SECURITIES AND EXCHANGE COMMISION
WASHINGTON, DC 20549
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FORM 10-K/A
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended December 31,2003
000-1084133
(Commission File Number)
Bluetorch, 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)
One World Trade Center, Suite 800, Long Beach, California 90831
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(Address of Principal Executive Offices) (Zip Code)
562-983-8045
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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
Check whether the issuer (1) filed all reports to be filed by Section 13 or 15
(d) of the Exchange Act during the past: 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S 8 is not contained in this form, and no disclosure will 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 KSB
or any amendments to this Form 10 KSB. []
The issuer's revenue for the Fiscal Year ended December 31,2003 were $-0-. The
aggregate market value of the voting stock (which consists solely of shares of
Common Stock) held by non-affiliated of the issuer as of December 31,2003,
computed by reference to the market value of the registrant's common stock as
reported by the over the counter bulletin board, was approximately
$4,355,473.
As of December 31,2003, there were 191,453,037 shares of the issuer's common
stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes [] No [X]
PART 1
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All shares and per share numbers for the Company's common stock set forth
in this Annual Report give effect to a forward three-for-one (3-1) stock split
which took effect on April 7,2003 and a forward five for one (5-1) stock split
which took effect on May 27, 2003.
Statements contained in this Annual Report that are not historical facts
are forward looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are subject to
risks and uncertainties, which could cause actual results to differ materially
from estimated results. Such risks and uncertainties are detailed in filings
with the Securities and Exchange Commission, including without limitation in
Item 1 "BUSINESS" and Item 6 "MANAGEMENT'S DISCUSSION AND DESCRIPTION OR PLAN OF
OPERATION" below.
ITEM 1. DESCRIPTION OF BUSINESS
A. IN GENERAL
Bluetorch, Inc. (the "Company" or "Bluetorch"), a Nevada corporation, was
incorporated on January 29, 1997. The Company's name was changed to Medex Corp.
on June 24,2002 and then to Aussie Apparel Group Ltd. on October 21,2002 and
then to Bluetorch, Inc. on October 24, 2003.
The Company has elected to be regulated as a business development company
under the Investment Company Act of 1940. See "Certain Government Regulations".
The Company's principal office is located at One World Trade Center, Suite
800, Long Beach, California 90831. The telephone number is (562) 983-8045.
Forward Looking Statements
This Annual Report contains forward-looking statements. The Company's
expectation at results and other forward-looking statements contained in this
Annual Report involve a number of risks and uncertainties. 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.
B. OVERVIEW
Bluetorch is an emerging extreme sports investment company that is rapidly
establishing itself as a one-stop shop in the extreme sports industry with a
multi-branded portfolio. Through its two portfolio investments Unboxed
Distribution, Inc. ("Unboxed") and Total Sports Distribution, Inc. ("Total
Sports") presently markets and wholesales three brands.
The Company signed an acquisition agreement in December 2002 with Australian
based Federation Group for the Hot Tuna, Xisle and Piranha Boy brands. (See
"Certain Transactions") Bluetorch Inc. then spent most of 2003 restructuring its
portfolio of apparel brands resulting in what Management believes is a far more
valuable and better known group of labels. As a result, the Company rescinded
its 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. (See "Certain Transactions). In addition, the Company changed its name from
Aussie Apparel Group Ltd. to Bluetorch in recognition of this brand
restructuring and the inclusion of the Bluetorch brand as its premier, or
high-end apparel brand, as well as its move away from its original portfolio of
Australian brands. The Company has replaced the intended portfolio of brands of
Hot Tuna, Xisle and Piranha Boy with the much more recognized (by consumers &
retailers alike) stable of brands including Bluetorch , True Skate Apparel
(TSABrand) and Airwalk .
Bluetorch also became a Business Development Corporation ("BDC") in order
to better align its structure in terms of raising capital and its ability to
make investments on behalf of its portfolio companies, or subsidiaries (formed
in 2003), in order to enhance the value of Bluetorch. As of the end of 2003,
Management has only assigned a value to one of its subsidiaries, Unboxed, as the
Company made no investments in its other subsidiary, Total Sports until 2004.
Unboxed markets and wholesales Bluetorch branded apparel under a licensing
agreement. In September 2003, Unboxed signed a licensing (with an option to
acquire) agreement with Gotcha Brands, Inc. for the Bluetorch brand for apparel
and certain other categories within the United States and Canada, with the first
right of refusal for all other international markets. In addition, the Company
acquired a first right of refusal to license Bluetorch worldwide on all product
categories exclusive of media. (See "Certain Transactions") The Bluetorch name
could potentially be utilized on accessories, video games, watches, sunglasses,
entertainment and events, sports drinks and other consumer products and services
identified with the extreme sports consumer.
Unboxed began shipping a limited number of Bluetorch branded apparel to
retailers starting in January 2003. Beyond apparel, the Company's goal is to
translate the Bluetorch brand name into a complete lifestyle brand focusing on
an eclectic array of products for the core extreme sports enthusiast. The
Bluetorch brand has a tremendous awareness among its target consumer audience as
a result of the Bluetorch TV series that runs on Fox Sports Net.
On March 6, 2004, Unboxed signed a letter-of-intent with Australian based Dome
Exchange Pty to license the "Aztec Rose" junior's apparel brand for the North
American market. Assuming the Company can finalize a definitive agreement, the
Company is hopeful of shipping a limited portion of the line to retail in time
for the Holiday 2004 season.
Total Sports markets and wholesales True Skate Apparel (TSABrand) and Airwalk
apparel, both under separate licensing agreements. 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 in the United States, Canada and Mexico, with an option for
international markets outside of Australia and Japan. (See "Certain
Transactions")
Total Sports will begin shipping TSABrand apparel to U.S. retailers in the
second quarter of 2004. After ten years of distribution in core skate shops,
TSABrand is targeted for expansion by Total Sports into better department stores
and upper-end sporting goods retailers in addition to the core shops. Management
feels this will result in greater revenue potential long term as compared to the
brand's historical revenue levels.
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. (See "Certain Transactions") Airwalk is the second most
recognized action sports brand among consumers in the U.S. Total Sports will
target mid-tier department stores and sporting goods chains with its Airwalk
apparel.
Management has a well-defined growth strategy focused on licensing, product
diversification, and a marketing program that encompasses the entire spectrum of
the extreme sports community. The Company's management philosophy is based on
establishing sound fundamentals, which over time will produce consistent
earnings for the shareholders. The business model is directed towards the
extreme sports arena, one of the fastest-growing segments in both the sporting
goods and apparel industries. The business strategy also calls for further
acquisitions and/or licensing agreements that can contribute to an expansion of
distribution channels, which in turn can contribute growth in revenues and
earnings.
The extreme sports arena is one of the fastest growing segments in both the
sporting goods and apparel industries. The Company will continue to look at
opportunities to expand into new distribution channels and into new product
categories, all within the extreme sports framework. New product categories
could include bags, sunglasses, video games, and watches. The Company will also
look at the whole extreme sports events and entertainment arena as possible
areas of synergy.
C. MARKET
The Bluetorch brand's targeted distribution is high-end specialty shops
that cater to the core consumer that participates in extreme sports. This brand
will be supported by a grass roots campaign combined in the future with a
vertical advertising campaign. TSABrand's target distribution is somewhat
broader in that it will be sold to better department stores and sport goods
retailers as well as specialty shops. The Airwalk brand is targeted to the
larger mid-tier department store and sport goods trade.
According to Sporting Goods Intelligence, the estimated size of the U.S.
sports apparel market at wholesale in 2002 was $19 billion. The National
Sporting Goods Association and American Sports Data (in 1991) stated that the
five-year growth of snowboarding and skateboarding was a plus 53.6% and 102.2%
respectively. This compared with basketball and football that both showed
declines of 9.6% each.
Management feels that extreme sports will continue to grow in popularity
and further influence fashion trends as they are well on their way to becoming a
mainstream part of society. The Company points to the inclusion of snowboarding
in the last Winter Olympics for the first time as well as the X-Games on ESPN
and Bluetorch TV on Fox Sports Net as other examples of the sports collective
popularity. The commercial success of such brands as Quiksilver and Billabong as
well as retailers like Pacific Sunwear are further indications of growth of the
extreme sports lifestyle.
D. MANAGEMENT & STAFFING
In January 2004, Bluetorch hired Scott Battenburg as its new Chief
Financial Officer. Mr. Battenburg came to the Company from the Virgin
Entertainment Group in Los Angeles where he served as Head of Finance. Previous
to joining the Company in a management capacity, Mr. Battenburg served on
Bluetorch Inc.'s board of directors. On January 26, 2004 the Company appointed
Read Worth, a long-time apparel industry executive, to replace Mr. Battenburg on
the board of directors.
At the end of January 2004, the Company announced the hiring of two veteran
extreme sports apparel designers, Chadd Godfrey and Pamela Zoolalian. In March
2004, the Company also hired a production manager, Fred Godshall. Management
feels that these collective hirings have dramatically increased the Company's
in-house capabilities as it pertains to design, development, sourcing (delivery
and margins) and quality control. The accurate trendiness and quality of the
Company's various apparel lines are essential to the Company's overall success.
E. DESIGN & PRODUCTION
The Company employs two designers and a Production Manager through its two
subsidiaries. They work with contract manufacturers, both domestically for
t-shirts and sweatshirts, and overseas for wovens, knits, denim and technical
outerwear. The Company has differing relationships with their various
contractors regarding the terms on production. Presently, the terms range from
payment upon receipt to letter-of-credit requirements thirty days prior to
receipt of goods. Management is committed to the timely delivery of quality and
trend correct product that result in sufficient margins and will continue to
invest in the infrastructure to ensure positive results in this area.
F. SALES
Both of the Company's subsidiaries, Unboxed and Total Sports employ independent
sales agencies and/or sales representatives around the country. With the
restructuring of the portfolio of brands, the Company has been able to also
attract a much higher quality of sales professional based on the better known
Bluetorch, TSABrand and Airwalk labels. Unboxed has shipped a limited amount of
domestically made Bluetorch branded product to retailers in the US market in the
1st quarter of 2004. This product includes young men's t-shirts and sweatshirts
that are embroidered and/or screened. Unboxed will begin shipping similar
Bluetorch branded product for junior's in the 2nd quarter. Additionally, Unboxed
is now selling a much broader apparel range for July 2004 delivery that includes
all of the lines foreign sourced apparel items including wovens, knits and
denim.
Total Sports plans to begun shipping the TSABrand apparel in the 2nd quarter of
2004. This product is a carryover line and the first line to be designed and
developed by us in now being sold for July 2004 delivery. Total Sports is also
optimistic that the addition of the Airwalk brand will contribute in a
meaningful way to that Company's growth. The license for Airwalk apparel allows
Total Sports to commence shipping to retailers in July of 2004. Of all the
brands currently in our portfolio, we are projecting Airwalk to contribute the
greatest level of revenue in 2004. In particular, the Company is upbeat about
the potential of the Airwalk brand's technical snowboarding apparel to be
delivered in the 3rd quarter of 2004.
The Total Sports sales force is now selling TSABrand and Airwalk apparel product
for 2nd half 2004 delivery.
The independent sales representatives and/or agencies are compensated on a
commission basis, the percentage ranging from 3% to 7%, depending on the brand
and account base.
The Company is optimistic that with a greater quality sales force, a collective
2nd half product line (of both subsidiaries) that has quadrupled in size as
compared to the 1st half offering, that 2nd half sales will be substantially
stronger than the 1st half. The Company is in fact projecting that the bulk of
2004 revenues will come in the 2nd half of 2004.
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. A
business development company provides shareholders the ability to retain the
liquidity of a publicly traded stock, while sharing in the possible benefits, if
any, of investing in primarily privately owned companies.
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:
- - Securities purchased in transactions not involving any public offering,
the issuer of which is an eligible portfolio company;
- - Securities received in exchange for or distributed with respect to
securities described in the bullet above or pursuant to the exercise of options,
warrants or rights relating to such securities; and
- - Cash, cash items, government securities or high quality debt securities
(within the meaning of the 1940 Act), maturing in one year or less from the time
of investment.
An eligible portfolio company is generally a domestic company that is not an
investment company (other than a small business investment company wholly owned
by a business development company); and
- - Does not have a class of securities registered on an exchange or a class
of securities with respect to which a broker may extend margin credit;
- - Is actively controlled by the business development company and has an
affiliate of a business development company on its board of directors; or
- - Meets such other criteria as may be established by the SEC.
Control under the 1940 Act is presumed to exist where a business development
company beneficially owns more than 25% of the outstanding voting securities of
the portfolio company.
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 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 board
of directors who are not interested persons and, in some cases, prior approval
by the SEC.
We are periodically examined by the SEC for compliance with the 1940 Act.
As with other companies regulated by the 1940 Act, a business development
company must adhere to certain substantive 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 us against
larceny and embezzlement. 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 malfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of such
person's office.
We maintain a code of ethics that establishes procedures for personal investment
and restricts certain transactions by our personnel. Our code of ethics
generally does not permit investment by our employees in securities that may be
purchased or held by us. The code of ethics is filed as an exhibit to our
registration statement, which is on file at the SEC. You may read and copy the
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, the code of ethics is available on the EDGAR
Database on the SEC Internet site at http://www.sec.gov. You may obtain copies
of the 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, 450 5th Street, NW, Washington, D.C. 20549.
As a business development company under the 1940 Act, we are entitled to provide
loans to our employees in connection with the exercise of options. However, as a
result of provisions of the Sarbanes-Oxley Act of 2002, we are prohibited from
making new loans to, or materially modifying existing loans with, our executive
officers in the future.
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 under 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. Since we made our business development
company election, we have not made any substantial change in the nature of our
business.
We fund new investments using cash, through the issuance of our common equity,
the reinvestment of previously accrued interest and dividends in debt or equity
securities, or the current reinvestment of interest and dividend income through
the receipt of a debt or equity security (payment-in-kind income). From time to
time, we may also opt to reinvest accrued interest receivable in a new debt or
equity.
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, 2003, approximately 99% 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 statement of operations as unrealized
gains and losses.
As a business development company, we invest in liquid securities including debt
and equity securities of primarily private companies. The structure of each
private finance debt and equity security is specifically negotiated to enable us
to protect our investment and maximize our returns. We include many terms
governing interest rate, repayment terms, prepayment penalties, financial
covenants, operating covenants, ownership parameters, dilution parameters,
liquidation preferences, voting rights, and put or call rights. Our investments
are generally subject to restrictions on resale and generally have no
established trading market. Because of the type of investments that we make and
the nature of our business, our valuation process requires an analysis of
various factors. Our fair value methodology includes the examination of, among
other things, the underlying investment performance, financial condition, and
market changing events that impact valuation.
Valuation Methodology - Private Finance. Our process for determining the fair
value of a private finance investment begins with determining the enterprise
value of the portfolio company. The fair value of our investment is based on the
enterprise value at which the portfolio company could be sold in an orderly
disposition over a reasonable period of time between willing parties other than
in a forced or liquidation sale. The liquidity event whereby we exit a private
finance investment is generally the sale, the recapitalization or, in some
cases, the initial public offering of the portfolio company.
There is no one methodology to determine enterprise value and, in fact, for any
one-portfolio company, enterprise value is best expressed as a range of fair
values, from which we derive a single estimate of enterprise value. To
determine the enterprise value of a portfolio company, we analyze its historical
and projected financial results. We generally require portfolio companies to
provide annual audited and 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 EBITDA
(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 EBITA
to determine enterprise value, we may adjust EBITA for non-recurring items.
Such adjustments are intended to normalize EBITA 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, and 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 the Company in
writing of his or her acquisition or sale of any such security.
The primary responsibility of the Audit Committee is to oversee the
Company's financial reporting process on behalf of the Company's Board of
Directors and report the result of their activities to the Board. Such
responsibilities shall exclude but shall not be limited to, the selection, and
if necessary the replacement of the Company's independent auditors, review and
discuss with such independent auditors and the Company's internal audit
department (i) the overall scope and plans for the audit, (ii) the adequacy and
effectiveness of the accounting and financial controls, including the Company's
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 the Company's annual report on Form 10-K. Shane Traveller, an
independent director, has been designated the Audit Committee's "financial
expert".
The Investment Committee shall have oversight responsibility with respect
to reviewing and overseeing the Company's 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 the Company's investment portfolio,
and, where appropriate, make recommendations respecting the role or addition of
portfolio investments and (c) all solicited and unsolicited offers to purchase
portfolio companies.
The members of the Audit Committee and the Investment Committee are Shane
Traveller and Read Worth, both independent directors of the Company.
RISK FACTORS
Investing in the Company involves a number of significant risks relating to our
business and investment objective. As a result, there can be no assurance that
we will achieve our investment objective. In addition to the risk factors
described below, other factors that could cause actual results to differ
materially include:
- - The ongoing global economic downturn, coupled with war or the threat of
war;
- - Risk associated with possible disruption in our operations due to
terrorism;
- - Future regulatory actions and conditions in our operating areas; and
- - Other risks and uncertainties as may be detailed from time to time in our
public announcements and SEC filings.
INVESTING IN PRIVATE COMPANIES INVOLVES A HIGH DEGREE OF RISK. Our portfolio
consists of primarily long-term loans to and investments in private companies.
Investments in private businesses involve a high degree of business and
financial risk, which can result in substantial losses and accordingly should be
considered speculative. There is generally no publicly available information
about the companies in which we invest, and we rely significantly on the
diligence of our employees and agents to obtain information in connection with
our investment decisions. In addition, some smaller businesses have narrower
product lines and market shares than their competition, and may be more
vulnerable to customer preferences, market conditions or economic downturns,
which may adversely affect the return on, or the recovery of, our investment in
such businesses.
OUR PORTFOLIO OF INVESTMENTS IS ILLIQUID. We generally acquire our investments
directly from the issuer in privately negotiated transactions. The majority of
the investments in our portfolio are typically subject to restrictions on resale
or otherwise have no established trading market. We typically exit our
investments when the portfolio company has a liquidity event such as a sale,
recapitalization, or initial public offering of the company. The illiquidity of
our investments may adversely affect our ability to dispose of debt and equity
securities at times when it may be otherwise advantageous for us to liquidate
such investments. In addition, if we were forced to immediately liquidate some
or all of the investments in the portfolio, the proceeds of such liquidation
would be significantly less than the current value of such investments.
Substantially all of our portfolio investments are recorded at fair value as
determined in good faith by our board of directors and, as a result, there is
uncertainty regarding the value of our portfolio investments. At December 31,
2003, approximately 98% of our total assets represented portfolio investments
recorded at fair value. Pursuant to the requirements of the 1940 Act, we value
substantially all of our investments at fair value as determined in good faith
by our board of directors on a quarterly basis. Since there is typically no
readily ascertainable market value for the investments in our portfolio, our
board of directors determines in good faith the fair value of these investments
pursuant to a valuation policy and a consistently applied valuation process.
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; we are instead required by the 1940 Act to specifically value each
individual investment on a quarterly basis, and record unrealized depreciation
for an investment that we believe 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. Without a readily
ascertainable market value and because of the inherent uncertainty of valuation,
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.
We will adjust quarterly the valuation of our portfolio to reflect the board of
directors' determination of the fair value of each investment in our portfolio.
Any changes in estimated fair value will be recorded in our statement of
operations as "Net unrealized gains (losses)."
OUR COMMON STOCK PRICE MAY BE VOLATILE. The trading price of our common stock
may fluctuate substantially. The price of the common stock may be higher or
lower than the price you pay for your shares, depending on many factors, some of
which are beyond our control and may not be directly related to our operating
performance. These factors include the following:
- - Price and volume fluctuations in the overall stock market from time to
time;
- - Significant volatility in the market price and trading volume of
securities of business development companies or other financial services
companies;
- - Volatility resulting from trading in derivative securities related to our
common stock including puts, calls, long-term equity anticipation securities, or
LEAPs, or short trading positions;
- - Changes in regulatory policies or tax guidelines with respect to business
development companies or regulated investment companies;
- - Actual or anticipated changes in our earnings or fluctuations in our
operating results or changes in the expectations of securities analysts;
- - General economic conditions and trends;
- - Loss of a major funding source; or
- - Departures of key personnel.
Recently, the trading price of our common stock has been volatile. Due to the
continued potential volatility of our stock price, we may be the target of
securities litigation in the future. Securities litigation could result in
substantial costs and divert management's attention and resources from our
business.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company currently leases 500 square feet of office space in Long Beach,
California at a monthly rental of $200. The lease is on a month-to-month basis.
In March 2004, the Company entered into a four-month lease for 2,526 square feet
of office space located in Cerritos, California. The lease became effective on
April 1, 2004 at a monthly rate of $2,778.00.
ITEM 3. LEGAL PROCEEDINGS.
NONE.
ITEM 4. Submission of Matters to a Vote of Security Holders.
NONE.
PART II
- --------
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock is traded in the over-the-counter bulletin board
stock market under the symbol "BTOR".
The high and low closing bid and asking prices for the fiscal years 2001
and 2002 and for the period ending March 31,2004, are as follows:
Year Quarter
- ---- -------
CLOSING BID CLOSING ASK
2001 . . . . . . . . . . . . . . HIGH LOW HIGH LOW
- ------ ----- ----- ----- -----
JAN. 2
THRU . . . . . . . . . . . . . . 22.5 3 45 24.75
JAN. 8
JAN. 9
THRU . . . . . . . . . . . . . . 2.25 0.625 12 1.5
MAR. 30
( After a 15 for 1 split )
APR. 2
THRU . . . . . . . . . . . . . . 5.50 1.00 9 2.50
Jun-04
July-04
THRU . . . . . . . . . . . . . . 5 0.9 8.5 1.4
SEPT. 28
OCT. 1
THRU . . . . . . . . . . . . . . 0.9 0.2 1.4 0.75
DEC. 31
2002
- ------
JAN. 2
THRU . . . . . . . . . . . . . . 0.35 0.2 0.9 0.51
MAR. 28
APR. 1
THRU . . . . . . . . . . . . . . 0.35 0.35 1.01 0.75
APR. 12
APR. 15
THRU . . . . . . . . . . . . . . 4.5 2.5 5.25 3.5
June-04
(After a 1 for 10 reverse split)
July-04
THRU . . . . . . . . . . . . . . 4.5 1.75 5.1 2
SEPT. 30
OCT. 1
THRU . . . . . . . . . . . . . . 2.5 1 2.9 1.2
DEC. 31
2003
- ------
JAN. 2
THRU . . . . . . . . . . . . . . 2.28 1.75 2.5 2.1
MAR. 31
APR. 1
THRU
APR. 4. . . . . . . . . . . . . 1.55 1.40 1.70 1.62
APR. 7
THRU
May-04 . . . . . . . . . . . . . 0.75 0.35 1.00 0.37
(After a 3 for 1 split)
May-04
THRU
June-04. . . . . . . . . . . . . 0.09 0.05 0.095 0.055
(After a 5 for 1 split)
July-04
THRU
SEPT. 30 . . . . . . . . . . . . 0.075 0.026 0.08 0.029
OCT. 1
THRU
DEC. 31. . . . . . . . . . . . . 0.042 0.024 0.045 0.026
JAN. 2
THRU
MAR. 31. . . . . . . . . . . . . 0.044 0.024 0.045 0.026
As of March 31,2004, there were approximately 227,785,657 shares of common
stock issued and outstanding held by approximately 423 shareholders of record.
Dividends on the Common Stock
The Company has not declared a cash dividend on its Common Stock in the
last two fiscal years and the Company does not anticipate the payment of future
dividends. The Company may not pay dividends on its Common Stock without first
paying dividends on its Preferred Stock. There are no other restrictions that
currently limit the Company's ability to pay dividends on its Common Stock other
than those generally imposed by applicable state law.
ITEM 6. Selected Financial Data
The following table sets forth selected finacial data as of and for each of the
two fiscal years ended December 31, 2003 and is derived from the Company's
audited financial statements . The data set forth below should be read in
conjunction with the Consolidated Financial Statements and related Notes to
Consolidated Fianancial Statements appearing elsewhere herin and in "Item - 7
Management's Discussion And Analysis Or Plan Of Operation"
Year Ended December 31
2003 2002
------------------------ ------------
Revenue. . . . . . . . . . . . . . $ - $ -
Operating Income/(Loss). . . . . . $ (5,232,485) $ (136,061)
Net Income/(Loss). . . . . . . . . $ (5,232,485) (136,061)
Loss per share, basic and diluted. $ (0.03) $ (0.01)
Weighted average number of shares
outstanding. . . . . . . . . . . 180,828,591 24,295,762
Working capital (deficit). . . . . $ (131,639) $ (379,101)
Total Assets . . . . . . . . . . . $ - $ -
Long Term Debt . . . . . . . . . . $ - $ -
Total Shareholders equity(deficit) $ 427,766 $ 5,654,723
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This information statement contains forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. These statements relate to
future events or to our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential" or "continue" or the negative of such terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. There are a number of factors that could cause
our actual results to differ materially from those indicated by such
forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements. Moreover, we do not assume
responsibility for the accuracy and completeness of such forward-looking
statements. We are under no duty to update any of the forward-looking statements
after the date of this information statement to conform such statements to
actual results. The foregoing management's discussion and analysis should be
read in conjunction with the Company's financial statements and the notes
herein.
Critical Accounting Policy and Estimates
Our Management's Discussion and Analysis of Financial Condition and Results of
Operations section discusses our financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. On an on-going basis,
management will evaluate its estimates and judgments, including those related to
revenue recognition, accrued expenses, financing operations, and contingencies
and litigation. Management will base its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying value of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions or conditions. The most significant accounting estimates
inherent in the preparation of our financial statements include estimates as to
the appropriate carrying value of certain assets and liabilities which are not
readily apparent from other sources, such as the investment in portfolio
companies and deferred tax asset valuation. These accounting policies are
described at relevant sections in this discussion and analysis and in the notes
to the consolidated financial statements included in our Annual Report on Form
10-KSB for the fiscal year ended December 31, 2003
..
Liquidity and Capital Resources.
We had cash totaling $517 as of December 31, 2003. Our other assets consist of
investments in Portfolio Companies (specifically Unboxed) of $559,405. Total
assets at December 31, 2003 were $559,922. At December 31, 2003 our total
liabilities of $132,156 represented $106,156 of accounts payable and $26,000 of
loans payable to related parties.
Our Plan of Operation for the Next Twelve Months.
While we were prepared to ship a limited amount of Bluetorch branded product in
time for Holiday 2003, retailers asked that the goods be shipped in 2004 rather
than mid December. Therefore, as of December 31, 2003, we have generated no
revenue. We hope to generate revenue in the next twelve months by focusing on
the launch of our newly formed portfolio companies. The vast majority of the
portfolio companies revenue will come in the 2nd half of 2004 as the collective
apparel product assortment of all the brands, Bluetorch , True Skate Apparel
(TSABrand) and Airwalk offered for delivery in the 2nd half will more than
quadruple as compared to the offering for 1st half 2004 delivery. Additionally,
we are still committed to looking for other acquisition and/or licensing
opportunities that could still potentially impact 2004 revenues. In March of
2004, we did sign a letter-of-intent to license and distribute the Australian
based Aztec Rose junior's label for North America. Assuming we can move to a
definitive agreement, we are hopeful that we can deliver a limited product line
to retail in time for the Holiday 2005 season.
Unboxed has shipped a limited amount of domestically made Bluetorch branded
product to retailers in the US market in the 1st quarter of 2004. This product
includes young men's t-shirts and sweatshirts that are embroidered and/or
screened. We will begin shipping similar Bluetorch branded product for junior's
in the 2nd quarter. We are now selling a much broader apparel range for July
2004 delivery that includes all of the lines foreign sourced apparel items
including wovens, knits and denim.
Total Sports plans to begun shipping the TSABrand apparel in the 2nd quarter of
2004. This product is a carryover line and the first line to be designed and
developed by us in now being sold for July 2004 delivery.
Total Sports is also optimistic that the addition of the Airwalk brand will
contribute in a meaningful way to that Companies growth. Our license for Airwalk
apparel allows us to commence shipping to retailers in July of 2004. Of all the
brands currently in our portfolio, we are projecting Airwalk to contribute the
greatest level of revenue in 2004.
As stated previously, the collective product offering for delivery in the 2nd
half of 2004 is significantly greater as compared to the first half. Add to
that, our intention to round out and finalize the respective sales forces for
all the brands by the end of April, and the number of accounts we are shipping
to will dramatically increase between now and the end of the year.
In order to properly develop and our new portfolio companies, we have incurred
additional expenses, which are reflected in our statement of operations for the
year ended December 31, 2003. The operating loss of $5,232,485 for the year
ended December 31, 2003 represents expenses including design and sampling costs
of $138,985 related to efforts prior to commencement as a BDC, sales and
marketing of $153,322, general and administrative costs (including legal,
accounting and compensation to the chief executive officer) totaling $502,439.
Other expenses include investment banking and related services totaling $731,362
as well as $290,701, representing the expense related to discounts given on
shares issued during the period. This loss also includes other significant
charges as follows: $78,750 resulting from the issuance of 525,000 shares of
common stock in connection with the conversion of Debentures into Series B
Preferred Stock; $2,784,600, related to the rescission of the Company's
previously reported deferred compensation plan; $418,326 for the cost of common
stock warrants issued in connection with Unboxed Distributions, Inc. obtaining a
license, with option to buy, for the Bluetorch tradename; and $134,000 related
to rescission of a trademark acquisition.
Failure to successfully develop our portfolio companies would hinder the
Company's ability to increase the size of our operations and realize asset
appreciation. If we are not able to generate additional revenues adequate to
cover increased operating costs, our business may ultimately fail.
The Company has cash equivalents of $517 as of December 31, 2003. Subsequent to
December 31, 2003, the Company received proceeds of $287,350 from the sale of
its securities. The Company has received commitments from third parties to raise
additional capital from the sale of its securities. In the opinion of
management, available cash is not sufficient to fund current operations.
However, management believes that it can obtain adequate capital via issuance
and sale of its securities.
Other than on-going merchandising and design of our seasonal product lines, we
are not, nor do we anticipate, conducting any research and development
activities. In the event that we expand our sales and customer base or, in
particular, if we were to develop or acquire additional trade names, we may need
to hire additional employees or independent contractors as well as purchase or
lease additional equipment.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
- --------------------------------------------------------------------------
Our business activities contain elements of risk. We consider the principal
types of risk to be portfolio valuations and fluctuations in interest rates. We
consider the management of risk essential to conducting our businesses.
Accordingly, our risk management systems and procedures are designed to identify
and analyze our risks, to set appropriate policies and limits and to continually
monitor these risks and limits by means of reliable administrative and
information systems and other policies and programs.
As a business development company, we invest in illiquid securities including
debt and equity securities of primarily private companies and non-investment
grade CMBS. Our investments are generally subject to restrictions on resale and
generally have no established trading market. We value substantially all of our
investments at fair value as policy. 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.
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
policy considers the fact that no ready market exists for substantially all of
the securities in which we invest. Our valuation policy 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 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. The values of the investments in public securities are
determined using quoted market prices discounted for restrictions on resale.
Without a readily ascertainable market value and because of the inherent
uncertainty of valuation, the fair value of 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.
In addition, the illiquidity of our investments may adversely affect our ability
to dispose of debt and equity securities at times when it may be otherwise
advantageous for us to liquidate such investments. In addition, if we were
forced to immediately liquidate some or all of the investments in the portfolio,
the proceeds of such liquidation would be significantly less than the current
value of such investments.
Because we may borrow money to make investments, our net investment income
before net realized and unrealized gains or losses, or net investment income, is
dependent upon the difference between the rate at which we borrow funds and the
rate at which we invest these funds. As a result, there can be no assurance
that a significant change in market interest rates will not have a material
adverse effect on our net investment income. In periods of rising interest
rates, our cost of funds would increase, which would reduce our net investment
income. We use a combination of long-term and short-term borrowings and equity
capital to finance our investing activities.
ITEM 8. Financial Statements.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Bluetorch, Inc.
Long Beach, California
We have audited the accompanying balance sheets of Bluetorch, Inc. as of
December 31, 2003 and 2002, and the related statements of operations,
stockholders' equity (deficit) and cash flows for the year ended December 31,
2003 and from inception on August 26, 2002, through December 31, 2002. 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 auditing standards of the Public
Company Accounting Oversight Board in the United States of America. Those
standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed more fully in Note 1 to the financial statements, securities
amounting to $559,405 (99.9% of net assets) at December 31, 2003 have been
valued at fair value as determined by the Board of Directors. We have reviewed
the procedures applied by the directors in valuing such securities and have
inspected underlying documentation; while in the circumstances the procedures
appear to be reasonable and the documentation appropriate, determination of fair
values involves subjective judgment which is not susceptible to substantiation
by auditing procedures.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bluetorch, Inc. as of December
31, 2003 and 2002 and the results of its operations and its cash flows for the
year ended December 31, 2003 and from inception on August 26, 2002, through
December 31, 2002, 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, As of December 31, 2003, the Company has generated no
revenues and has incurred losses totaling $5,368,546 for the period from August
26, 2002 (inception) through December 31, 2003. These items raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 9. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Stonefield Josephson, Inc.
- ------------------------------
Santa Monica, California
April 9, 2004
BLUETORCH, INC,
BALANCE SHEET - DECEMBER 31
2003 2002
ASSETS
Investment in Portfolio Companies . . . . . . . . . . . . . . . . . $ 559,405 $ -
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 517 912
Tradenames. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 6,033,824
------------ -----------
$ 559,922 $6,034,736
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . $ 106,156 $ 129,013
Deposits Payable. . . . . . . . . . . . . . . . . . . . . . . . . . - 225,000
Loans payable, related parties. . . . . . . . . . . . . . . . . . . 26,000 26,000
------------ -----------
Total current liabilities . . . . . . . . . . . . . . . . . 132,156 380,013
------------ -----------
STOCKHOLDERS' EQUITY:
Preferred Series A, $.001 par value; 400,000 shares issued
and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . - 1,058,824
Preferred Series B, $.001 par value; 480,000 shares issued
and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . 480 610
Preferred Series C, $.001 par value; 10,000,000 shares issued
and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 -
Common Stock, $.001 par value;950,000,0000 shares
authorized; 191,453,037 shares issued and 190,372,632 outstanding 56,377 5,739
Common stock subscriptions receivable . . . . . . . . . . . . . . . (112,500) -
Additional Paid in Capital. . . . . . . . . . . . . . . . . . . . . 5,841,955 4,725,611
Deficit accumulated during the development stage. . . . . . . . . . (5,368,546) (136,061)
------------ -----------
Total stockholders' equity. . . . . . . . . . . . . . . . . 427,766 5,654,723
------------ -----------
$ 559,922 $6,034,736
============ ===========
BLUETORCH, INC,
SCHEDULE OF INVESTMENTS
DESCRIPTION PERCENT FAIR
COMPANY. . . . . . . . . . OF BUSINESS OWNERSHIP COST VALUE AFFILIATION
Unboxed Distribution, Inc. Extreme Sports 100% $559,405 $559,405 (1) Yes
Apparel
<FN>
(1) Fair value determined by the Company's Board of Directors base on the actual
cost of investment.
See also Note 2 for further explanation on the Company's methods of
determining fair values.
BLUETORCH, INC,
STATEMENT OF OPERATIONS
FOR THE FROM INCEPTION ON
YEAR AUG 26, 2002
ENDED THROUGH
DECEMBER 31, 2003 DECEMBER 31, 2002
-------------------- --------------------
INCOME . . . . . . . . . . . . . . $ - $ -
-------------------- --------------------
EXPENSES -
general and administrative . . . (5,232,485) (136,061)
-------------------- --------------------
Total expenses . . . . . (5,232,485) (136,061)
-------------------- --------------------
NET LOSS . . . . . . . . . . . . . $ (5,232,485) $ (136,061)
==================== ====================
BASIC AND DILUTED - loss per share (0.03) (0.06)
==================== ====================
WEIGHTED AVERAGE COMMON SHARES -
basic and diluted. . . . . . . . 180,828,591 24,295,762
==================== ====================
BLUETORCH, INC.
(FORMERLY AUSSIE APPAREL GROUP, LTD.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION ON
AUGUST 26, 2002 THROUGH DECEMBER 31, 2003
Series A Series B Series C
Preferred Stock Preferred Stock Preferred Stock Common Stock
----------------- ----------------- ---------------- -------------
Shares Amount Shares Amount Shares Amount Shares Amount
------- ------- ------ -------- ------- ------- -------- ----------
At inception on August 26, 2002, as
restated for effect of reverse
merger with Aussie Apparel and stock splits
(see Note 1 ) . . . . . . . . . . . . . . - $ - - $ - - $ - 97,500,000 $ 1,000
Shares issued in connection with
merger with Aussie Apparel,
October 29, 2002 (see Note 1 ) . . . . . . - - 610,000 610 - - 39,590,430 2,639
Shares issued for acquisition
of tradenames (Note 7) . . . . . . . . . . 400,000 1,058,824 31,500,000 2,100
Net loss December, 31 2002 . . . . . . . . . - - - - - - - -
------- -------- ------ -------- ------- ------- ---------- ------
Balance at December 31, 2002 . . . . . . . . 400,000 1,058,824 610,000 610 - - 168,590,430 5,739
Preferred and Common shares
issued for compensation,
services and in connection with
rescission of employee stock options. . . 10,000,000 10,000 6,191,873 4,963
Shares issued to a foreign
entity for resale , and recorded
on balance sheet as stock
subscription receivable . . . . . . . . . 750,000 50
Shares issued in connection
with conversion of
convertible debentures. . . . . . . . . . 525,000 35
Creation of stock option / deferred
Compensation plan
Shares issued in connection
with rescission
of employee stock options . . . . . . . . 682,147 682
Shares issued in connection
with stock subscription. . . . . . . . . 18,545,818 18,321
Rescission of stock option / deferred
compensation plan
Issuance of convertible debenture
with beneficial conversion feature. . . .
Shares issued in connection
with conversion
of series B preferred stock . . . . . . (130,000) (130) 5,087,364 5,087
Shares issued in settlement
of notes payable. . . . . . . . . . . . 18,200,000 18,200
Warrants issued in connection
with license agreement/
option purchase agreement
Shares cancelled in connection
with recession of trademark
acquisition. . . . . . . . . . . . . . (400,000)(1,058,824) (31,500,000)
Shares issued as settlement
expense in relation to
rescission of trademark
acquisition . . . . . . . . . . .. . . 3,300,000 3,300
Net loss December 31, 2003
------- -------- ------ -------- --------- -------- ----------- ------
Balance at December 31, 2003. . . . . . . . - $ - 480,000 $ 480 10,000,000 $10,000 190,372,632 56,377
BLUETORCH, INC.
(FORMERLY AUSSIE APPAREL GROUP, LTD.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION ON
AUGUST 26, 2002 THROUGH DECEMBER 31, 2003
Deficit
accumulated
Less stock . Stock optns Treasury Additional during the Total
subscription /deferred stock paid-in development stockholders'
receivable . comp'sation receivable capital stage equity
At inception on August 26, 2002, as
restated for effect of reverse
merger with Aussie Apparel and
stock splits (see Note 1 ). . . . . . . . - $ - - $ - $ - $ 1,000
Shares issued in connection with
merger with Aussie Apparel,
October 29, 2002 (see Note 1 ) . . . . . . 2,711 5,960
Shares issued for acquisition
of tradenames . . . . . . . . . . . . . . 4,722,900 5,783,824
Net loss December, 31 2002 . . . . . . . . . - - - - (136,061) (136,061)
------- -------- ------ -------- --------- ---------
Balance at December 31, 2002 . . . . . . . . - - - 4,725,611 (136,061) 5,654,723
Preferred and Common shares issued
for compensation, services and in
connection with rescission of employee
stock options. . . . . . . . . . . . . . . 1,164,900 1,179,863
Shares issued to a foreign
entity for resale , and recorded
on balance sheet as stock
subscription receivable . . . . . . . . . (112,500) 112,450 -
Shares issued in connection
with conversion of
convertible debentures. . . . . . . . . . 78,715 78,750
Creation of stock option / deferred
Compensation plan (2,784,600) 2,784,600
Shares issued in connection
with rescission
of employee stock options . . . . . . . . 47,068 47,750
Shares issued in connection
with stock subscription. . . . . . . . . 641,492 659,813
Rescission of stock option / deferred
compensation plan 2,784,600 (380,250) 2,404,350
Issuance of convertible debenture
with beneficial conversion feature. . . . 8,000 8,000
Shares issued in connection
with conversion
of series B preferred stock . . . . . . (4,957) -
Shares issued in settlement
of notes payable. . . . . . . . . . . . 479,300 497,500
Warrants issued in connection
with license agreement/
option purchase agreement 418,326 418,326
Shares cancelled in connection
with recession of trademark
acquisition. . . . . . . . . . . . . . (4,725,000) (5,783,824)
Shares issued as settlement
expense in relation to
rescission of trademark
acquisition . . . . . . . . . . .. . . - 491,700 495,000
Net loss December 31, 2003 (5,232,485) (5,232,485)
------- -------- ------ --------- ---------- -----------
Balance at December 31, 2003. . . . . . . . $(112,500) $ - $ - $5,841,955 (5,368,546) $ 427,766
BLUETORCH, INC,
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION ON
AUGUST 26, 2002 THROUGH DECEMBER 31, 2003
2003 2002
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(5,232,485) $(136,061)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
PROVIDED BY (USED FOR) OPERATING ACTIVITIES -
Write off of non-used assets 6,960
Common and preferred shares issued for compensation, services in
connection with employee stock options 1,179,863
Cost associated with cancellation of options. . . . . . . . . . . . . . 2,404,350
Common shares issued in connection with cancellation of employee
stock options 380,250
Shares issued for settlement expense. . . . . . . . . . . . . . . . . . 495,000
Cash payment for settlement expense . . . . . . . . . . . . . . . . . . 25,000
Beneficial conversion feature . . . . . . . . . . . . . . . . . . . . . 8,000
Notes payable in exchange for services. . . . . . . . . . . . . . . . . 243,750
CHANGES IN OPERATING ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS -
Intangibles (250,000)
INCREASE (DECREASE) IN LIABILITIES:
Accounts payable
Accounts payable and Accrued Expense . . . . . . . . . . . . . . . . . (22,857) 354,013
------------ ----------
Total adjustments. . . . . . . . . . . . . . . . . . . . . . . . . 4,713,356 110,973
Net cash used for operating activities . . . . . . . . . . . . . . (519,129) (25,088)
------------ ----------
CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES -
Payments advanced to investments in portfolio companies. . . . . . . . . . (141,079) -
------------ ----------
Net cash provided (used) for investing activities . . . . . . . . (141,079) -
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES -
Loans payable 26,000
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . 659,813
------------
Net cash provided (used) for financing activities . . . . . . . . 659,813 26,000
NET INCREASE (DECREASE) IN CASH. . . . . . . . . . . . . . . . . . . . . . . (395) 912
CASH AND CASH EQUIVALENTS, beginning of period . . . . . . . . . . . . . . . 912 -
------------ ----------
CASH AND CASH EQUIVALENTS, end of period . . . . . . . . . . . . . . . . . . $ 517 $ 912
============ ==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND
INVESTING ACTIVITIES -
Stock Subscription Receivable. . . . . . . . . . . . . . . . . . . . . . . . $ 112,500
============
Shares issued in settlement of notes payable . . . . . . . . . . . . . . . . $ 497,500
============
Warrants issued for investments in portfolio companies . . . . . . . . . . . $ 418,326
============
Shares issued in connection with conversion of convertible debentures. . . . $ 78,750
============
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDING DECEMBER 31, 2003
AND THE PERIOD FROM INCEPTION ON AUGUST 26, 2002 THROUGH DECEMBER 31, 2002
(1) Summary of Significant Accounting Policies:
Organization and Business:
Mercury Software, a Nevada corporation, was incorporated on January 29, 1997 and
its name was changed to Medex Corp. on June 24, 2002. Aussie Apparel Group Ltd.
("Aussie Apparel" or "the Company"), a Nevada corporation, was incorporated on
August 26, 2002. In October 2002, Medex Corp. issued an aggregate of 6,500,000
(pre-stock split) shares of its common stock to the shareholders of the Company
in connection with the merger of the Company with Medex Corp., whose name was
then changed to "Aussie Apparel Group Ltd" on October 21, 2002. Since the
shareholders of the Company became the controlling shareholders of MedEx after
the exchange, the Company was treated as the acquirer for accounting purposes.
Accordingly, the financial statements as presented here are the historical
financial statements of the Company and include the transactions of Medex only
from the date of acquisition, using reverse merger accounting.
The Company's name was changed to Bluetorch, Inc. effective November 3, 2003
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. 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 effected a 3 to 1 stock split, followed on May 27,
2003 by an additional 5 to 1 stock split. The accompanying financial statements
have been restated to reflect these stock splits for all periods presented.
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 period. Actual results could differ from those estimates.
Cash:
Equivalents
Cash equivalents include all highly liquid debt instruments with original
maturities of three months or less which are not securing any corporate
obligations.
Concentration
The Company maintains its cash in bank deposit accounts, which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts.
Revenue Recognition:
The Company has not recognized any revenues for the year ended December 31, 2003
and the period from inception on August 26, 2002 through December 31, 2002, and
will in the future recognize revenue based up the appreciation of investments.
(See Note 2)
Fair Value of Financial Instruments:
The Company's financial instruments consist of certain assets and liabilities,
none of which are held for trading, whose carrying amounts approximate their
fair value due to the highly liquid nature of these short-term instruments.
Income Taxes:
The Company accounts for income taxes under SFAS 109, "Accounting for Income
Taxes." Under the asset and liability method of SFAS 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statements carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period the
enactment occurs. A valuation allowance is provided for certain deferred tax
assets if it is more likely than not that the Company will not realize tax
assets through future operations.
Segment Reporting:
Based on the Company's integration and management strategies, the Company will
operate on a non-consolidated basis. Operations of the portfolio companies will
be reported at the subsidiary level and only the appreciation or impairment will
be included in the Company's financial statements. For the year ended December
31, 2003, no revenue has been earned and all operations are domestic.
Stock-Based Compensation:
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees" and complies with the
disclosure provisions of SFAS No.123, "Accounting for Stock-Based Compensation."
Under APB No. 25, employee compensation cost is recognized over the vesting
period based on the excess, if any, on the date of grant of the fair value of
the Company's shares over the employee's exercise price. When the exercise price
of the employee share options is less than the fair value price of the
underlying shares on the grant date, deferred stock compensation is recognized
and amortized to expense in accordance with FASB Interpretation No. 44 over the
vesting period of the individual options. Accordingly, if the exercise price of
the Company's employee options equals or exceeds the market price of the
underlying shares on the date of grant, no compensation expense is recognized.
Options or shares awards issued to non-employees are valued using the fair value
method and expensed over the period services are provided.
As of December 31, 2003 there were no options outstanding.
Basic and Diluted Earnings (Loss) Per Share:
Basic earnings (loss) per share are determined by dividing the net earnings
(loss) by the weighted average shares of Common Stock outstanding during the
period. Diluted earnings (loss) per share are determined by dividing the net
earnings (loss) by the weighted average shares of Common Stock outstanding plus
the dilutive effects of stock options, warrants, and other convertible
securities. 25,600,000 and 182,000 common stock equivalents, representing common
shares eligible to be converted in relation to Preferred Stock and warrants,
calculated using the market price on December 31, 2003 and December 31, 2002
respectively have been excluded from the calculation of diluted loss per share
at December 31, 2003 and December 31, 2002, respectively, as their effect would
be anti-dilutive.
Advertising Costs:
Advertising costs will be expensed as incurred. There were no advertising
expenses for the period ended December 31, 2003.
Comprehensive Income:
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for the
reporting and display of comprehensive income and its components in the
financial statements. As of December 31, 2003, the Company has no items that
represent comprehensive income and, therefore, has not included a statement of
Comprehensive Income in the Financial Statements.
Recent Accounting Pronouncements:
During April 2003, the FASB issued SFAS 149 - "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities", effective for contracts entered
into or modified after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. In addition, except as stated
below, all provisions of this Statement should be applied prospectively. The
provisions of this Statement that relate to Statement 133 Implementation Issues
that have been effective for fiscal quarters that began prior to June 15, 2003,
should continue to be applied in accordance with their respective effective
dates. In addition, paragraphs 7(a) and 23(a), which relate to forward purchases
or sales of when-issued securities or other securities that do not yet exist,
should be applied to both existing contracts and new contracts entered into
after June 30, 2003. The adoption of this statement did not have a material
impact on the Company's financial position or results of operations as the
Company does not participate in such transactions.
During May 2003, the FASB issued SFAS 150 - "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity", effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective for public entities at the beginning of the first interim period
beginning after June 15, 2003. This Statement establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a freestanding financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of those instruments were
previously classified as equity. Some of the provisions of this Statement are
consistent with the current definition of liabilities in FASB Concepts Statement
No. 6, Elements of Financial Statements. The adoption of this statement did not
have a material impact on the Company's financial position or results of
operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (an interpretation of Accounting Research Bulletin
(ARB) No. 51, Consolidated Financial Statements). Interpretation 46 addresses
consolidation by business enterprises of entities to which the usual condition
of consolidation described in ARB-51 does not apply. The Interpretation changes
the criteria by which one company includes another entity in its consolidated
financial statements. The general requirement to consolidate under ARB-51 is
based on the presumption that an enterprise's financial statements should
include all of the entities in which it has a controlling financial interest
(i.e., majority voting interest). Interpretation 46 requires a variable interest
entity to be consolidated by a company that does not have a majority voting
interest, but nevertheless, is subject to a majority of the risk of loss from
the variable interest entity's activities or entitled to receive a majority of
the entity's residual returns or both. A company that consolidates a variable
interest entity is called the primary beneficiary of that entity.
In December 2003 the FASB concluded to revise certain elements of FIN 46,
primarily to clarify the required accounting for interests in variable interest
entities. FIN-46R replaces FIN-46, that was issued in January 2003. FIN-46R
exempts certain entities from its requirements and provides for special
effective dates for entities that have fully or partially applied FIN-46 as of
December 24, 2003. In certain situations, entities have the option of applying
or continuing to apply FIN-46 for a short period of time before applying
FIN-46R. In general, for all entities that were previously considered special
purpose entities, FIN 46 should be applied in periods ending after December 15,
2003. Otherwise, FIN 46 is to be applied for registrants who file under
Regulation SX in periods ending after March 15, 2004, and for registrants who
file under Regulation SB, in periods ending after December 15, 2004. The Company
does not expect the adoption to have a material impact on the Company's
financial position or results of operations.
In December 2003, the FASB issued a revised SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" which replaces the
previously issued Statement. The revised Statement increases the existing
disclosures for defined benefit pension plans and other defined benefit
postretirement plans. However, it does not change the measurement or recognition
of those plans as required under SFAS No. 87, "Employers' Accounting for
Pensions," SFAS No. 88, "Employers' Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits," and SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
Specifically, the revised Statement requires companies to provide additional
disclosures about pension plan assets, benefit obligations, cash flows, and
benefit costs of defined benefit pension plans and other defined benefit
postretirement plans. Also, companies are required to provide a breakdown of
plan assets by category, such as debt, equity and real estate, and to provide
certain expected rates of return and target allocation percentages for these
asset categories. The Company has implemented this pronouncement and has
concluded that the adoption has no material impact to the financial statements.
2) Investments:
On August 21, 2003, the Company formed Unboxed for the purpose of owning and
operating the Bluetorch license agreement.
In October 2003, the Company formed Total Sports for the purpose of owning and
operating the True Skate Apparel brand ("TSABrand),".
Unboxed and Total Sports are wholly-owned subsidiaries ("Investments")of the
Company and are focused on providing apparel to the action sports area,
including surfing, wakeboarding, and skateboarding. The Investments plan to
develop high tech garments for athletes and participants in these sports as well
as designing more casual lifestyle clothing aimed at a wider range of consumers.
The Investments plan to begin manufacturing & marketing under various brand
names and will market apparel to high end sporting goods stores, mid-tier
department stores, as well as specialty chains. The " TSABrand " name, will be
marketed to specialty shops and to high end sporting goods and specialty chains.
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 intervals 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 which the owner
might reasonably expect to receive for them upon their current sale. Methods
which 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 which the directors should consider
in determining a valuation method for an individual issue of securities include:
1) the fundamental analytical data relating to the investment, 2) the nature and
duration of restrictions on disposition of the securities, and 3) an evaluation
of the forces which influence the market in which these securities are purchased
and sold. Among the more specific factors which are to be considered are: type
of security, financial statements, cost at date of purchase, size of holding,
discount from market value of unrestricted securities of the same class at time
of purchase, special reports prepared by analysis, information as to any
transactions or offers with respect to the security, existence of merger
proposals or tender offers affecting the securities, price and extent of public
trading in similar securities of the issuer or comparable companies, and other
relevant matters.
The board 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 investments
ability to continue as a going concern.
Based on the previous methodology, the Company determined that it's investment
in Unboxed should be valued at $559,405 comprised of the
following: Warrants issued and cash paid to acquire the licensing rights of
$418,326 and $45,000 respectively and advances of $96,079. Total Sports
has not been valued since there were no investments as of
December 31, 2003.
(3) Asset Purchase Agreement
On December 15, 2002, the Company acquired the Hot Tuna, Xisle and the
children's surf brand Piranha Boy and Piranha Girl brands and trademarks from
Federation Group Limited ("FGL" and 'the Seller") in exchange for an aggregate
of a $250,000 deposit payable in cash, 19,500,000 shares of the Company's common
stock and 400,000 shares of the Company's Series A Preferred Stock (the "Series
APS"). $25,000 of the cash deposit was paid, with $125,000 of the cash deposit
satisfied in shares of the Company's common stock.
The trademarks were valued at the cash deposit and fair value of the shares,
common and preferred, issued.
The common stock and preferred stock were issued but never delivered to the
seller. The Company contends that the Seller never delivered the proper items
necessary to market the trade name. The Parties began conversations regarding
amending the agreement during the quarter ended June 30, 2003. Subsequently, in
November 2003, the Company entered into a settlement agreement, pursuant to
which that original agreement has been rescinded. Accordingly, the Company has
returned all trademarks and related assets. In exchange, FGL has returned
28,200,000 of the Company's common shares plus 400,000 shares of the Company's
Preferred Series A to the Company, who has cancelled the shares. 3,300,000
common shares were retained by FGL as a settlement expense, which has been
valued at $495,000 on the accompanying financial statements. Also recognized as
part of the settlement expense is the $25,000 cash deposit paid.
As the intent and economic substance of the settlement is in fact an unwinding
of the original Purchase Agreement, all amounts have been reversed out at the
amount at which they were originally recognized. Accordingly, as of December 31,
2003 the Company has provided for the net impact of this agreement as if it had
been executed September 30, 2003. The entire value of the trademarks in question
has been reversed, and $5,783,824 charged to equity for the original value of
the common and preferred shares
(4) Notes Payable
Notes payable to four parties, payable on demand or by May 31 2005, were issued
on May 30th, 2003 in exchange for consulting and other services, carrying
interest at 8% per annum; total amount of notes issued $325,000. These notes
were converted to 15,000,000 shares of common stock during the year ended
December 31, 2003
(5) Convertible debenture payable:
On April 1, 2003 the Company issued a $25,000 convertible debenture, convertible
at 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.
(6) Income Taxes:
The reconciliation of the effective income tax rate to the Federal statutory
rate is as follows:
Federal Income Tax Rate 34.0%
Permanent difference (expense related
To the cancellation of stock options) (18.0%)
Increase in valuation allowance (16.0)%
-------
Effective Income Tax Rate -
=======
As of December 31, 2003, the Company had net carryforward losses of $2,584,000.
Because of the current uncertainty of realizing the benefit of the tax
carryforward, a valuation allowance equal to the deferred tax assets benefit for
the loss carryforward has been established. The full realization of the tax
benefit associated with the carryforward depends predominantly upon the
Company's ability to generate taxable income during the carry forward period.
Deferred tax assets and liabilities reflect the net tax effect of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities were as follows:
Deferred tax assets:
Loss carryforwards $880,000
Less valuation allowance (880,000)
----------
Net deferred tax assets $ -
=========
Net operating loss carry forwards expire through 2023.
7) Rescission of Options
During the year ended December 31, 2003, the Company granted
33,150,000 options to employees (after giving effect to two forward splits), all
of which would have vested March 2004 through March 2007. In accordance with APB
25, a $2,784,600 compensation cost was included in deferred compensation costs,
to be recognized over the future vesting period.
Subsequent to the issue of the options, the Company obtained agreements from
employees to rescind all of those options, in exchange for a lesser quantity of
common shares to be issued immediately. Accordingly, the $2,784,600 option cost,
previously deferred, has been charged to operations.
(8) Stockholders' Equity:
Preferred Stock
The Company is authorized to issue up to 50,000,000 shares of Preferred stock,
$.001 par value. As of December 31, 2003 the Company has issued the following
shares:
Series A ("Series APS"), 400,000 Shares Originally Authorized - None Outstanding
These shares were issued in connection with the Asset Purchase Agreement
described in Note ( 3). The shares were cancelled in connection with the
rescission of the transactions contemplated by the Asset Purchase Agreement in
November December 2003.
Series B ("Series BPS"), 610,000 Shares Authorized and 480,000
Outstanding
The holders of the Series BPS are entitled to receive dividends on the number of
shares of Series BPS, which are converted into shares of Company common stock,
at the dividend rate of 6% of the conversion price for the number of shares
converted, payable in cash or in common stock. The dividend rate is based upon
the ten (10) day average of the lowest closing bid price prior to the date of
conversion ("Market Price"). The Series BPS are convertible into common stock
based upon a conversion price equal to the number of shares being converted
divided by 80% of the Market Price described in the preceding paragraph. All
shares of Series B outstanding three (3) years from the date of issuance shall
automatically converted into common stock based upon the foregoing formula.
Series C ("Series CPS"), 10,000,000 Shares Authorized and Issued
The holders of the Series CPS are not entitled to receive dividends and are
convertible into Common Stock of the Company in an amount equal to the number of
Series CPS being converted. In connection with any reorganizations, merger,
consolidation or sale of assets involving the Company, the number of Series CPS
shares outstanding and the number of shares of Common Stock into which the
Series CPS are convertible, will not be affected by any such capital
reorganization.
Equity Transactions
During the year ended December 31, 2003, the Company issued 18,565,818 common
shares, in exchange for which it received $423,263.
During the year ended December 31, 2003, the Company issued 6,191,873 shares of
common stock (adjusted for splits) to employees, consultants and other vendors
for services, for $519,863, the market value of the shares on the dates issued.
The total cost has been reflected in charges to the accompanying financial
statements, as follows: $368,662 has been included in General and Administrative
expense; the balance of $151,201, representing the difference between the value
of services rendered and the market value of shares issued, has been charged to
shares issued at a discount in exchange for services.
During the year ended December 31, 2003, the Company issued 682,147 shares of
common stock to five current and former employees in exchange for their
agreement to the rescission by the Company of 33,150,000 options (as adjusted
for the 5:1 split which took effect May 21, 2003) which had been granted during
the quarter ended March 31, 2003. The full $47,750 cost of these shares, at
market value at date of issuance, has been charged to "write-off of deferred
compensation" expense in the accompanying financial statements.
During the year ended December 31, 2003, the Company issued 525,000 shares (as
adjusted for splits) of common stock to former holders of convertible
debentures, which had been converted to Series B Preferred Stock during the
period from inception through December 31, 2002, in satisfaction for an offer of
Inducement to convert. $78,750, the market value of the shares on the date of
issuance, has been reflected as debt conversion costs.
On March 7, 2003, the Company issued 750,000 shares (as adjusted for splits) of
common stock, valued at their market value of $112,500, to a foreign entity for
resale under Regulation S. As these shares have not yet been resold by the
foreign entity, and no consideration has been received, the shares have been
reflected in Common stock subscriptions receivable on the accompanying financial
statements
On June 18, 2003, the Company issued an aggregate of 10,000,000 of its Series C
Preferred Shares to certain officers, directors, and consultants in exchange for
services provided of $367,500, based on fair market value of the underlying
common shares. The Series C Preferred Shares are convertible on a 1:1 basis into
shares of the Company's common stock.
During the year ended December 31, 2003, 5,087,364 shares of common stock were
issued in connection with a shareholder's election to convert 130,000 shares of
Preferred Series B.
During the year ended December 31, 2003, 18,200,000 common shares were issued in
satisfaction of notes payable in the amount of $413,000.
During the year ended December 31, 2003, with shareholder approval, the Company
issued warrants for the purchase of 15 million shares of the Company's common
stock at exercise prices ranging from $.05 to $.10 per share in connection with
a licensing agreement for Unboxed Distribution, Inc. distribute under. The
estimated value of the options totaled approximately $418,326 at the date of
grant. The value of the options was estimated using the Black-Scholes option
pricing model with the following assumptions: risk-free interest of 5.5%;
dividend yield of 0%; volatility factor of the expected market price of the
Company's common stock of 173.5%; and a term of 5 years. This amount has been
included the valuation of the investment.
(9) Going Concern:
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern. As of December 31,
2003, the Company has generated no revenues and has incurred losses totaling
$5,368,546 for the period from August 26, 2002 (inception) through December 31,
2003. Additionally, as of December 31, 2003 the Company has negative working
capital of $131,639. These matters raise substantial doubt about the Company's
ability to continue as a going concern. These financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts, or amounts and classification of liabilities that might
be necessary should the Company be unable to continue as a going concern.
Management plans to take the following steps that it hopes will be sufficient to
provide Bluetorch with the ability to continue in existence:
REVENUE
On September 8, 2003 the Company's subsidiary, Unboxed, signed an agreement to
license (with an option to purchase in 2006) the Bluetorch trademark for apparel
and certain other product categories. Unboxed began shipment to retail of
Bluetorch branded apparel in the first quarter of 2004 with a limited product
line of domestically produced young men's embroidered and/or screened t-shirts
and sweatshirts. In the second quarter of 2004, Unboxed will begin shipment to
retail of similar apparel product in the junior's side. In the second half of
2004, Unboxed will ship a dramatically broader Bluetorch apparel line (as
compared to first of 2004) as the Company will include foreign sourced product
in young men's and junior's including wovens, knits and denim.
Bluetorch Inc. has been working to acquire additional trade names. On October
21,2003 the Company's other subsidiary, Total Sports finalized an agreement to
license (with an option to purchase) the True Skate Apparel ("TSABrand")
trademark. Total Sports will begin began shipping TSABrand apparel to retailers
in April 2004. This product line being shipped in the second quarter of 2004 is
limited as Total Sports inherited this product line upon licensing the brand.
Management feels that the TSABrand being shown to retailers for delivery
starting July 2004 is a broader, more fashion correct product line. Total Sports
will also look to broaden the distribution of where TSABrand has been
historically sold. In addition to the core shops that have carried TSABrand
since, 1991, Total Sports is planning to expand the brand's presence into better
department stores and upper-end sporting goods retailers.
Total Sports will also start generating revenue as a result of its licensing
agreement for the Airwalk trademark in apparel. This agreement allows Total
Sports to begin shipping to retailers starting in July of 2004. Management is
projecting the Airwalk label to generate the most revenue in 2004 from its
portfolio of brands despite being limited to six months of shipments in 2004.
On March 6th, 2004 the Unboxed signed a letter of intent with Dome Exchange Pty.
for the licensing rights of Aztec Rose for the North American territory.
Assuming the Company can finalize a definitive agreement, it is hopeful to begin
shipping a limited product line to retailers for the Holiday 2004 season, with
the bulk of the product line being offered for spring 2005 delivery.
FINANCING
On June 19, 2003, Bluetorch Inc. filed an Offering Circular that authorizes the
Company to raise up to $3,000,000 via sale of its common stock. Through December
31, 2003, the Company has raised $980,500 against this limit, and an additional
$831,685 through March 31, 2004. These sums include both cash proceeds and
conversion of debt. This leaves $1,187,815 that Bluetorch management will
continue to pursue from the equity markets. Part of this will be pursued through
an agreement that Bluetorch entered into in October 2003 with an Investment
Agreement pursuant to which the investment advisor agreed to purchase $1,800,000
of the Company's common stock over a one year period ending October 2004.
Management will also endeavor to utilize debt financing (receivables and /or
inventory financing) to create additional working capital.
CONCLUSION
Management is projecting the majority of 2004's revenue to be created in the
second half of 2004 due to the quadrupling of the collective product lines as
compared to the collective first half product line. Management is anticipating
that the cash generated from the projected revenue combined with cash raised
from a combination of equity and debt financing will allow Bluetorch and its
subsidiaries Unboxed and Total Sports to continue to grow their operations and
revenues.
(10) Subsequent Events (unaudited)
Equity Transactions
Subsequent to December 31, 2003 through March 31, 2004 the Company has issued
22,500,000 common shares in exchange for $749,000.
Subsequent to December 31, 2003 through March 31, 2004 the Company has issued
13,832,632 common shares with a shareholder's election to convert 290,000 shares
of Preferred Series B; included in the common shares issued were interest and
penalties that represented 1,666,667 of common shares.
Licensing Agreement
Subsequent to December 31, 2003, Total Sports, a
wholly-owned subsidiary of the Company, entered into a license agreement with
Collection Licensing, International, LLC with respect to the Airwalk trademarks.
The license agreement is effective as of July 1, 2004.
Letter of Intent
On March 6th, 2004 the company signed a letter of intent with Dome Exchange Pty.
for the licensing rights of Aztec Rose for the North American territory.
ITEM 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosures.
None.
ITEM 9A. Controls and Procedures
The Company's management, under the supervision and with the participation
of the Company's principal executive officer and principal financial officer,
has evaluated the Company's disclosure controls and procedures as of the date of
this Annual Report on Form 10 K. Based upon that evaluation, the Company's
principal executive officer and principal financial officer have concluded that
the Company's disclosure controls and procedures are effective. There were no
significant changes in the Company's 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.
PART III
--------
ITEM 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The names and ages of each of the current directors and executive officers
of the Company are as follows:
NAME AGE POSITION
- ---- --- --------
Bruce MacGregor 45 President, CEO and Director
Scott Battenburg 41 Vice President, Chief Financial
Officer and Secretary
Shane H. Traveller 37 Director
Read Worth 48 Director
BRUCE MACGREGOR: PRESIDENT/CEO
Mr. MacGregor brings over 20 years of sporting goods experience in both the
apparel/footwear and action sports segments including both high growth and
start-up entities. Mr. MacGregor's experience includes Avia where as part of the
original management team (VP of Marketing) he helped grow the brand from $3.0
million in revenue to $200 million within five years. As President/COO of L.A.
Gear, he is credited with restructuring the company to allow for the successful
sale of the business. At Razor USA LLC, Mr. MacGregor, as COO, led the scooter
company from $15 million to $200 million in revenue.
SCOTT BATTENBURG: VICE PRESIDENT CHIEF FINANCIAL OFFICER AND SECRETARY
Mr. Battenburg has over 15 years of financial and operational experience in the
consumer products, financial services and retail sectors. Mr. Battenburg has
vast experience in building world-class financial organizations and contributing
to the bottom line success. As Vice President/CFO of Razor USA LLC, Mr.
Battenburg designed and implemented the accounting, reporting and planning tools
that assisted with the phenomenal growth. As Director of Finance for LA Gear,
Inc., Mr. Battenburg made positive contributions in the planning, restructuring
and sales and marketing areas. Mr. Battenburg is a graduate of the California
Polytechnic State University, San Luis Obispo and an alumnus of KPMG Peat
Marwick.
SHANE H. TRAVELLER: DIRECTOR
Mr. Traveller brings an extensive background in service to public companies both
as an independent auditor, then later as an officer and director. He is a
licensed CPA and sits on the board of directors of three public companies where
he serves as chairman of the audit committee. From 1998 through 2001, Mr.
Traveller served the Chief Financial Officer of Trimedyne, Inc., a NASDAQ
NMS-listed medical device company. In 2002, he was named President and COO
where he oversaw all operations, product development and manufacturing in
addition to financial reporting, investor relations, and information systems for
all aspects of the company. During his tenure, sales increased 33%,
productivity increased 45%, staffing decreased 42% and the company achieved cash
flow break even for the first time in ten years. Mr. Traveller left Trimedyne
to become President of Javelin Holdings, Inc., a corporate finance and
consulting company, a position he still enjoys. With a company he co-founded
prior to joining Trimedyne, Mr. Traveller established supply channels in Eastern
Europe, negotiated a letter of intent and subsequently joint venture agreement
with a Russian supplier, and oversaw the market release of five new products.
He raised seed capital and set up the production facility, and internal
accounting controls. As a consultant and independent auditor, Mr. Traveller has
been closely involved in the development and implementation of internal
controls, management staff, preparation and filing of countless financial
statements and SEC filings. He has led clients through IPOs and secondary
offerings, private placements, mergers and acquisitions. Mr. Traveller is a
graduate of Brigham Young University, where he has a degree in Accounting.
READ WORTH: DIRECTOR
Mr. Read Worth comes to the Company from RLX Polo Sport where he served as
Senior Vice President/GMM. Mr. Worth brings over 15 years of apparel
merchandising experience to AAPG. This includes time with such venerable brand
as Nike, Patagonia and Polo. Mr. Worth also spent three years as Senior Vice
President at Champs (Foot Locker division) where he built their private label
business from zero to $485 Million.
Each of these officers and directors are employed as consultants to the
Company on six-month verbal agreements, which are renewable upon the mutual
agreement of the parties.
Compliance with Section 16(a) of the Exchange Act
Based solely upon a review of forms 3, 4 and 5 furnished to the Company,
the Company is not aware of any person who at any time during the fiscal year
ended December 31,2003, was a director, officer, or beneficial owner of more
than ten percent of the Common Stock of the Company, and who failed to file, on
a timely basis, reports required by Section 16(a) of the Securities Exchange Act
of 1934 during such fiscal year.
ITEM 11. Executive Compensation
No compensation in excess of $100,000 was awarded to, earned by, or paid to
any executive officer of the Company during the fiscal years 2002 and 2003. The
following table provides summary information for the years 2002 and 2003
concerning cash and noncash compensation paid or accrued by the Company to or on
behalf of the Company's chief executive officers.
SUMMARY COMPENSATION TABLES
Annual Compensation
Name and Principal Position Year Salary (US$) Bonus($) Other Comp
Bruce MacGregor 2003 $91,100 NONE NONE
President
Bruce MacGregor 2002 $58,000 NONE NONE
President
Long Term Compensation
Awards Payouts
NAME & POSITION YEAR RESTRICTED STOCK SECURITIES UNDERLYING LTIP PAYOUTS
STOCK AWARD(S) ($) OPTIONS/ SARS(#) ($)
2002 NONE NONE NONE
2001 NONE NONE NONE
Options/SAR Grants in Last Fiscal Year (Individual Grants)
Name Number of Securities Percent of Total Exercise of Base Expiration Date
Underlying Options/ Options/SARs Price ($/Sh)
SARs(1) Granted to Employees
In Fiscal Year
Bruce MacGregor NONE NONE NONE
<FN>
In February 2003, Mr. MacGregor was granted 2,400,000 options at an exercise price of $0.246 per share, which vest 25% per yea
DIRECTOR COMPENSATION
NONE.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth, as of March 31, 2004 the name, address, and
the number of shares of the common stock, held of record or beneficially by each
person who held of record, or was known by the Company to own beneficially, more
than 5% of the 227,785,657 shares of common stock issued and outstanding, and
the name and shareholdings of each director, and of all officers and directors
as a group.
CLASS OF STOCK NAME AND ADDRESS OF NUMBER OF SHARES PERCENT OF CLASS
BENEFICIAL OWNER BENEFICIALLY OWNED(1) (1)
- ----------------------------------------------------------------------------------------------------------------
Executive Officers & Directors
- ----------------------------------------------------------------------------------------------------------------
Common Stock Bruce MacGregor 16,585,718 7.3%
One World Trade Center Ste 800
Long Beach, Ca 90831
Common Stock Read Worth 582,143 Less than 1%
One World Trade Center Ste 800
Long Beach, Ca 90831
Common Stock Scott Battenburg 66,250 Less than 1%
One World Trade Center Ste 800
Long Beach, Ca 90831
Common Stock Shane H. Traveller -0- 0%
One World Trade Center Ste 800
Long Beach, Ca 90831
ALL EXECUTIVE OFFICERS & DIRECTORS AS A GROUP 17,224,111 7.5%
<FN>
(1) The number of shares and percentages of class beneficially owned by the entities above is determined
under rules promulgated by the SEC and the information is not necessarily indicative of beneficial ownership for
any other purpose. Under such rules, beneficial ownership includes any shares as to which the individuals has
sole or shared voting power or investment power and also any shares as to which the individual has the right to
acquire within 60 days through the exercise of any stock option or other right. The inclusion herein of such
shares, however, does not constitute an admission that the named stockholder is a direct or indirect beneficial
owner of such shares. Unless otherwise indicated, each person or entity named in the table has sole voting
power and investment power (or shares such power with his or her spouse) with respect to all shares of capital
stock listed as owned by such person or entity.
The following table sets forth, as of March 31,2004 the name, address, and the
number of shares of the Preferred Stock, held of record or beneficially by each
person who held of record, or was known by the Company to own beneficially, more
than 5% of the 190,000 shares of Preferred Stock issued and outstanding, and the
name and shareholdings of each director, and of all officers and directors as a
group.
SERIES OF PREFERRED NAME & ADDRESS OF NUMBER OF SHARES PERCENT OF
STOCK BENEFICIAL OWNER BENEFICIALLY OWNED CLASS
- -----------------------------------------------------------------------------------------------------------
Series B Preferred Jerry Mann 45,000 23.6%
Stock 312 Stuart St 3rd Floor
Boston, MA 02116
Series B Preferred Craig Wexler 25,000 13.1%
Stock 312 Stuart St 3rd Floor
Boston, MA 02116
Series B Preferred Lawrence Wexler 35,000 18.4%
Stock 312 Stuart St 3rd Floor
Boston, MA 02116
Series B Preferred Peter Zator 50,000 26.3%
Stock 312 Stuart St 3rd Floor
Boston, MA 02116
Series B Preferred Andrew Smith 10,000 5.2%
Stock 312 Stuart St 3rd Floor
Boston, MA 02116
Series B Preferred Michael Dix 25,000 13.1%
Stock 312 Stuart St. 3rd Floor
Boston, MA 02116
ALL EXECUTIVE OFFICERS & DIRECTORS AS A GROUP NONE N/A
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In May 2002, the Company acquired substantially all of the assets of
Sanotech Group SPL ("SGS") from STG Corp in exchange for an aggregate of
22,987,800 shares of its common stock, which were issued to the STG shareholders
(the "STG Acquisition"). In connection with the STG Acquisition, the Company
issued an aggregate of $545,000 of Convertible Debentures to eight persons.
Prior to the STG Acquisition, STG had acquired the assets of SGS from the SGS
shareholders. In August 2002, the Company agreed to return to SGS all of the
assets formerly owned by SGS in exchange for delivery to the Company of a number
of the shares of the common stock issued to the former SGS shareholders in
connection with the STG Acquisition. An aggregate of 20,876,064 were returned
to the Company and these shares were cancelled in November 2002.
In October 2002, the Company issued an aggregate of 19,500,000 shares of
its common stock to the shareholders of Aussie Apparel Group Ltd. ("Aussie
Apparel") in connection with the merger of Aussie Apparel with and into Medex
Corp. whose name was changed to "Aussie Apparel Group Ltd", as the surviving
entity.
In November 2002, the Company issued an aggregate of 545,000 shares of its
Series B Preferred Stock ("Series B") in exchange for $545,000 face amount of
its Convertible Debentures upon the conversion thereof, which were issued in
connection with the STG Acquisition in May 2002. An aggregate of 105,000 shares
of the Company's common stock was also issued to the holders of the Convertible
Debentures in connection with the conversion of the Convertible Debentures into
the Series B Preferred Stock.
The holders of the Series B are entitled to receive dividends on the number
of shares of Series B, which are converted into shares of Company common stock,
at the dividend rate of 6% of the conversion price for the number of shares
converted, payable in cash or in common stock. The dividend rate is based upon
the ten (10) day average of the lowest closing bid price prior to the date of
conversion ("Market Price").
The Series B are convertible into common stock based upon a conversion
price equal to the number of shares being converted divided by 80% of the Market
Price described in the preceding paragraph. All shares of Series B outstanding
three (3) years from the date of issuance shall automatically converted into
common stock based upon the foregoing formula.
An affiliate of Dutchess Advisors Ltd. ("Dutchess") and its principals were
shareholders of STG and received shares of the Company's common stock in
connection with the STG Acquisition. In connection with the rescission of the
STG Acquisition, Dutchess and its principals returned substantially all of their
shares to the Company for cancellation. Dutchess was issued 65,000 shares of
Series B in connection therewith.
In connection with the STG Acquisition, Irwin R. Dyer III and Marion Day,
principals of SGS were elected directors of the Company on May 9,2002. Michael
Novielli, a principal of Dutchess, was elected President of the Company on April
3,2002 and as director of the Company on May 9,2002. Mr. Dyer, Day and Novielli
resigned their positions with the Company on November 26,2002. Between April
1,2002 and June 30,2002, Dutchess was paid $107,500 in consulting fees by the
Company. Mr. Novielli was reimbursed $21,934 for expenses incurred on behalf of
the Company. The Company reimbursed Mr. Douglas Leighton, a principal of
Dutchess, $12,603 during this period.
During the same period Mr. Dyer was paid consulting fees of $102,001 and
Mr. Day was paid $75,000 by the Company. In addition, Messrs Dyer and Day were
reimbursed $62,642 and $20,808, respectively, by the Company for expenses
incurred on behalf of the Company.
On April 1,2003, the Company issued a Debenture (the "Debenture") in the
face amount of $25,000 to Dutchess which is payable on April 1,2007 and bears
interest at the rate of six percent (6%) per annum, which is payable in cash or
common stock at the option of the Company. The Debenture is convertible into
the Company's common stock at a rate of the lesser of (i) 75% of the average of
the lowest closing bid price for the 15 trading days prior to conversion or (ii)
100% of the average of the closing bid prices for the 20 trading days
immediately preceding April 3,2003. This Debenture was retired in October of
2003.
On February 6, 2004, the Company completed the redemption of 365,000 of the
Series B held by Dutchess Private Equities Fund Ltd.
In addition, on April 1,2003, the Company entered into an Investment
Agreement ("IA Agreement") with Dutchess pursuant to which Dutchess agreed to
purchase up to $4,000,000 of the Company's common stock over a 24 month period
ending April 1,2005. The purchase price shall be equal to 93% of the lowest bid
price during the 10-day period prior to the date the Company requests that
Dutchess purchase common stock.
The Company has granted registration rights to Dutchess with respect to the
shares of its common stock underlying the Debenture and the IA Agreement.
On April 8, 2003, the Company entered into a License/Distributorship
Agreement with Frontier with respect to the Hot Tuna, Xisle, Piranha Boy and
Piranha Girl trademarks in the countries of Australia, New Zealand, Fiji, New
Caledonia and Pacific Islands on an exclusive basis and Singapore and Malaysia
on a non-exclusive basis. The initial term of the Agreement was to be for 10
years with an option in favor of Frontier for an additional 10-year term.
Royalties of 6% of net sales in the territories described above were to be
payable by Frontier to the Company. These agreements were assigned to Frontier
in January 2004.
In December 2002, the Company acquired the Hot Tuna (surf and wakeboarding),
Xisle (surf/skate) and the children's surf brand Piranha Boy and Piranha Girl
brands and trademarks from Federation Group Limited ("FGL") in exchange for an
aggregate of 6,690,000 shares of the Company's common stock and 400,000 shares
of its Series A Preferred Stock (the "Series APS"). The holders' of the Series
APS are entitled to receive a yearly dividend of Series APS payable in shares of
common stock equal to five cents ($0.05) per share times the 400,000 shares or
$20,000 divided by 95% of the market price of the Company's common stock on
January 1 of each year. The Series APS is also convertible into shares of the
Company's common stock equal to the number of Series APS being converted divided
by 85% of the market price at the time of conversion. This transaction was
rescinded in November 2003. The Series A Preferred Stock was cancelled and
Federation returned all but 3,300,000 shares of the Company's common stock
issued in connection with this transaction.
On February 20, 2003, the Company's Board of Directors authorized the
issuance of 33,150,000 options to certain officers and directors at an exercised
price of $0.24 per share. These options were rescinded on May 30, 2003 and an
aggregate of 682,147 shares of common stock were issued in lieu thereof.
On April 7, 2003 and on May 27, 2003, the Company effected a 3 for 1 and 5
for 1 forward stock split.
On March 1, 2003, the Company agreed to issue 3,750,000 shares of common
stock to Overseas Investment Banking Alliance ("OIBA") at $0.25 per share.
On September 8, 2003, Unboxed Distributions Inc., a wholly-owned subsidiary
of the Company, entered into a License Agreement with Option to Purchase with
Gotcha Brands, Inc ('Gotcha") and in connection therewith, issued 15,000,000
warrants to Gotcha principals.
On September 8, 2003 and September 9, 2003, the Company's Board of
Directors and shareholders authorized the change of the Company's name to
"Bluetorch Inc." and an increase in the capitalization of the Company to
950,000,000 shares of common stock a par value $0.001, and 50,000,000 shares of
preferred stock a par value $0.001.
On May 30, 2003, the Company filed the appropriate documents with the
Securities and Exchange Commission to become a "Business Development Company"
under the Investment Company Act of 1940 and thereafter issued an aggregate of
58,566,667 shares of common stock under Regulation E under the Securities Act of
1933 thru March 31, 2004; this became effective June 19, 2003.
Also, on May 30, 2003, the Company (i) cancelled $400,000 of notes in
exchange for the issuance of a $600,000 debenture, (ii) authorized the issuance
of 10,000,000 shares of Series C Preferred Stock, of which 4,750,000 share were
issued to Bruce MacGregor, 4,750,000 shares to Davenport Investments Limited and
500,000 to Peak Solutions and (iii) issued 5,167,500 shares of common stock in
exchange for the cancellation of $198,600 of debt owed to certain officers,
directors, consultants and vendors for accrued liabilities.
On November 23, 2003, the Company exchanged $212,500 of debt held by
certain shareholders for 500,000 shares of common stock.
On January 26, 2004, Scott Battenburg resigned as a director and Read Worth
was appointed a director of the Company. Mr. Battenburg was appointed the
Company's Chief Financial Officer and Secretary, effective January 26, 2004.
On October 10, 2003, the Company entered into a Stock Purchase Agreement
("SPA") with Dutchess Private Equities Fund, L.P. ("Dutchess") agreed to
purchase up to $1,800,000 of the Company's common stock over a twelve-month (12)
period. From October 24, 2003 through March 31, 2004, the Company issued
58,566,667 shares of common stock under the SPA. Such shares were issued
pursuant to Regulation E under the Securities Act of 1933, as amended.
An aggregate of 16,679,169 shares of common stock were issued from
October 1, 2003 through February 9, 2004, pursuant to the conversion of Series B
Preferred Stock of which Dutchess received 15,504,452 shares. Dutchess no
longer owns any Series B Preferred Stock.
Effective February 1, 2003, the Company issued an aggregate of 6,630,000
options to acquire shares of common stock at an exercise price of $0.246 per
share, to certain officers and/or consultants of the Company for services
rendered namely:
Name No. Of Shares Vesting Period
- --------------- --------------------- ------------------
Bruce MacGregor 2,400,000 25% per year commencing Feb. 1, 2004 thru Feb. 1, 2007
Read Worth 1,800,000 Same per year
Stewart Kawamura 750,000 Same per year
Rod Williams 1,500,000 Same per year
GiGi Carrano 180,000 Same per year
These options were cancelled on May 30, 2003.
On March 1,2003, the Company issued an aggregate of 1,168,875 shares of
restricted common stock to employees and/or consultants for services rendered,
namely:
Name No. Of Shares Date Of Issuance
- ---------------- ------------- -----------------
Read Worth 300,000 25% on March 1,2003
25% on April 1,2003
25% on July 1,2003
25% on October1, 2003
Rod Williams 75,000 Same 25% and dates
Scott Battenburg 45,000 Same 25% and dates
GiGi Carrano 36,000 Same 25% and dates
John Kraus 22,500 Same 25% and dates
Howard Salamon 60,000 100% on March 1,2003
David Lasell 30,000 100% on March 1,2003
IC12 Pty., Ltd. 30,000 100% on March 1,2003
GISBeX 150,000 100% on March 1,2003
On September 8, 2003, the Company's (wholly-owned subsidiary Unboxed entered
into a License Agreement with an Option to Purchase Agreement ("Bluetorch
License") with Gotcha Brands Inc. ("Gotcha") with respect to the Bluetorch
trademark (which are owned by Gotcha) for use in the United States, Mexico and
Canada. Unboxed has the option to acquire, after three years, the Bluetorch
trademark in certain categories. The term of the Bluetorch License is three
years and four months, commencing September 8, 2003. The Bluetorch License shall
automatically renew for three additional six year terms or Unboxed may acquire
the Bluetorch Trademark in the territories and categories in which Unboxed is
selling products as long as Unboxed is not in material breach of the Bluetorch
License and Unboxed has reached the guaranteed domestic monthly minimum royalty
("Minimum Royalty").
The Bluetorch License provides for a royalty equal to 6% of net sales per
year on sales of licensed products. The Minimum Royalty shall be $90,000 in
2003/04, $180,000 for 2005 and $300,000 for 2006. Unboxed has paid Gotcha
$45,000 as an advance against the first years' Minimum Royalty.
The Option price to acquire the Bluetorch trademark shall consist of (a)
$75,000 cash, (b) $150,000 of free trading stock, (c) $75,000 of restricted
stock and (d) a 2% royalty fee for seven years and a 1% for 13 years following
the original 7 years on the net sales of all products bearing one or more of the
Bluetorch Trademarks.
Gotcha has the right to approve any changes in the Unboxed management.
On October 21, 2003, the Company's Total Sports entered into a License
Agreement with an Option to Purchase Agreement ("TSA License") with Krash
Distribution Inc. ("Krash") with respect to the use of the TSA Trademark in the
United States, Mexico and Canada ("Territory"). The TSA License is for a term of
three years and six months, commencing July 1, 2004. The TSA License is
automatically renewable for three additional terms of five years or Total Sports
may acquire the TSA Trademark utilized in the Territory only or globally so long
as Total Sports is not in material breach of the TSA License and Total Sports
has reached the guaranteed domestic monthly minimum royalty ("Minimum Royalty").
The TSA License provides for a royalty equal to 4% for the net sales per
year on sales of the licensed products. The Minimum Royalty shall be $28,000 in
2004, $140,000 for 2005, $350,000 for 2006 and $520,000 for 2007. Total Sports
has paid Krash $20,000 as an advance against the 2004 Minimum Royalty.
The Option price for the TSA Trademark shall consist of the greater of (i)
the total royalties paid to Krash from July 1, 2004 through December 31, 2007 or
(ii) $1,008,000. If Total Sports parent is a BDC entity at the time of exercise
of the Option, said sum shall be paid 25% in cash, 25% in free trading stock and
50% in restricted stock. If Total Sports parent is not a BDC entity, said sum
shall be paid 35% in cash and 65% in restricted stock.
Total Sports has entered into a License Agreement with Collective Licensing
International, LLC ("Collective") with respect to the Airwalk Trademark owned by
Collective. The License Agreement will become effective on July 1, 2004. The
License Agreement is for a term of 5 years commencing on July 1, 2004 and
relates only to the geographic area known as the United States of America.
Total Sports has the Option to renew the License Agreement for one
additional five-year term substantially upon the terms and conditions relating
to the initial term unless Total Sports is not in full compliance with the terms
and conditions of the initial License Agreement.
Total Sports has agreed to pay to Collective guaranteed payments ranging
from $280,000 for the six months ended December 31, 2004 up to $1,920,000 for
2008. TSDI has made an advance payment of $32,800 against the guaranteed
payments due for 2004.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
For the fiscal year ended December 31, 2003, Stonefield Josephson, Inc. has
billed the Company the following fees for services rendered during the audit in
respect of that year:
AUDIT FEES
For the fiscal years ended December 31, 2002 and December 31, 2003, Stonefield
Josephson, Inc. billed the Company $20,355 and $40,397, respectively, for
services rendered for the audit of the Company's annual financial statements
included in its report on Form 10-K and the reviews of the financial statements
included in its reports on Form 10-Q filed with the SEC.
TAX FEES
For the fiscal years ended December 31, 2002, Stonefield Josephson, Inc. billed
the Company $479 in connection with the preparation of tax returns and the
provision of tax advice.
ITEM 15. EXHIBITS AND REPORTS ON FORM 8K
(a) All Financial Statements.
(b) Exhibits. None.
(c) Reports on Form 8-K. None.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, this 10th day of June 2004.
BLUETORCH, INC.
By: /S/ Bruce MacGregor
-----------------------
Bruce MacGregor, President
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act 1934, this report has been duly signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
NAME POSITION DATE
- ---- -------- ------
/S/ BRUCE MACGREGOR PRESIDENT, CHIEF EXECUTIVE June 10, 2004
Bruce MacGregor OFFICER AND DIRECTOR
/S/ SCOTT A. BATTENBURG VICE PRESIDENT- FINANCE AND June 10, 2004
Scott Battenburg CHIEF FINANCIAL OFFICER
/S/READ WORTH DIRECTOR June 10, 2004
/S/SHANE H. TRAVELLER DIRECTOR June 10, 2004
CERTIFICATIONS
I, Bruce MacGregor, certify that:
1. I have reviewed this annual report on Form 10-K/A of Bluetorch, Inc;
2. Based on my knowledge, this annual report does not contain any untrue
statements of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have;
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of the date of this annual
report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions);
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditor any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: June 10, 2004
BY: /S/ BRUCE MACGREGOR
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Bruce MacGregor, President
CERTIFICATIONS
I, Scott Battenburg, certify that:
1. I have reviewed this annual report on Form 10-K/A of Bluetorch, Inc;
2. Based on my knowledge, this annual report does not contain any untrue
statements of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have;
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of the date of this annual
report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions);
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditor any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: June 10, 2004
BY:_/S/ SCOTT A. BATTENBURG
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Scott Battenburg, Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Bruce MacGregor, Chief Executive Officer of Bluetorch, Inc., certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) the Annual Report of the Company on Form 10-K for the period from August
26, 2002 (inception) through December 31, 2003 (the "Report") fully complies
with the requirements of section 13(a) or 15(d) of the Securities Exchange Act
of 1934; and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/s/ Bruce MacGregor
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Bruce MacGregor
Chief Executive Officer
June 10, 2004