 common shares of the
Company. Subsequent to December 31, 2004 and through March 31, 2005, the
debenture holder converted the total $187,500 of this debenture into 21,429
shares of common stock.
During the year ended December 31, 2004, 4,867 common shares were issued upon
conversion of Series B preferred shares. An additional 67 common shares were
issued as settlement for penalties and interest in connection with the
conversion of these Series B preferred shares.
(7) COMMON STOCK OPTIONS
The Company granted options to the three owners of an advertising vendor used by
Rudy to acquire up to 450,000 shares of its common stock at an exercise price of
$1.05 per share, the average price on the date of the grant, June 14, 2006. The
stock option agreements expire on June 14, 2011, are fully vested and allow for
payment of the exercise price in either cash or as an offset to their monthly
billing of a minimum of 20%.
The Company does not have a stock option plan.
A summary of stock option activity during the year ended December 31, 2006, is
as follows (no activity in 2005):
Weighted
Average
Exercise
Shares Price ($)
----------- ------------
Outstanding, beginning of year -- $ --
Granted 450,000 $ 1.05
Exercised (25,962) $ 1.05
-----------
Outstanding, end of year 424,038 $ 1.05
===========
Exercisable at year end 424,038 $ 1.05
===========
61
The fair value of each option on the date granted is estimated using the Black
Scholes option valuation model. The following weighted-average assumptions were
used for the options granted during 2006:
Expected term 2 years
Expected cumulative volatility 55%
Expected dividend yield 0%
Risk-free interest rate 4.86%
Expected annual forfeiture rate 0%
Using these criteria, the Company calculated an intrinsic value of the options
issued during 2006 of $161,799, which was recorded as an increase to paid-in
capital and an offsetting equity reduction in deferred option compensation.
The Company recognizes compensation expense on a straight-line basis over the
requisite service period for each stock option grant. Total stock-based
compensation expense recognized during 2006 was $40,450, which reduced the
deferred option expense balance to $121,349.
(8) COMMITMENTS AND CONTINGENCIES
The Company leases its office facility on a month-to-month basis at the rate of
$1,000 per month.
As a result of the transactions discussed in Note 10, the Company will be
required to advance $830,000 in loan payments required by one of the portfolio
companies and an additional $670,000 in follow-on investments in the portfolio
companies. Of this amount, approximately $580,000 has been advanced as of March
31, 2007.
See Note 10 for additional commitments.
(9) GOING CONCERN
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern, which contemplates, among other things, the
realization of assets and satisfaction of liabilities in the normal course of
business. As of December 31, 2006, the Company had limited revenues and incurred
net losses totaling $16,963,728 since inception through December 31, 2006.
Additionally, as of December 31, 2006, the Company has a deficit in working
capital of almost $1,500,000. These factors, among others, raise substantial
doubt about the Company's ability to continue as a going concern. The Company
intends to fund operations through debt and equity financing arrangements which
management believes should be sufficient to fund its capital expenditures,
provide working capital and other necessary cash requirements for the year
ending December 31, 2007. The successful outcome of future activities cannot be
determined at this time and there is no assurance that if achieved, the Company
will have sufficient funds to execute its intended business plan or generate
positive operating results.
The Company currently estimates it will require a total of approximately
$2,500,000 to meet its operating cash flow requirements and its currently
committed follow-on investments in 2007. The total requirements include $300,000
in loan payments required by the acquisitions discussed in Note 10; $830,000 in
loan payments by one of the acquired portfolio companies; $670,000 in follow-on
investments to the portfolio companies; and an estimated $700,000 for working
capital and overhead requirements.
Management plans to take the following steps in response to these factors:
o REVENUE
It has been determined that, as an investment company, the Company will
only invest in/acquire businesses which are cash flow positive and
profitable or businesses which projections indicate can become cash flow
positive and profitable within a reasonable period. These entities will
have good growth potential as a result of access to additional capital
and/or additional management acumen.
As part of this strategic process, the Company has decided to concentrate
its efforts in the beverage industry. It is believed that this new
direction will both reduce the risk for the Company and its shareholders
as well as provide the best opportunity for long-term shareholder value.
o FINANCING
On January 3, 2007, the Company filed an Offering Circular under
Regulation E of the Securities Act of 1933. A total of 700,000 shares of
common stock were sold for $87,500 before the Offering Circular was
withdrawn and an Amended Offering Circular was filed on February 5, 2007.
As of March 27, 2007, 21,333,333 shares had been sold for cash proceeds of
$2,064,683 and stock subscriptions receivable of $1,141,517.
62
o ACQUISITIONS AND DISPOSITIONS
As discussed in more detail in Note 10, on February 23, 2007, we acquired
BNM from XStream. This acquisition is expected to provide positive cash
flow for the Company after completing initial working capital
requirements.
On January 18, 2007, the Company agreed to sell Rudy to Partners for a
note, which will eliminate future follow-on investments to Rudy.
On March 20, 2007, we acquired AM which is also expected to provide
positive future cash flow.
Whereas the Company believes it will be successful with its plans, due to market
factors and economic conditions, no assurance can be given that financing will
be available on favorable terms or at all.
The financial statements do not include any adjustments related to
recoverability and classification of assets carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
(10) SUBSEQUENT EVENTS
(a) On January 3, 2007, the Company filed an Offering Circular under
Regulation E of the Securities Act of 1933. A total of 700,000
shares of common stock were sold for $87,500 before the Offering
Circular was withdrawn and an Amended Offering Circular was filed on
February 5, 2007. As of March 27, 2007, 21,333,333 shares had been
sold for cash proceeds of $2,064,683 and stock subscription
receivables of $1,141,517.
(b) On January 12, 2007, the Company issued 5,000,000 shares of its
common stock to Daniel "Rudy" Ruettiger in exchange for $625,000 due
Mr. Ruettiger by Rudy Beverage.
(c) On January 18, 2007, the Company executed an agreement with Rudy
Partners, Ltd. ("Partners") wherein the Company sold its 80%
interest in Rudy for an 8% secured promissory note in the amount of
$6,000,000 plus assumption of the advances and receivables owed to
the Company by Rudy. The agreement is expected to close by April 30,
2007. The note is collateralized by 11,000,000 shares of the
Company's common stock and is payable in six annual installments of
$1,000,000 commencing January 31, 2008. In addition, Partners agreed
to convert any notes payable by Rudy to the Company, once Partners
becomes publicly-traded or a subsidiary of a publicly-traded
company, into no more than 20% of the common stock of the publicly
traded entity, based upon the market value of the public entity's
common stock.
(d) The Company completed two transactions as follows:
(1) On February 23, 2007, the Company completed the purchase of
Beverage Network of Maryland, Inc., ("BNM") a wholly-owned
subsidiary of XStream Beverage Network, Inc. ("XStream")
(commission file number 033-30158A). The transaction was
structured as a merger of BNM into a wholly-owned subsidiary
of the Company, Global Merger Corp., under the Agreement and
Plan of Merger between the parties dated January 31, 2007, and
amended on February 23, 2007.
Based in Jessup, Maryland, BNM engages in the distribution of
beverages in the Mid-Atlantic States.
Global issued 60,500,000 shares of its common stock to XStream
plus a note in the amount of $2,000,000, of which $229,000 was
paid at closing. In addition, the note requires payment of 40%
of any cash proceeds received by Global from the February 5,
2007 1-E Offering (see (a) above) with the remainder payable
in monthly installments of $25,000 commencing September 1,
2007. In a Master Security Agreement, Global granted XStream a
continuing security interest in substantially all of its
assets as collateral as long as any obligation arising from
the Agreement and Plan of Merger, as amended, remains
outstanding. In addition, pursuant to a Stock Pledge
Agreement, the BNM stock owned by Global is pledged as
additional collateral on the obligations and BNM guarantees
the Global obligations to XStream.
63
The Agreement and Plan of Merger also provided that effective
February 23, 2007, the President and a Director of XStream,
Jerry Pearring, would resign his position with XStream and
become a Director and Chief Executive Officer of Global. Mr.
Pearring would be the only officer of Global after the
transaction and would receive an annual salary of $185,000.
In addition, the Agreement and Plan of Merger provided that
Global was required to amend its Articles of Incorporation and
By-Laws, as necessary, to allow four Directors and that
XStream had the right to nominate three of the four directors.
On March 13, 2007, Global issued 4,000,000 shares of its
restricted stock to restructure part of the indebtedness of
BNM.
Management has reviewed the accounting guidance related to
this transaction, which includes EITF 90-13 and has concluded
that in future financial statements of the Company this
transaction will be reported as a "reverse merger."
(2) On March 29, 2007, the Company completed the purchase of Aqua
Maestro, LLC ("AM") from its shareholders. The transaction was
structured as a merger of AM into the Company's wholly owned
subsidiary, Global Beverage Acquisition Corp. pursuant to the
Agreement and Plan of Merger and Reorganization between the
parties dated March 29, 2007.
With the business office in Boca Raton, Florida and logistics
in Fort Lauderdale, Florida, AM is engaged in the wholesale
and retail distribution of domestic and imported bottled
water, comprising forty-four brands and over one
hundred-seventy different items. The wholesale client base is
across North America and the Caribbean, including well-known
hotels and resorts. In its retail home delivery division, AM
provides product through its Internet site aquamaestro.com.
Consideration for the acquisition of AM includes $500,000 in
cash, 10,000,000 shares of the Company's common stock and an
earn-out. The cash is payable $300,000 at closing and the
balance in equal monthly installments of $22,222 beginning
April 15, 2007. The earn-out is a percentage of defined gross
profit equal to 10% of calendar 2008 gross profit, 5% of
calendar 2009 gross profit and 3% of calendar 2010 gross
profit.
In conjunction with the acquisition of AM, the Company issued
650,000 common shares, 400,000 shares in exchange for $50,000
in debt, 200,000 shares to restructure a $150,000 note payable
and 50,000 shares to the principals of AM in exchange for
their guaranty of the AM obligation for $50,000.
After completion of the transactions described above and the shares
issued in conjunction with the transactions, the Company has
147,260,400 shares outstanding. The secured convertible promissory
notes payable are convertible into 10,680,000 shares based upon the
current conversion ratio (See Note 4). Accordingly, XStream owns
38.3% of the common stock of Global on a fully-diluted basis.
(e) On March 26, 2007, the Company received comments from the SEC
regarding its Amended 1-E Offering filed on February 5, 2007
("Amended Offering"). In its comments, the SEC raised issues not
only with the Amended Offering, but previous 1-E Offerings as well.
A primary issue was its belief that the Company was not eligible to
take advantage of the Regulation E Exemption afforded 1940 Act
companies. After reviewing the SEC comments, the Company has engaged
outside counsel to determine the applicability of the comments set
forth in the SEC Letter. Presently, our attorneys are evaluating the
comments and are preparing a response. Although the Company believes
that it is currently in compliance with the Investment Company Act
of 1940, it, and its attorneys, are presently working with the SEC
to resolve all issues raised in a manner which is satisfactory to
the SEC. In the event the SEC is correct in its assessment that the
Company was not eligible for using the Regulation E exemption, the
Company could be required to offer rescission to each subscriber of
the Company's 1-E offerings from September 15, 2005 to January 19,
2007.
64
GLOBAL BEVERAGE SOLUTIONS, INC.
Schedules of Financial Ratios
Three Years Ended December 31, 2006, 2005 and 2004
2006 2005 2004
------------ ------------ ------------
PER SHARE INFORMATION:
Net asset value, beginning of year $ 0.140 $ 2.130 $ 5.590
Net decrease from operations (0.030) (0.060) (10.480)
Net change in realized and unrealized depreciation
on investments (0.138) (0.040) (12.630)
Net increase from stock transactions 0.030 (1.890) 19.650
------------ ------------ ------------
Net asset value, end of year $ 0.002 $ 0.140 $ 2.130
============ ============ ============
PER SHARE MARKET VALUE:
Beginning of period $ 1.67 $ 12.50 $ 67.50
End of period $ 0.42 $ 1.67 $ 12.50
Investment return, based on market price at end
of period -74.85% -86.64% -81.48%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year $ 89,396 $ 5,827,124 $ 396,001
Average net assets 4,843,219 1,305,000 412,000
Annualized ratio of expenses to average net assets 0.27 0.81 2.84
Annualized ratio of decrease in net assets from
operations to average net assets (1.51) (1.31) (6.27)
Weighted average number of shares outstanding during
the year 43,052,471 18,418,649 111,755
Number of shares outstanding, end of year 43,665,067 41,312,391 185,896
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On November 17, 2005, the Company dismissed its former independent registered
public accountants, Squar, Milner, Reehl & Williamson, LLP ("Squar Milner"),
Certified Public Accountants, of Newport Beach, California and engaged Turner,
Stone & Company, LLP ("Turner Stone"), Certified Public Accountants, of Dallas,
Texas, as its independent registered public accounting firm. The decision to
change accountants was approved by the Board of Directors of the Company.
During the fiscal year ended December 31, 2004 and the subsequent interim
periods until the change, there were no disagreements with Squar Milner on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Squar Milner would have caused them to make reference in
connection with their report to the subject matter of the disagreement, and
Squar Milner has not advised the Company of any reportable events as defined in
Item 304(a)(1)(v) of Regulation S-K except as follows:
Squar Milner advised us as part of their 2004 audit as to deficiencies in our
disclosure controls, which have resulted in a pattern of late filings with the
Securities and Exchange Commission. Management and the board of directors have
now taken specific steps to correct these issues in the 2005 quarterly reports.
The report of independent registered public accounting firm of Squar Milner as
of and for the year ended December 31, 2004, did not contain any adverse opinion
or disclaimer of opinion, nor was it qualified or modified as to audit scope or
accounting principle. The report contained a "going concern" modification.
During the year ended December 31, 2004, and through November 17, 2005, the
Company did not consult with Turner Stone regarding any of the matters or events
set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.
65
ITEM 9A: CONTROLS AND PROCEDURES
Evaluation of Controls and Procedures
The Company's board of directors and management, including the Chief Executive
Officer ("CEO") and Chief Financial Officer ("CFO"), evaluated the effectiveness
of the design and operation of the Company's disclosure controls and procedures,
as defined in Rule 13(a)-15(e) and 15(d)-15(e) of the Exchange Act. Based upon
that evaluation, the Company's board of directors and management, including the
CEO and CFO, concluded that, as of December 31, 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 their most recent evaluation as of the Evaluation Date, the CEO and the
CFO have also concluded that the other controls and procedures, that are
designed to ensure that information required to be disclosed in our periodic
filings with the SEC, are adequate.
Changes in Internal Control
At the time of its election as a business development company, the Company
adopted what it considered to be adequate controls and procedures (the "Old
Controls"). These Old Controls lacked time constraints that would force timely
posting of transactions and, as a result, the Company has been late with the
preparation of its financial disclosures on numerous occasions. The Company has
undertaken a review of its controls to determine what additional controls should
be implemented to insure timely filings in the future. The Company has
determined that it will retain outside `bookkeeping services' under a
contractual relationship that includes timeliness as a contractual obligation
and may adopt additional controls in the future. In the preliminary review of
the Old Controls, the Company determined that both assets of the Company and the
quality of its financial information are safeguarded but the issue of timeliness
has been problematic and requires being addressed. The Company designated its
Chief Executive Officer with the added responsibility of its Chief Compliance
Officer.
The Company updated its internal controls as of December 31, 2005, at which time
they were adopted by the Board of Directors. There were no significant changes
made in the Company's internal controls over financial reporting that have
materially affected, or are reasonably likely to materially affect, these
internal controls. Thus, no corrective actions, with regard to significant
deficiencies or material weaknesses, were necessary.
On March 26, 2007, the Company received comments from the SEC regarding its
Amended 1-E Offering filed on February 5, 2007 ("Amended Offering"). In its
comments, the SEC raised issues not only with the Amended Offering, but previous
1-E Offerings as well. A primary issue was its belief that the Company was not
eligible to take advantage of the Regulation E Exemption afforded 1940 Act
companies. After reviewing the SEC comments, the Company has engaged outside
counsel to determine the applicability of the comments set forth in the SEC
Letter. Presently, our attorneys are evaluating the comments and are preparing a
response. Although the Company believes that it is currently in compliance with
the Investment Company Act of 1940, it, and its attorneys, are presently working
with the SEC to resolve all issues raised in a manner which is satisfactory to
the SEC. In the event the SEC is correct in its assessment that the Company was
not eligible for using the Regulation E exemption, the Company could be required
to offer rescission to each subscriber of the Company's 1-E offerings from
September 15, 2005 to January 19, 2007.
Further, in connection with this comment letter, the matter of the controls of
the Company were raised. Controls would come into place to determine the
appropriateness of the Company's use of, and eligibility to file under, certain
filings. Controls would also come into place to manage the flow of accurate
information in order to insure timely filings. The Company believes that it has
adequate controls to insure the flow of accurate information but acknowledges
that the extraordinary nature of certain significant events indicated as
occurring subsequent to the close of our fiscal year lead to analysis and review
which required additional time. While it may be said that the Company could have
avoided late filing by holding off completion of the contemplated transactions,
the decision to pursue these transactions was a business decision based on
reasons that the Company believes to be sound and reasonable and the result,
while not unforeseen, was not unreasonable. Additionally, the Company was aware
of the claims of the Securities and Exchange Commission regarding the recent
notification to sell stock and does not believe that the logic of the Securities
and Exchange Commission is correct. This is a business decision based on review
with outside counsel and does not reflect inadequacy of controls. Not being
advised of the possibility of delays, in the first case, or the possibility of
concerns of the Securities and Exchange Commission, in the second case, might
indicate problems with our controls.
ITEM 9B: OTHER INFORMATION
None.
66
PART III
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following section sets forth, as of February 28, 2007, the names, ages and
current positions with the Company held by the Directors, Executive Officers and
Significant Employees; together with the year such positions were assumed. There
is no immediate family relationship between or among any of the Directors,
Executive Officers or Significant Employees, and the Company is not aware of any
arrangement or understanding between any Director or Executive Officer and any
other person pursuant to which he was elected to his current position. Each
Executive Officer will serve until he or she resigns or is removed or otherwise
disqualified to serve, or until his or her successor is elected and qualified.
Each Director will serve until he or she resigns or is removed or otherwise
disqualified to serve or until his or her successor is elected. The Company
currently has three Directors.
NAME AGE POSITION
Jerry Pearring 47 President, CEO and Director since
February 23, 2007
Richard T. Clark 59 President, CEO and Director from
September 2005 until January 19, 2007
Bryce Knight 23 Vice-president, CFO, Secretary and
Treasurer from September 2005 until
February 23, 2007
Ross E. Silvey 78 Outside Director since September 2005;
Interim CEO and President from January 19,
2007 until February 23, 2007
Terry Turner 60 Outside Director since September 2005
Jerry Pearring - Mr. Pearring accepted the appointment of President, CEO and
Director on February 23, 2007. Until February 23, 2007, Mr. Pearring was the
president of Xstream Beverage Network, Inc. where he has served since the
beginning of 2003. Prior to joining Xstream Beverage Network, Inc., Mr. Pearring
served as Sr. VP of Domestic Business for BEVsystems International, a bottled
water manufacturer in Miami, Florida. From 1996 to 2001, he served as president
and CEO of Total Quality Beverage, a natural beverage manufacturer based in
Keene, New Hampshire. From 1994 to 1996, Mr. Pearring served as General Manager
of Nantucket Nectars of Washington, D.C., and he served as the National Sales
Manager of Soho Beverages from 1992-1994. From 1984-1992, Mr. Pearring was
General Manager and owner of Chesapeake Export, a ford and beverage broker in
Washington, D.C. Mr. Pearring served in a sales and marketing position with
Anheuser-Busch, Inc., in Washington, D.C. and Boston from 1981 until 1984. He
holds a Masters in Business Administration from Marymount University in
Arlington, Virginia, and a Bachelors of Science degree in Marketing from George
Mason University in Fairfax, Virginia.
Richard T. Clark - Mr. Clark became President, CEO and a Director in September
2005 upon the resignation of the former CEO. Since 1992, Mr. Clark is the owner
and principal operating officer of Clark Capital Corp., a private company with
emphasis on public company corporate restructuring, including bankruptcies and
tax arbitrage. Previously, from 1980 until 1989, Mr. Clark was a stock broker
with Harris Uphan & Co. before becoming vice-president with Rotan Mosle, Paine
Webber and Dean Witter Reynolds. Mr. Clark worked as an independent broker
dealer dealing in corporate finance for S.C. Costa Co. from 1989 to 1992. Mr.
Clark graduated from the University of Tulsa with a Master's degree in Finance.
Mr. Clark resigned his position as President, CEO and Director on January 19,
2007.
Bryce Knight - Mr. Knight became Vice-President and Chief Financial Officer of
the Company upon the resignation of his predecessor. Mr. Knight also serves as
Chief Executive Officer and Director of Small Cap Strategies, Inc. He is the
President of Knight Consulting Corporation, a corporate strategy and financial
consulting firm, as well. Previously Mr. Knight worked with General Electric as
a financial analyst for its consumer products division and with Robert Bosch
Tool Corporation in the marketing department. Mr. Knight graduated with honors
from Bellarmine University with a Business Administration degree and a Master's
of Business Administration.
Ross E. Silvey - Dr. Silvey was elected as an outside Director of the Company in
September 2005. Dr. Silvey has owned and operated franchised automobile
businesses, finance companies and insurance companies for over thirty years. Dr.
Silvey has taught as an adjunct or full-time professor most of the courses in
the upper division and MBA programs at the University of Tulsa, Oral Roberts
University, Langston University and Southern Nazarene University. His formal
education is an MBA from the Harvard Business School. He has also been awarded
the Ph.D. degree from the Walden Institute of Advance Studies. Dr. Silvey served
as Chairman of the Audit Committee until January 19, 2007, when he became
Interim CEO and President as a result of the resignation of Mr. Clark. Dr.
Silvey resigned on February 23, 2007, when Mr. Pearring accepted the appointment
of President, CEO and Director.
67
Terry Turner - Mr. Turner was elected an outside Director of the Company in
September 2005. Mr. Turner has been a restaurant owner in Tulsa for over 35
years and has previously served as an independent director on the boards of two
other public companies. Mr. Turner has a BS degree in Business Administration
from the University of Arkansas. Mr. Turner began serving as Chairman of the
Audit Committee on January 19, 2007, when Dr. Silvey became Interim CEO.
AUDIT COMMITTEE
The Board of Directors has determined that Terry Turner meets the requirements
of a financial expert and serves as Chairman of the Audit Committee. Mr. Turner
is independent as specified in Item 7 (d)(3)(iv) of Schedule 14A under the
Exchange Act.
We have a separately designated standing audit committee established in
accordance with Section 3 (a)(58)(A) of the Exchange Act, which is currently
made up of Mr. Turner.
The primary responsibility of the Audit Committee is to oversee our financial
reporting process on behalf of the Board of Directors and report the result of
their activities to the Board. Such responsibilities shall include, but shall
not be limited to, the selection and, if necessary, the replacement of our
independent auditors and review and discussion with such independent auditors of
(i) the overall scope and plans for the audit, (ii) the adequacy and
effectiveness of the accounting and financial controls, including our system to
monitor and manage business risks, and legal and ethical programs, and (iii) the
results of the annual audit, including the financial statements to be included
in our annual report on Form 10-K.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our
executive officers, directors and persons who own more than ten percent of our
common stock to file initial reports of ownership and changes in ownership with
the SEC. Additionally, SEC regulations require that we identify any individuals
for whom one of the referenced reports was not filed on a timely basis during
the most recent fiscal year or prior fiscal years. To our knowledge, based
solely on a review of reports furnished to us, Mr. Clark, Dr. Silvey and Mr.
Turner did not file their Form 3 when they became a Director and they have not
timely file their required Form 5 for fiscal 2006.
CODE OF ETHICS
The Board of Directors of the Company adopted a Code of Ethics effective as of
August 27, 2003.
The Code of Ethics in general prohibits any officer, director or advisory person
(collectively, "Access Person") of the Company from acquiring any interest in
any security which we (i) are considering a purchase or sale thereof, (ii) are
being purchased or sold by us, or (iii) are being sold short by us. The Access
Person is required to advise us in writing of his or her acquisition or sale of
any such security.
INVESTMENT COMMITTEE
The Board of Directors of the Company adopted an Investment Committee Charter
effective as of August 27, 2003.
The Investment Committee shall have oversight responsibility with respect to
reviewing and overseeing our contemplated investments and portfolio companies
and investments on behalf of the Board and shall report the results of their
activities to the Board. Such Investment Committee shall (i) have the ultimate
authority for and responsibility to evaluate and recommend investments, and (ii)
review and discuss with management (a) the performance of portfolio companies,
(b) the diversity and risk of our investment portfolio, and, where appropriate,
make recommendations respecting the role or addition of portfolio investments
and (c) all solicited and unsolicited offers to purchase portfolio companies.
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.
CHIEF COMPLIANCE OFFICER
We are required to designate a Chief Compliance Officer under Rule 38(a)1 of the
Investment Company Act of 1940. Previous to his resignation, Mr. Rick Clark
served in this capacity. Subsequent to his resignation, we asked our counsel,
James A. Reskin to serve in this capacity. Mr. Reskin serves in this capacity on
a part-time basis and receives no additional compensation for his serving in
this capacity. The Chief Compliance Officer is required to oversee the Company's
actions as they relate to compliance with the Investment Company Act of 1940 as
well as the reporting requirements under the Securities and Exchange Act of 1934
and the various rules and regulations promulgated under these two acts. Our
Chief Compliance Officer is required to respond to inquiries regarding
compliance both from within our organization and outside and also work with our
auditors in the periodic reporting requirements.
68
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. Compensation of our officers and directors is based on comparative
compensation levels for similar positions and time spent.
The following table sets forth the cash and other compensation we paid during
the past three fiscal years to our chief executive officer, president and other
individuals who served as executive officers and whose total compensation was
$100,000 or more.
SUMMARY COMPENSATION TABLE
Name and principal position Year Salary Total
- ------------------------------------------------------------------------------------------------------
Jerry Pearring (CEO since February 23, 2007) (1) 2006 N/A N/A
2005 N/A N/A
2004 N/A N/A
Ross E. Silvey (Interim CEO from January 19, 2007 to 2006 N/A N/A
February 23, 2007) 2005 N/A N/A
2004 N/A N/A
Richard T. Clark (CEO from September 2005 until 2006 $104,000 $104,000
January 19, 2007) (2) 2005 $ 7,500 $ 7,500
2004 N/A N/A
Bruce MacGregor (CEO until September 2005) (3) 2006 $ 31,850 $ 31,850
2005 $119,640 $119,640
2004 $132,000 $132,000
Bryce Knight (CFO from September 2005 until 2006 $ 30,000 $ 30,000
February 23, 2007) (4) 2005 $ 2,500 $ 2,500
2004 N/A N/A
Bernard Gurr (CFO from August 2004 until September 2006 N/A N/A
2005) 2005 $ 99,771 $ 99,771
2004 $ 41,666 $ 41,666
Scott Battenberg (CFO from January until July 2004) 2006 N/A N/A
2005 N/A N/A
2004 $ 58,333 $ 58,333
1. Mr. Pearring became President and CEO on February 23, 2007 when BNM was
acquired from XStream. Mr. Pearring has an employment agreement which
provides an initial annual compensation of $185,000 and includes a
automobile allowance and other standard benefits.
2. Mr. Clark's compensation increased to $10,000 per month commencing January
1, 2006, and by mutual agreement decreased to $6,000 per month commencing
September 1, 2006, and has been paid to Clark Capital, which is wholly
owned by Mr. Clark.
3. Mr. MacGregor had $31,850 in accrued payroll from prior years as of
December 31, 2005, which was paid to him during 2006. Salary amounts in
the table are W-2 compensation.
4. Mr. Knight's part-time compensation increased to $2,500 per month
commencing January 1, 2006, and is paid to Knight Consulting Corporation,
which is wholly owned by Mr. Knight.
Columns for bonus, stock awards, option awards, non-equity incentive plan
compensation, change in pension value and nonqualified deferred compensation
earnings and all other compensation are omitted from the table as all amounts
are $0.
Compensation for our officers and directors is based on comparative compensation
levels for similar positions and time.
o GRANTS OF PLAN-BASED AWARDS TABLE
There were no grants of plan-based awards during the year to the named
individuals.
o OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE
There were no outstanding equity awards at December 31, 2006, for the named
individuals.
69
o OPTION EXERCISES AND STOCK VESTED TABLE
There were no option exercises or stock vested during the year for the named
individuals.
o PENSION BENEFITS
The named individuals are not covered by a pension plan.
o NONQUALIFIED DEFINED CONTRIBUTION AND OTHER NONQUALIFIED DEFERRED
COMPENSATION PLANS
We do not have a nonqualified defined contribution or deferred compensation
plan.
o POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE-IN-CONTROL
There are no potential payments upon termination or change-in-control for the
named individuals.
o COMPENSATION OF DIRECTORS
Director Fee
Earned or Paid
Name in Cash ($)
----------------------------------------------------------------
Ross E. Silvey $ 1,000
Terry Turner $ 500
The other director during 2006 was the CEO at the time, Mr. Clark. Mr. Clark was
not paid separately for director meetings.
Dr. Silvey was to be compensated at the rate of $1,000 per meeting during 2006,
which included his position as Chairman of the Audit Committee. Mr. Turner was
to be compensated at the rate of $500 per meeting during 2006. The Board of
Directors had one formal meeting during 2006.
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 wan no other form of
compensation for the directors.
o COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The outside Directors served on the Compensation Committee.
o 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 February 28, 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 February 28, 2007, there were
132,610,400 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 Ruettiger Family Trust 8,000,000 6.03%
7633 E 63rd Pl, Ste 220
Tulsa, OK 74133
Common XStream Beverage Network, Inc. 60,500,000 45.62%
2 South University Drive, Suite 220
Plantation, FL 33324
70
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 February 28,
2007, the most recent practicable date. As of February 28, 2007, there were
132,610,400 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 Jerry Pearring (a) -- --
Common Richard T. Clark -- --
Common Bryce Knight -- --
Common Ross Silvey -- --
Common Terry Turner -- --
Common All officers and directors as a -- --
Group (4 persons)
(a) Mr. Pearring owns 2,100,000 shares of XStream (approximately 3%).
Accordingly, in the event of a distribution of the Global stock owned by XStream
to its shareholders, Mr. Pearring would own approximately 1,815,000 shares of
Global or approximately 1.4%.
EQUITY COMPENSATION PLAN INFORMATION
We do not currently have an equity compensation plan.
The Company granted options to the three owners of an advertising vendor used by
Rudy to acquire up to 450,000 shares of its common stock at an exercise price of
$1.05 per share, the average price on the date of the grant, June 14, 2006. The
stock option agreements expire on June 14, 2011, are fully vested and allow for
payment of the exercise price in either cash or as an offset to their monthly
billing of a minimum of 20%. A total of 25,962 options were exercised during
2006.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
On January 19, 2007, Mr. Clark resigned his position as CEO and Director and Dr.
Silvey assumed the position of interim CEO and resigned his position as Chairman
of the Audit Committee. On February 23, 2007, Dr. Silvey resigned his position
as CEO and the Board of Directors appointed Mr. Pearring to serve as President,
CEO and Director.
During 2006, Mr. Clark's compensation of $104,000 was paid to Clark Capital,
which is wholly owned by Mr. Clark. Mr. Knight's compensation of $30,000 was
paid to Knight Consulting Corporation, which is wholly owned by Mr. Knight. Mr.
Knight resigned his position as CFO, Vice-president, Secretary and Treasurer
effective February 23, 2007.
On September 15, 2005, Bruce MacGregor resigned his position as President, Chief
Executive Officer and Director; Bernard Gurr resigned his position as Chief
Financial Officer; Kenneth Wiedrich resigned his position as Director; and Read
Worth resigned his position as Director. Simultaneously, Richard T. Clark was
appointed President, Chief Executive Officer and Director; Bryce Knight was
appointed Chief Financial Officer; Ross Silvey was appointed Director; and Terry
Turner was appointed Director. C.R. Garner was also appointed a Director,
although he elected not to serve due to other time commitments.
On March 11, 2005, Shane Traveller resigned as a director of the Company and
Kenneth Wiedrich was appointed to the board of directors.
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ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Annual Report on Form 10-K for the year ended December 31, 2004, was audited
by Squar, Milner, Reehl & Williamson, LLP ("Squar Milner") (Certified Public
Accountants).
The Company changed auditors to Turner, Stone & Company, LLP ("Turner Stone") on
November 17, 2005.
AUDIT FEES:
As of February 28, 2007, for the fiscal years ended December 31, 2006 and 2005,
Turner Stone billed the Company $26,608 and $30,355, respectively, for services
rendered for the audit of the Company's financial statements included in its
report on Form 10-K and the reviews of the financial statements included in its
reports on Form 10-Q filed with the SEC.
AUDIT RELATED FEES
None.
TAX FEES
The auditors have billed no fees for tax services.
OTHER FEES
None.
ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
1. Financial Statements - The following financial statements of
Global Beverage Solutions, Inc. are contained in Item 8 of
this Form 10-K:
o Reports of Independent Certified Public Accountants
o Statements of Net Assets at December 31, 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 Schedules of Financial Ratios 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
72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized on April 24, 2007.
GLOBAL BEVERAGE SOLUTIONS, INC.
By: /s/ Jerry Pearring
----------------------------------------
Jerry Pearring, Director, President,
CEO and CFO (Principal Executive
Officer and Principal 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
- ---- ---------------- ---------
April 24, 2007 Director, President, CEO and CFO /s/ Jerry Pearring
(Principal Executive Officer and --------------------
Principal Financial Officer) Jerry Pearring
April 24, 2007 Director /s/ Ross Silvey
--------------------
Ross Silvey
April 24, 2007 Director /s/ Terry Turner
--------------------
Terry Turner
73