UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarter Ended September 30, 2005.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission File Number 33-42498
AVENTURA HOLDINGS, INC.
(Exact name of small business issuer as specified in its charter)
Florida 65-024624
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
2650 Biscayne Boulevard, First Floor, Miami, Florida 33137
(Address of principal executive offices)
(305) 937-2000
(Issuer's telephone number)
Aventura Holdings, Inc.
20533 Biscayne Boulevard, Suite 1122, Aventura, Florida 33180
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes [X]
No [ ]
The number of shares of common stock outstanding as of November 7, 2005 was
1,700,657,813.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
AVENTURA HOLDINGS, INC. F/K/A SUN NETWORK GROUP, INC.
Index
Page
Number
PART I. FINANCIAL INFORMATION 2
Item 1. Financial statements 2
Balance Sheet as of September 30, 2005 (unaudited) 2
Statements of Operations for the three months ended
September 30, 2005 and 2004, from January 1, 2005 through
March 15, 2005, from March 16, 2005 through September 30, 2005
and for the nine months ended September 30, 2004 (unaudited) 3
Statements of Cash Flows for the
nine months ended September 30, 2005 and 2004 (unaudited) 4
Statement of Changes in Net Assets as of
September 30, 2005(unaudited) 5
Schedule of Investments as of September 30, 2005 (unaudited) 6
Schedule of Financial Highlights from March 16, 2005
through September 30, 2005 (unaudited) 7
Notes to Financial Statements (unaudited) 8
Item 2. Management's Discussion and Analysis or Plan of Operations 13
Item 3. Controls and Procedures 19
PART II. OTHER INFORMATION 19
Item 1. Legal Proceedings 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits 21
SIGNATURES 21
CERTIFICATIONS EX
1
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
AVENTURA HOLDINGS, INC. F/K/A SUN NETWORK GROUP, INC.
BALANCE SHEET
SEPTEMBER 30, 2005
(unaudited)
ASSETS:
Current Assets
Prepaid consulting $ 11,808
---------------------
Total Current Assets 11,808
---------------------
Investments in and Advances to Affiliates
Majority owned affiliates 912,032
Minority owned other non-controlled affiliates 100,000
---------------------
Total Investments in Affilates 1,012,032
---------------------
Other Assets
Deferred finance costs 34,812
---------------------
TOTAL ASSETS $ 1,058,652
=====================
LIABILITIES & SHAREHOLDERS' EQUITY:
Current Liabilities
Accounts payable $ 18,029
---------------------
Total Current Liabilities 18,029
Other Liabilities
Liability payable with common stock 362,250
---------------------
Total Other Liabilities 362,250
Total Liabilities 380,279
---------------------
Shareholder Equity
Common Stock; $0.001 par value; 5,000,000,000 shares
authorized; 1,525,657,813 shares issued and outstanding 1,525,658
Common Stock Issuable (250,000,000 shares) 250,000
Additional Paid in Capital 9,305,226
Deferred Consulting Fees (24,000)
Accumulated Deficit (10,378,511)
---------------------
Total Shareholders Equity 678,373
---------------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 1,058,652
=====================
Net Asset Value Per Share (NAV) $ 0.00
=====================
The accompanying notes are an integral part of these financial statements.
2
AVENTURA HOLDINGS, INC. F/K/A SUN NETWORK GROUP, INC.
STATEMENTS OF OPERATIONS
Post BDC Election Pre BDC Election For The Nine
For The Three Months Ended From March 16 From January 1 Months Ended
September 30 Thru September 30 Thru March 15 September 30
---------------------------- --------------------------------------- -------------
2005 2004 2005 2005 2004
------------- ------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
OPERATING INCOME:
------------------
REVENUES:
Operating Revenues $ - $ 1,875 $ - $ 5,000 $ 6,090
EXPENSES:
Operating Expenses
Compensation - 1,410,500 949,500 - 1,542,708
Consulting 24,000 235,619 664,000 149,000 1,632,088
Debenture Penalties - - - - 30,000
Debt issuance cost
Amortization - 8,925 - - 39,850
Investor Relations 12,745 - 30,810 - -
Professional Fees (3,773) (139) 50,249 2,729 23,478
General and
Administrative
Expenses 12,586 17,566 31,528 34,960 110,445
------------- ------------ ------------ ------------ ------------
Total Operating
Expenses 45,558 1,672,471 1,726,087 186,689 3,378,569
------------- ------------ ------------ ------------ ------------
Net Operating Loss (45,558) (1,670,596) (1,726,087) (181,689) (3,372,479)
OTHER INCOME AND (EXPENSES):
Finance Cost (27,438) (27,438)
Settlement Expense (144,527)
Interest Expense (19,775) (45,934)
Recovery of Bad Debt 4,724 2,849 14,168
------------- ------------ ------------ ------------ ------------
Total Other Revenues and
(Expenses) (27,438) (15,051) (27,438) 2,849 (176,293)
NET LOSS. $ (72,996) $(1,685,647) (1,753,525) (178,840) (3,548,772)
============= ============ ============= ============ ============
LOSS PER SHARE:
Net Loss Per
Common Share -
Basic and Diluted (0.00) (0.01) (0.00) (0.00) (0.03)
============= ============ ============= ============ ============
Weighted Common
Shares Outstanding -
Basic and Diluted 1,525,657,813 183,838,791 1,055,155,300 323,657,813 131,029,460
============== ============ ============== ============ ============
The accompanying notes are an integral part of these financial statements
3
AVENTURA HOLDINGS, INC. F/K/A SUN NETWORK GROUP, INC.
STATEMENTS OF CASH FLOWS
For the Nine Months Ended
September 30
------------------------------
2005 2004
-------------- --------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net Loss $ (1,932,365) $ (3,548,772)
Adjustments to reconcile net loss to net
cash used in operating activities:
Amortization of deferred finance costs 27,438 39,850
Amortization of debt discounts to interest expense - 3,062
Amortization of consulting expense 203,025 -
Stock based consulting expense 1,592,627 3,096,871
Settlement expense - 144,527
(Increase) decrease in:
Prepaids (11,808) 34,000
Increase (decrease) in:
Accounts payable (5,834) (3,311)
Accrued interest - 38,547
Accrued penalties - 30,000
Accrued compensation, related party - 54,300
Minority interest (38,127) -
-------------- --------------
Net cash used in operating activities (165,044) (110,926)
-------------- --------------
Cash flows from investing activities:
Investment in portfolio companies (299,925) -
Payment of Company expenses by portfolio company 88,617 -
-------------- --------------
Net cash used in investing activities (211,308) -
-------------- --------------
Cash flows from financing activities:
Proceeds from loans payable 56,500 824,000
Liability payable with common stock 315,000 -
Deferred finance cost (15,000) -
Debt issuance costs - (71,400)
Payments on convertible debenture - (750,000)
- 7,000
-------------- --------------
Net cash provided by financing activities 356,500 9,600
-------------- --------------
Net decrease in cash (19,852) (101,326)
Cash at beginning of year 19,852 101,879
-------------- --------------
Cash at end of period $ - $ 553
============== ==============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ - $ -
============== ==============
Income Taxes $ - $ -
============== ==============
Non-Cash investing and financing activities:
Common stock issued for debentures payable $ - $ 62,188
============== ==============
Debt issuance costs deferred in connection with
convertible debentures $ - $ 49,000
============== ==============
Common stock issued for accrued compensation $ - $ 242,792
============== ==============
Investment in portfolio company - stock based $ (800,724) $ -
============== ==============
Deferred Finance Costs $ (47,250) $ -
============== ==============
Stockholder Payable settled with Common Stock $ (103,500) $ -
============== ==============
Deferred Consulting Fees $ (80,000) $ -
============== ==============
The accompanying notes are an integral part of these financial statements.
4
AVENTURA HOLDINGS, INC. F/K/A SUN NETWORK GROUP, INC.
STATEMENT OF CHANGES IN NET ASSETS
SEPTEMBER 30, 2005
From March 16
Through
September 30, 2005
------------------
(unaudited)
Decrease in net assets from operations:
Net operating loss $ (1,753,525)
------------------
Net decrease in net assets from operations (1,753,525)
Common stock transactions 2,514,724
------------------
Total increase in net assets 761,199
Net Assets:
Beginning of Period (82,826)
------------------
End of Period 678,373
==================
The accompanying notes are an integral part of these financial statements
5
.AVENTURA HOLDINGS, INC. F/K/A SUN NETWORK GROUP, INC.
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2005
Title of Percentage of
Securities Held Class Held on
Portfolio Primary By The a Fully Diluted Fair
Company Industry Company Basis (4) Cost Value
----------------------------- -------------------- ------------------ ------------------ ------------ -----------
Investments:
Majority Owned Affiliate (1):
Radio TV Network, Inc. Media Common Stock 100% $ - $ -
Aventura Networks, LLC Telecommunications Member Units 100% 912,032 $ 912,032
Total Majority Owned Affiliate
Investments $ 912,032 $ 912,032
============ ============
Minority Owned Other Controlled
Affiliate (2):
Radio X Network, Inc. Media Common Stock 50% $ 110,000 -
------------ ------------
Total Minority Owned Other
Controlled Affiliate Investments $ 110,000 -
============ ============
Minority Owned Other
Non-Controlled Affiliate (3):
VoIPBlue.com, Inc. Telecommunications Common Stock 10% 100,000 100,000
------------ ------------
Total Minority Owned Other Non-Controlled
Affiliate Investments $ 100,000 $ 100,000
============ ============
(1) Majority owned investments are generally defined under the Investment Company Act of 1940 as companies in which
we own more than 50%
of the voting securities of the company. If we own 100% of a Company, it is presented as majority owned.
(2) Minority owned investments are generally defined under the Investment Company Act of 1940 as companies in which
we own more than 25%
but less than a majority of the voting securities of the company.
(3) Other affiliate investments are generally defined under the Investment Company Act of 1940 as companies in which
we own more than 5%
up to 25% of the voting securities of the company.
(4) All common stock and member unit investments are in private companies, non-income producing and restricted at
the relevant period end.
The accompanying notes are an integral part of these financial statements
6
AVENTURA HOLDINGS, INC. F/K/A SUN NETWORK GROUP, INC.
SCHEDULE OF FINANCIAL HIGHLIGHTS
FROM MARCH 16 THROUGH SEPTEMBER 30, 2005
(unaudited)
Per Share Data:
Net asset value at beginning of period (a) $ (0.00)
Net operating income (losses) before investment gains and losses (b) (0.00)
Net realized gains (losses) on investments (b) -
Net unrealized gains (losses) on investments (b) -
---------------
Net increase (decrease) in shareholders' equity from net income (loss) (0.00)
---------------
Dividends declared -
---------------
Net increase (decrease) in stockholders equity resulting from dividends -
---------------
Issuance of shares 0.00
---------------
Net increase (decrease) in stockholders equity relating to share issuances 0.00
---------------
Net asset value at end of period (a) $ 0.00
===============
Per share market value at end of period $ 0.00
Total return (c) 719.03%
Shares outstanding at end of period 1,525,657,813
Ratio/Supplemental Data:
Net assets at end of period $ 678,373
Ratio of operating expenses to average net assets (annualized) 254.45%
Ratio of net operating income to average net assets (annualized) -168.51%
(a) Based on total shares outstanding.
(b) Based on weighted average shares outstanding.
(c )Total return equals the change in the ending net asset value over the beginning of period net asset
value divided by the beginning net asset value.
The accompanying notes are an integral part of these financial statements
7
AVENTURA HOLDINGS, INC. F/K/A SUN NETWORK GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - NATURE OF ORGANIZATION
On March 15, 2005, the Company filed form N-54A with the SEC Securities and
Exchange Commission to become a Business Development Company ("BDC") pursuant to
Section 54 of the Investment Company Act of 1940 ("the "1940 Act"). As a result
of its new status, the Company will now operate as an investment holding company
and plans to announce a number of acquisitions and investments, each of which
will be designed to build an investment portfolio and enhance the Company's
shareholder value. It is the Company's intention to provide capital and
advisory services for management buyouts, recapitalizations, and the growth and
capital needs of emerging growth companies.
As a BDC, the Company will be structured in a manner more consistent with its
current business strategy. As a result, the Company is positioned to raise
capital for acquisitions and investments in a more efficient manner and to
develop and expand its business interests. The Company is currently
concentrating its investment strategies in the telephony sector based upon
experience and exposure to opportunities but plans to expand its potential
acquisitions and investments to other lines of business and industry, as the
acquisitions and investments, in total, will enhance value to stockholders
through capital appreciation and payments of dividends to the Company by its
investee companies.
BDC regulation was created in 1980 by Congress to encourage the flow of public
equity capital to small businesses in the United States. BDC's, like all mutual
funds and closed-end funds, are regulated under the 1940 Act. BDC's report to
stockholders like traditional operating companies and file regular quarterly and
annual reports with the Securities and Exchange Commission. BDC's are required
to make available significant managerial assistance to their portfolio
companies.
The Company filed for a change in name with the State of Florida on June 3, 2005
from Sun Network Group, Inc. to Aventura VoIP Networks, Inc. and on October 19,
2005 from Aventura VoIP Networks, Inc. to Aventura Holdings, Inc. The Company
financial statements are presented as Aventura Holdings, Inc. The NASD accepted
the Aventura Holdings, Inc. name change, assigned 053563 10 2 as our new CUSIP
and AVNT as our new trading symbol.
8
NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A - Basis of Presentation
-----------------------------
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). The accompanying financial statements for the interim
periods are unaudited and reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the financial position and operating results for the
periods presented. These financial statements should be read in conjunction
with the financial statements of Aventura Holdings, Inc. f/k/a Sun Network
Group, Inc. for the years ended December 31, 2004 and 2003 and notes thereto
contained in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 2004 as filed with the SEC . The results of operations for the nine
months ended September 30, 2005 are not necessarily indicative of the results
for the full fiscal year ending December 31, 2005.
The accompanying unaudited financial statements are prepared in accordance with
the guidance in the AICPA's Audit and Accounting Guide, "Audits of Investment
Companies" since the Company elected to be regulated as a Business Development
Company effective March 15, 2005.
In accordance with Article 6 of Regulation S-X under the Securities Act of 1933
and Securities Exchange Act of 1934, the Company does not consolidate portfolio
company investments, including those in which it has a controlling interest.
Therefore, effective March 16, 2005, the Company no longer consolidates Radio X
Network and Radio TV Network.
The results of operations for 2005 are divided into three periods. The period
from January 1, to March 15, 2005 represents the period prior to BDC election
and the periods from March 16, 2005 to September 30, 2005 and July 1, 2005 to
September 30, 2005 representing the periods the Company operated as a BDC.
Accounting principles used in the preparation of the financial statements
beginning March 16, 2005 are different from those of prior periods and,
therefore, the financial position and results of operations of these periods are
not directly comparable. The Company utilizes the cumulative effect method to
reflect the effects of conversion to a BDC. There was no cumulative effect
adjustment from the conversion to a BDC in March 2005.
B - Summary of Significant Accounting Policies
----------------------------------------------------
Investments
Investments in securities of unaffiliated issuers represent holdings of less
than 5% of the issuer's voting common stock. Investments in and advances to
affiliates are presented as (i) majority-owned, if holdings, directly or
indirectly, represent over 50% of the issuer's voting common stock, (ii)
minority-owned other controlled affiliates if the holdings, directly or
indirectly, represent over 25% and up to 50% of the issuer's voting common stock
and (iii) minority-owned other non-controlled affiliates if the holdings,
directly or indirectly, represent 5% to 25% of the issuer's voting common stock.
Investments - other than securities represent all investments other than in
securities of the issuer.
Investments in securities or other than securities of privately held entities
are initially recorded at their original cost as of the date the Company
obtained an enforceable right to demand the securities or other investment
purchased and incurred an enforceable obligation to pay the investment price.
For financial statement purposes, investments are recorded at their fair value.
Currently, readily determinable fair values do not exist for our investments and
the fair value of these investments is determined in good faith by the Company's
Board of Directors pursuant to a valuation policy and consistent valuation
process. Due to the inherent uncertainty of these valuations, the estimates may
differ significantly from the values that would have been used had a ready
market for the investments existed and the differences may be material. Our
valuation methodology includes the examination of among other things, the
underlying portfolio company performance, financial condition and market
changing events that impact valuation.
Realized gains (losses) from the sale of investments and unrealized gains
(losses) from the valuation of investments are reflected in operations during
the period incurred.
Revenue Recognition
Prior to its BDC election in March, 2005 the Company recognized revenues in
accordance with the guidance in the Securities and Exchange Commission Staff
Accounting Bulletin 104. Revenue was recognized when persuasive evidence of an
arrangement exists, as services are provided and when collection of the fixed or
determinable selling price is reasonable assured.
Revenues from the current and future activities as a business development
company which may include investment income such as interest income and
dividends, and realized or unrealized gains and losses on investments will be
recognized in accordance with the AICPA's Audit and Accounting Guide, "Audits of
Investment Companies."
9
Net Loss Per Common Share
Basic net income (loss) per common share (Basic EPS) excludes dilution and is
computed by dividing net income (loss) available to common stockholder by the
weighted average number of common shares outstanding for the period. Diluted
net income per share (Diluted EPS) reflects the potential dilution that could
occur if stock options or other contracts to issue common stock were exercised
or converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company. For 2005, diluted loss per share is
the same as basic loss per share since the effect of all common stock
equivalents was antidilutive due to the net loss. At September 30, 2005 there
were one hundred twenty five million shares issued that were considered to be
dilutive securities that may dilute future earnings per share (Note 5J and 5L)
NOTE 3 - INVESTMENTS
At September 30, 2005, the Company held a 50% investment in Radio X Network.
The original cost basis was $110,000 and the fair market value at September 30,
2005 was zero.
At September 30, 2005 the Company held a 100% investment in Radio TV Network,
Inc. The original cost basis was $0 and the fair market value at September 30,
2005 was zero.
On June 3, 2005 the Company purchased 10 units of VoIPBlue.com, Inc. pursuant to
a private offering memorandum of April 22, 2005. Each Unit consists of (i) a
three (3) year promissory note (the "Note") in the principal amount of $10,000
bearing interest (interest payable semi-annually) at the rate of 8% per annum
due and payable on the earliest of (a) the closing of any transaction in which
any class ofVoIPBlue.com, Inc.'s securities are exchanged for securities of an
issuer that is required to file reports pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (the "Act"), as amended, or (b) three (3) years
from the date of the Note, and (ii) 10,000 Class "A" Warrants (the "Class A
Warrants"), $.01 par value. Each Class "A" Warrant entitles the registered
holder (the "Holder") thereof to purchase one (1) share of the Company's Common
Stock, $.001 par value (the "Common Stock"), at an exercise price of $1.00 per
underlying share for three (3) years commencing on the date of closing. The
Class "A" Warrants are subject to adjustment in certain events, at any time
during the period commencing on the date hereof. The Class "A" Warrants will be
exercisable until the close of business on the day immediately preceding the
date fixed for redemption. The Warrants were immediately exercised and the note
was surrendered subsequent to the purchase. The fair market value at September
30, 2005 was $100,000.
On June 7, 2005 the Company issued 880,000,000 shares of its previously
un-issued common stock to Aventura Holdings, Inc. in exchange for 100% interest
in Aventura Networks, LLC. The shares were valued at a discounted price of
$0.00091 per share and are reflected on the financial statements at $800,724.
In addition the company provided $299,925 in advances to Aventura Networks, LLC
and Aventura Networks, LLC paid obligations of $59,547 for the Company and made
an investment on behalf of the Company in VoIPBlue.com, Inc. in the amount of
$100,000. The net amount Aventura Networks, LLC owes the Company at September
30, 2005 is $111,308.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
A - Anti-Dilution and Additional Share Issuance Provisions:
------------------------------------------------------------------
The stock purchase agreement of May 27, 2005 and the Aventura Networks, LLC
Interest Purchase Agreement closed on June 7, 2005 are both subject to
anti-dilution or additional share issuance provisions which may require the
issuance of a significant quantity of additional common shares for no additional
consideration. The issuance of additional shares could significantly dilute
current shareholders (see note 5).
10
B - Compliance with the BDC Rules and Regulations under the Investment Company
--------------------------------------------------------------------------------
Act of 1940:
--------------
In March 2005, we filed an election to become subject to Sections 55 through 65
of the Investment Company Act of 1940, such that we could commence conducting
our business activities as a BDC. In April 2005, we determined to commence an
offering of shares of our common stock as a BDC in accordance with the exemption
from the registration requirements of the Securities Act of 1933 as provided by
Regulation E. In connection with that prospective offer, we filed a Form 1-E
with the U.S. Securities and Exchange Commission (SEC). In June 2005 we closed
on a $315,000 common stock sale under Regulation E.
In April 2005 and subsequently we received a series of comment letters from the
SEC regarding various compliance issues with regard to our status as a Business
Development Company. As a result, we currently understand that we may be out of
compliance with certain of the rules and regulations governing the business and
affairs, financial status, and financial reporting items required of BDCs. We
are making every effort to comply as soon as is practicable with the relevant
sections of the 1940 Act and are working with our counsel to accomplish that
compliance. While we are seeking to comply with the 1940 Act, we cannot
provide any specific time frame for full compliance. We cannot predict with
certainty what, if any, regulatory or financial consequences may result from the
foregoing. The above matter may result in certain contingent liabilities to the
Company as a result of potential actions by the SEC or others against the
Company. Such contingent liabilities could not be estimated by management as of
the date of this Report. The Company may have granted and issued common stock
for consulting services after its election as a BDC in March 2005, which may
have violated certain sections of the 1940 Act. Management is considering
actions to remedy such potential violations. As the result of such actions, the
Company may incur liabilities to the consultants which management could not
estimate as of the date of this report.
The outcome of the above matters could have a significant impact on our ability
to continue as a going concern.
C - Violation Of Stock Purchase Agreement:
------------------------------------------------
The Company was in violation of provisions of the Stock Purchase Agreement
relating to the timeliness of the issuance of the June 30, 2005 quarterly report
(Form 10-Q). Dutchess agreed to waive penalties as the delay was related to
actions of past management and outside of the control of the Company.
D - Other Legal Matters:
----------------------------
From time to time we may become subject to proceedings, lawsuits and other
claims in the ordinary course of business including proceedings related to
environmental and other matters. Such matters are subject to many
uncertainties, and outcomes are not predictable with assurance.
NOTE 5 - STOCKHOLDERS EQUITY AND LIABILITY PAYABLE WITH COMMON STOCK
Common Stock Transactions
---------------------------
A. On May 13, 2005 the Company granted 150,000,000 shares of its previously
un-issued common stock to RTV Media Corp. an affiliate of outgoing officer and
director T. Joseph Coleman in exchange for settlement of loans totaling
$103,500. The shares were valued at $0.007 per share or $1,050,000 on May 13,
2005. The difference between the loan and value of the securities was recorded
as $946,500 in non-cash compensation. As a BDC, the Company is not permitted to
issue stock for services and is currently attempting to determine whether this
transaction is a violation of Section 23a of the Investment Company Act of 1940:
in the event that this transaction is not permitted, the Company intends to seek
recovery of the shares improperly issued and arrange alternate compensation to
this recipient, if warranted.
B. On May 26, 2005 the Company issued 20,000,000 shares of its previously
un-issued common stock to Big Apple Consulting USA, Inc. pursuant to a June 7,
2005 Consulting Agreement and recorded the issuance as non-cash compensation
valued at $0.004 per share or $80,000 of which $32,000 was expensed and $48,000
was deferred as of September 30, 2005. The term of the agreement is three
months. 12,000,000 shares were placed with an escrow agent for services in the
second and third months, 8,000,000 shares were delivered directly to Big Apple
Consulting USA, Inc. Big Apple Consulting USA, Inc. was also engaged by RTV
Media Corp. As a BDC, the Company is not permitted to issue stock for services
and is currently attempting to determine whether this transaction is a violation
of Section 23a of the Investment Company Act of 1940: in the event that this
transaction is not permitted, the Company intends to seek recovery of the shares
improperly issued and arrange alternate compensation to this recipient, if
warranted.
C. On May 26, 2005 the Company issued 30,000,000 shares of its previously
un-issued common stock to the Coleman Family Trust and recorded the issuance as
non-cash compensation valued at $0.004 per share or $120,000 which was expensed
immediately. The Coleman Family Trust is believed to be owned and / or
controlled by outgoing director T. Joseph Coleman. As a BDC, the Company is not
permitted to issue stock for services and is currently attempting to determine
whether this transaction is a violation of Section 23a of the Investment Company
Act of 1940: in the event that this transaction is not permitted, the Company
intends to seek recovery of the shares improperly issued and arrange alternate
compensation to this recipient, if warranted.
11
D. On May 26, 2005 the Company issued 32,000,000 shares of its previously
un-issued common stock to Vega 7 Entertainment and recorded the issuance as
non-cash compensation valued at $0.004 per share or $128,000 which was expensed
immediately. Vega 7 Entertainment is believed to be owned and / or controlled
by outgoing director T. Joseph Coleman. As a BDC, the Company is not permitted
to issue stock for services and is currently attempting to determine whether
this transaction is a violation of Section 23a of the Investment Company Act of
1940: in the event that this transaction is not permitted, the Company intends
to seek recovery of the shares improperly issued and arrange alternate
compensation to this recipient, if warranted.
E. On May 26, 2005 the Company issued 10,000,000 shares of its previously
un-issued common stock to Stephen Kern and recorded the issuance as non-cash
compensation valued at $0.004 per share or $40,000 which was expensed
immediately. Stephen Kern was a consultant to the Company providing investor
relations. As a BDC, the Company is not permitted to issue stock for services
and is currently attempting to determine whether this transaction is a violation
of Section 23a of the Investment Company Act of 1940: in the event that this
transaction is not permitted, the Company intends to seek recovery of the shares
improperly issued and arrange alternate compensation to this recipient, if
warranted.
F. On May 26, 2005 the Company issued 15,000,000 shares of its previously
un-issued common stock to Peter Klamka and recorded the issuance as non-cash
compensation valued at $0.004 per share or $60,000 which was expensed
immediately. Peter Klamka was an outgoing director of the Company. As a BDC,
the Company is not permitted to issue stock for services and is currently
attempting to determine whether this transaction is a violation of Section 23a
of the Investment Company Act of 1940: in the event that this transaction is not
permitted, the Company intends to seek recovery of the shares improperly issued
and arrange alternate compensation to this recipient, if warranted.
G. On May 26, 2005 the Company issued 20,000,000 shares of its previously
un-issued common stock to Mark Rolland and recorded the issuance as non-cash
compensation valued at $0.004 per share or $80,000 which was expensed
immediately. Mark Rolland was a consultant to the Company. As a BDC, the
Company is not permitted to issue stock for services and is currently attempting
to determine whether this transaction is a violation of Section 23a of the
Investment Company Act of 1940: in the event that this transaction is not
permitted, the Company intends to seek recovery of the shares improperly issued
and arrange alternate compensation to this recipient, if warranted.
H. On May 26, 2005 the Company issued 35,000,000 shares of its previously
un-issued common stock to Wilshire Capital LTD. and recorded the issuance as
non-cash compensation valued at $0.004 per share or $140,000 which was expensed
immediately. Wilshire Capital LTD. is believed to be owned and / or controlled
by outgoing director T. Joseph Coleman. As a BDC, the Company is not permitted
to issue stock for services and is currently attempting to determine whether
this transaction is a violation of Section 23a of the Investment Company Act of
1940: in the event that this transaction is not permitted, the Company intends
to seek recovery of the shares improperly issued and arrange alternate
compensation to this recipient, if warranted.
I. On May 26, 2005 the Company issued 10,000,000 shares of its previously
un-issued common stock to RTV Media Corp. an affiliate of outgoing officer and
director T. Joseph Coleman and recorded the issuance as non-cash compensation
valued at $0.004 per share or $40,000 which was expensed immediately. As a BDC,
the Company is not permitted to issue stock for services and is currently
attempting to determine whether this transaction is a violation of Section 23a
of the Investment Company Act of 1940: in the event that this transaction is not
permitted, the Company intends to seek recovery of the shares improperly issued
and arrange alternate compensation to this recipient, if warranted.
J. On May 27, 2005 the Company entered into a Stock Purchase Agreement with
Dutchess Private Equities Fund II, L.P. (Dutchess) to sell up to five million
dollars ($5,000,000) of the Company's common stock over a twenty four (24) month
period in accordance with the offering circular under Regulation E (file number
095-00254). The terms of the agreement call for the Company to submit a draw
request to Dutchess then transfer a number of shares to Dutchess based upon the
draw amount and current market value of the Company's shares. Dutchess is then
entitled to sell the shares at market to recoup the draw amount plus a fifteen
percent (15%) profit. If Dutchess has shares remaining after recouping the draw
amount and fifteen percent (15%) profit, Dutchess is obligated to return the
remaining shares to the Company. If Dutchess sells all of the transferred
shares before recouping the draw amount and fifteen percent (15%) profit the
Company is obligated to issue additional shares to Dutchess until the draw
amount and fifteen percent (15%) profit are received by Dutchess. There is an
anti-dilution paragraph (8.4) in the June 7, 2005 LLC Interest Purchase
Agreement which entitles Aventura Holdings, Inc. to additional shares in the
event additional shares are issued to Dutchess relating to the initial draw of
this Stock Purchase Agreement. Aventura Holdings, Inc. is entitled to 5 times
the additional shares Dutchess receives in the event additional shares are
issued pursuant to the initial draw. The May 27, 2005 Stock Purchase Agreement
also grants Dutchess right of first refusal for the issuance of new Company
securities and penalties for non-compliance with the terms of the agreement.
The Company was in violation of provisions of the Stock Purchase Agreement
relating to the timeliness of the filing of the June 30, 2005 quarterly report
(Form 10-Q). Dutchess agreed to waive penalties as the delay was related to
actions of past management and outside of the control of the Company. The
initial draw occurred on May 27, 2005 in the amount of three hundred fifteen
thousand dollars ($315,000). The Company transferred seventy five million
(75,000,000) shares to Dutchess. On June 3, 2005 the Company's portfolio
investee Aventura Networks, LLC received two hundred ninety nine thousand nine
hundred twenty five dollars ($299,925) directly from Dutchess after deduction of
fifteen thousand dollars ($15,000) for legal fees and seventy five dollars ($75)
in bank fees from the initial draw. The fifteen thousand dollars ($15,000) is
treated as a direct financing cost asset and amortized to operations based on
the ratio of Dutchess proceeds from sale of Company shares issued to them
compared to the total liability payable with common stock. On September 28,
2005 Dutchess received an additional fifty million (50,000,000) shares and on
November 3, 2005 an additional fifty million (50,000,000) shares to satisfy
obligations of the initial draw amount and the Company's Board approved their
issuance. The stock purchase transaction is recorded as a liability payable
with common stock due to the criteria of FASB Statement 150 (Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity (Issued 5/03)) at the fair value of the total guaranteed return of
$362,250. The $47,250 difference between the $362,250 and the $315,000
investment is treated as a deferred financing cost. As of September 30, 2005
$27,438 has been amortized as a cost of financing. All shares issued to
Dutchess are not considered issued or outstanding until a final settlement date
is achieved. At September 30, 2005 however the total shares of seventy five
million and fifty million (see below) shares issued to Dutchess are considered
dilutive for purposes of the computation of diluted earnings per share (See Note
2(B)).
12
K. On June 7, 2005 the Company issued 880,000,000 shares of its previously
un-issued common stock to Aventura Holdings, Inc. in exchange for 100% interest
in Aventura Networks, LLC. The shares were valued at $0.00091 per share based
on a discounted quoted trading price. The investment is reflected on the
financial statements at $800,724.
L. On September 28, 2005 the Company issued 50,000,000 shares of its
previously un-issued common stock to Dutchess Private Equities Fund II LP
(Dutchess) pursuant to a $5,000,000 Stock Purchase Agreement. The Company was
obligated to issue these shares to Dutchess as additional re-payment of the May
27, 2005 $315,000 advance. As of September 30, 2005 Dutchess sold 60,390,004
shares for $159,667 (See Note 4A).
M. On September 28, 2005 250,000,000 shares became issuable under the
anti-dilution provision of the Aventura Networks, LLC acquisition agreement (See
Notes 3, 5J and 5K).
NOTE 6 - GOING CONCERN
As reflected in the accompanying financial statements, the Company had an
accumulated deficit of $10,378,511, net losses of $1,932,365 for the nine months
ended September 30, 2005 and working capital deficit of $6,221 at September 30,
2005, and cash used in operations in for the nine months ended September 30,
2005 of $165,044.
The financial statements do not include any adjustments that might be necessary
if the Company is unable to continue as a going concern. Management believes
that the actions presently being taken to further implement its business plan,
including seeking portfolio investments provide opportunity for the Company to
continue as a going concern.
Because the Company is regulated as a business development company, the Company
believes that is has access to sufficient cash and capital resources to operate
and grow its business for the next 12 months. Specifically, the Company intends
to sell common stock permitted under the exemption from registration offered by
Regulation E of the Securities Act to meet its financial needs in addition to
its investment goals and opportunities.
NOTE 7 - SUBSEQUENT EVENTS
On October 17, 2005 the Company merged with Aventura Holdings, Inc. Aventura
Holdings, Inc. sole net assets were 880,000,000 shares of the Company stock and
anti-dilution rights acquired in the LLC purchase agreement between the Company
and Aventura Networks, LLC. Immediately prior to the merger, Aventura Holdings,
Inc. transferred its net assets to its shareholder. Subsequent to the merger
the Company adopted the name Aventura Holdings, Inc and the former company was
dissolved.
On November 3, 2005 the Company issued 50,000,000 shares of its previously
un-issued common stock to Dutchess Private Equities Fund II LP (Dutchess)
pursuant to a $5,000,000 Stock Purchase Agreement. The Company was obligated to
issue these shares to Dutchess as additional re-payment of the May 27, 2005
$315,000 advance (See Note 4A).
Item 2. Management's Discussion and Analysis or Plan of Operations
This following information specifies certain forward-looking statements of
management of the company. Forward-looking statements are statements that
estimate the happening of future events are not based on historical fact.
Forward-looking statements may be identified by the use of forward-looking
terminology, such as "may", "shall", "could", "expect", "estimate",
"anticipate", "predict", "probable", "possible", "should", "continue", or
similar terms, variations of those terms or the negative of those terms. The
forward-looking statements specified in the following information have been
compiled by our management on the basis of assumptions made by management and
considered by management to be reasonable. Our future operating results,
however, are impossible to predict and no representation, guaranty, or warranty
is to be inferred from those forward-looking statements.
The assumptions used for purposes of the forward-looking statements specified in
the following information represent estimates of future events and are subject
to uncertainty as to possible changes in economic, legislative, industry, and
other circumstances. As a result, the identification and interpretation of data
and other information and their use in developing and selecting assumptions from
and among reasonable alternatives require the exercise of judgment. To the
extent that the assumed events do not occur, the outcome may vary substantially
from anticipated or projected results, and, accordingly, no opinion is expressed
on the achievability of those forward-looking statements. No assurance can be
given that any of the assumptions relating to the forward-looking statements
specified in the following information are accurate, and we assume no obligation
to update any such forward-looking statements.
13
OVERVIEW
RISK FACTORS
Investing in our common stock involves a high degree of risk. You should
consider carefully the risks described below and all other information contained
in this Report, including our financial statements and the related notes and the
schedules and exhibits to this Report.
Risks Related to Our Business and Financial Results
We have a limited operating history as a business development company which may
impair your ability to assess our prospects.
Prior to March, 2005, we had not operated as a business development company
under the Investment Company Act of 1940. As a result, we have limited operating
results under these regulatory frameworks that can demonstrate to you either
their effect on our business or our ability to manage our business under these
frameworks. In addition, prior to March, 2005, our management had no prior
experience managing a business development company. We cannot assure you that we
will be able to operate successfully as a business development company.
Because there is generally no established market for which to value our
investments, our board of directors' determination of the value of our
investments may differ materially from the values that a ready market or third
party would attribute to these investments.
Under the 1940 Act, we are required to carry our portfolio investments at market
value or, if there is no readily available market value, at fair value as
determined by our board. We are required by the 1940 Act to specifically value
each individual investment and to record any unrealized depreciation for any
asset that we believe has decreased in value. Because there is typically no
public market for the equity securities of the companies in which we invest, our
board will determine the fair value of these equity securities on a quarterly
basis pursuant to our valuation policy. Because of the inherent uncertainty of
determining the fair value of investments that do not have a readily available
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.
We may make loans to and invest in primarily small- and medium-sized privately
owned companies, which may default on their loans, thereby reducing or
eliminating the return on our investments.
Our portfolio primarily consists of securities issued by small and medium-sized
privately owned businesses. Compared to larger publicly owned firms, these
companies may be more vulnerable to economic downturns, may have more limited
access to capital and higher funding costs, may have a weaker financial
position, and may need more capital to expand or compete. These businesses also
may experience substantial variations in operating results. They may face
intense competition, including from companies with greater financial, technical
and marketing resources. Typically, they also depend for their success on the
management talents and efforts of an individual or a small group of persons. The
death, disability or resignation of any of their key employees could harm their
financial condition. Furthermore, some of these companies do business in
regulated industries and could be affected by changes in government regulation.
Accordingly, these factors could impair their cash flow or result in other
events, such as bankruptcy, which could limit their ability to repay their
obligations to us, and may adversely affect the return on, or the recovery of,
our investment in these businesses. Deterioration in a borrower's financial
condition and prospects may be accompanied by deterioration in any collateral
for any loan we may make.
Some of these companies may be unable to obtain financing from public capital
markets or from traditional credit sources, such as commercial banks.
Accordingly, advances made to these types of customers may entail a
higher risk of loss than advances made to customers who are able to utilize
traditional credit sources. These conditions may also make it difficult for us
to obtain repayment of any loans.
14
Furthermore, there is generally no publicly available information about such
companies and we must rely on the diligence of our employees to obtain
information in connection with our investment decisions. If we are unable to
uncover all material information about these companies, we may not make a fully
informed investment decision and we may lose money on our investments.
If the industry sectors in which our portfolio is currently concentrated
experience adverse economic or business conditions, our operating results may be
negatively impacted.
Currently our investment base is primarily in the communications, information
services, media, technology, software and business services industry sectors.
These sectors are characterized by high margins, high growth rates,
consolidation and product and market extension opportunities. Value often is
vested in intangible assets and intellectual property. These customers can
experience adverse business conditions or risks related to their industries.
Accordingly, if our customers suffer (as some customers currently are) due to
these adverse business conditions or risks or due to economic slowdowns or
downturns in these industry sectors, we will be more vulnerable to losses in our
portfolio and our operating results may be negatively impacted.
Our financial results could be negatively affected if Aventura Networks, LLC
fails to perform as expected.
At September 30, 2005, our largest portfolio investment was Aventura Networks,
LLC ("LLC"), which totaled $912,032 at value, or 90.12% of the fair value of our
investments. Our financial results could be negatively affected if this
portfolio company fails to perform as expected.
Economic downturns or recessions could impair our investment portfolio.
Our investments may be susceptible to economic downturns or recessions and may
be unable to perform as expected. Therefore, our non-performing portfolio
company investment values are likely to increase and the value of our total
portfolio is likely to decrease during these periods. Economic downturns or
recessions could lead to financial losses in our portfolio and a decrease in net
income. Unfavorable economic conditions could also lead to a decrease in
revenues and assets.
An economic downturn could disproportionately impact the industry sectors in
which we concentrate causing us to be more vulnerable to losses in our portfolio
and experience diminished demand for capital in these industry sectors and,
consequently, our operating results may be negatively impacted.
Unfavorable economic conditions also could increase our funding costs, limit our
access to the capital markets or result in a decision by lenders not to extend
credit to us. These events could prevent us from increasing our investments and
harm our operating results.
Indebtedness and servicing our indebtedness could reduce funds available to grow
our business or make new investments.
At September 30, 2005, the Company had no debt. However, if the Company elects
to borrow, also known as leverage, this may magnify the potential for gain or
loss on amounts invested and, therefore, increase the risks associated with
investing in our securities. Leverage is generally considered a speculative
investment technique. If the value of our consolidated assets increases, then
leveraging would cause the net asset value attributable to our common stock to
increase more than it otherwise would have had we not utilized leverage.
Conversely, if the value of our consolidated assets decreases, leveraging would
cause net asset value attributable to our common stock to decline more than it
otherwise would have had we not utilized leverage. Similarly, any increase in
our consolidated revenue in excess of consolidated interest expense on our
borrowed funds would cause our net income to increase more than it would without
the use of leverage. Any decrease in our consolidated revenue would cause net
income to decline more than it would have had we not borrowed funds and could
negatively affect our ability to make distributions on our common stock.
As a business development company, we generally are required to meet a coverage
ratio of total assets to total borrowings and other senior securities, which
include all of our borrowings and any preferred stock we may issue in the
future, of at least 200%. If this ratio declines below 200%, we may not be able
to incur additional debt and may need to sell a portion of our investments to
repay some debt when it is disadvantageous to do so, and we may not be able to
make distributions.
You may not receive distributions.
15
We intend to make distributions on a quarterly basis to our stockholders. We may
not be able to achieve operating results that will allow us to make
distributions at a specific level or to increase the amount of these
distributions from time to time. In addition, due to the asset coverage test
applicable to us as a business development company, we may be limited in our
ability to make distributions. See "Regulation as a Business Development
Company". Also, restrictions and provisions in any new debt facilities may limit
our ability to make distributions. If we do not distribute a certain percentage
of our income annually, we will suffer adverse tax consequences, including
possible loss of our status as a business development company. We cannot assure
you that you will receive any distributions or distributions at a particular
level.
We may have difficulty paying our required distributions if we recognize income
before or without receiving cash representing such income.
In accordance with generally accepted accounting principles and tax regulations,
we include in income certain amounts that we have not yet received in cash.
Since we may recognize income before or without receiving cash representing such
income, we may have difficulty distributing said income.
If we fail to manage our growth, our financial results could be adversely
affected.
Our growth can place significant strain on our management systems and resources.
We must continue to refine and expand our marketing capabilities, our management
of the investment process, our access to financing resources and our technology.
As we grow, we must continue to hire, train, supervise and manage new employees.
We may not develop sufficient lending and administrative personnel and
management and operating systems to manage our expansion effectively. If we are
unable to manage our growth, our operations could be adversely affected and our
financial results could be adversely affected.
If we need to sell any of our investments, we may not be able to do so at a
favorable price and, as a result, we may suffer losses.
Our investments are usually subject to contractual or legal restrictions on
resale or are otherwise illiquid because there is usually no established trading
market for such investments. The illiquidity of most of our investments may make
it difficult for us to dispose of them at a favorable price, and, as a result,
we may suffer losses. In addition, if we were forced to immediately liquidate
some or all of the investments in our portfolio, the proceeds of such
liquidation could be significantly less than the current value of such
investments. We may be required to liquidate some or all of our portfolio to
meet our debt service obligations or to maintain our qualification as a business
development company and as a regulated investment company if we do not satisfy
one or more of the applicable criteria under the respective regulatory
frameworks.
Our business depends on our key personnel.
Our future success depends to a significant extent on the continued services of
Craig A. Waltzer, our Chief Executive Officer as well as other key personnel.
The loss of key persons would likely have a significant detrimental effect on
our business.
Regulations governing our operation as a business development company will
affect our ability to, and the way in which we raise additional capital.
We may issue debt securities and/or borrow money from banks or other financial
institutions, which we refer to collectively as "senior securities," up to the
maximum amount permitted by the 1940 Act. Under the provisions of the 1940 Act,
we are permitted, as a business development company, to issue senior securities
only in amounts such that our asset coverage, as defined in the 1940 Act, equals
at least 200% after each issuance of senior securities. If the value of our
assets declines, we may be unable to satisfy this test. If that happens, we may
be required to sell a portion of our investments and, depending on the nature of
our leverage, repay a portion of our indebtedness at a time when such sales may
be disadvantageous.
We are not generally able to issue and sell our common stock at a price below
net asset value per share. We may, however, sell our common stock at a price
below the current net asset value of the common stock if our board of directors
determines that such sale is in the best interests of Aventura Holdings, Inc.
and its stockholders, and our stockholders approve such sale. In any such case,
the price at which our securities are to be issued and sold may not be less than
a price which, in the determination of our board of directors, closely
approximates the market value of such securities (less any distributing
commission or discount).
Any change in regulation of our business could negatively affect the
profitability of our operations.
Changes in the laws, regulations or interpretations of the laws and regulations
that govern business development companies, regulated investment companies or
non-depository commercial lenders could significantly affect our operations and
our cost of doing business. We are subject to federal, state and local laws and
regulations and are subject to judicial and administrative decisions that affect
our operations. If these laws, regulations or decisions change, or if we expand
our business into jurisdictions that have adopted more stringent requirements
than those in which we currently conduct business, we may have to incur
significant expenses in order to comply or we might have to restrict our
operations.
16
Our ability to invest in private companies may be limited in certain
circumstances.
If we are to maintain our status as a business development company, we must not
acquire any assets other than "qualifying assets" unless, at the time of and
after giving effect to such acquisition, at least 70% of our total assets are
qualifying assets. If we acquire debt or equity securities from an issuer that
has outstanding marginable securities at the time we make an investment, these
acquired assets generally cannot be treated as qualifying assets. This result is
dictated by the definition of "eligible portfolio company" under the 1940 Act,
which in part focuses on whether a company has outstanding marginable
securities.
Amendments promulgated in 1998 by the Board of Governors of the Federal Reserve
System expanded the definition of a marginable security under the Federal
Reserve's margin rules to include any non-equity security. Thus, any debt
securities issued by any entity are marginable securities under the Federal
Reserve's current margin rules. As a result, the staff of the SEC has raised the
question as to whether a private company that has outstanding debt securities
would qualify under the relevant portion of the "eligible portfolio company"
criteria. The SEC has recently issued proposed rules to include any company that
does not have a class of securities listed on a national securities exchange or
association in the definition of "eligible portfolio company."
Until the question raised by the staff of the SEC pertaining to the Federal
Reserve's 1998 change to its margin rules has been addressed by final
legislative, administrative or judicial action, we intend to treat as qualifying
assets only those debt and equity securities that are issued by a private
company that has no marginable securities outstanding at the time we purchase
such securities or that otherwise qualifies as an "eligible portfolio company"
under the 1940 Act.
RECENT DEVELOPMENTS
On March 15, 2005, we elected to be regulated as a business development company
under the Investment Company Act of 1940. We filed Form 1-E under the Securities
and Exchange Act notifying the Securities and Exchange Commission of the intent
to sell, under Regulation E promulgated under the Securities Act of 1933, up to
$5 million of our common stock.
On May 27, 2005 the Company entered into a Stock Purchase Agreement with
Dutchess Private Equities Fund II, L.P. (Dutchess) to sell up to five million
dollars ($5,000,000) of the Company's common stock over a twenty four (24) month
period in accordance with the offering circular under Regulation E (file number
095-00254). The terms of the agreement call for the Company to submit a draw
request to Dutchess then transfer a number of shares to Dutchess based upon the
draw amount and current market value of the Company's shares. Dutchess is then
entitled to sell the shares at market to recoup the draw amount plus a fifteen
percent (15%) profit. If Dutchess has shares remaining after recouping the draw
amount and fifteen percent (15%) profit, Dutchess is obligated to return the
remaining shares to the Company. If Dutchess sells all of the transferred
shares before recouping the draw amount and fifteen percent (15%) profit the
Company is obligated to issue additional shares to Dutchess until the draw
amount and fifteen percent (15%) profit are received by Dutchess. There is an
anti-dilution paragraph (8.4) in the June 7, 2005 LLC Interest Purchase
Agreement which entitles Aventura Holdings, Inc. to additional shares in the
event additional shares are issued to Dutchess relating to the initial draw of
this Stock Purchase Agreement. Aventura Holdings, Inc. is entitled to 5 times
the additional shares Dutchess receives in the event additional shares are
issued pursuant to the initial draw. The May 27, 2005 Stock Purchase Agreement
also grants Dutchess right of first refusal for the issuance of new Company
securities and penalties for non-compliance with the terms of the agreement.
The Company is in violation of provisions of the Stock Purchase Agreement
relating to the timeliness of the filing of the June 30, 2005 quarterly report
(Form 10-Q). Dutchess agreed to waive penalties as the delay is related to
actions of past management and outside of the control of the Company.
The initial draw occurred on May 27, 2005 in the amount of three hundred fifteen
thousand dollars ($315,000). The Company transferred seventy five million
(75,000,000) shares to Dutchess. On June 3, 2005 the Company's portfolio
investee Aventura Networks, LLC received two hundred ninety nine thousand nine
hundred twenty five dollars ($299,925) directly from Dutchess after deduction of
fifteen thousand dollars ($15,000) for legal fees and seventy five dollars ($75)
in bank fees from the initial draw. The fifteen thousand dollars ($15,000) is
treated as a direct offering cost asset and amortized to operations based on the
ratio of Dutchess proceeds from sale of Company shares issued to them compared
to the total liability payable with common stock. On September 28, 2005
Dutchess received an additional fifty million (50,000,000) shares and on
November 3, 2005 an additional fifty million (50,000,000) shares to satisfy
obligations of the initial draw amount and the Company's Board approved their
issuance. The stock purchase transaction is recorded as a liability payable
with common stock due to the criteria of FASB Statement 150 (Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity (Issued 5/03)) at the fair value of the total guaranteed return of
$362,250. The $47,250 difference between the $362,250 and the $315,000
investment is treated as a deferred financing cost. As of September 30, 2005
$27,438 has been amortized as a cost of financing.
17
RESULTS OF OPERATIONS
As a BDC, the Company does not operate a business or consolidate its earnings
with its portfolio investees. Effective March 15, 2005 the Company elected BDC
status meaning that the Company is in the business of investing in other
businesses. BDC's measure most income by investment gains and losses and the
fluctuation in the value of its portfolio investees. It is difficult to
meaningfully compare the nine months ended September 30, 2005 to the nine months
ended September 30, 2004. All comparative references are for presentation
purposes only and should be viewed accordingly.
REVENUES
Revenues for the nine months ended September 30, 2005 were $5,000 as compared to
revenues for the nine months ended September 30, 2004 of $6,090 and were derived
from our subsidiary, Radio X Network prior to our BDC election.
OPERATING EXPENSES
Compensation was $949,500 for the nine months ended September 30, 2005 compared
to $1,542,708 for the comparable period in 2004. For 2005, $949,500 was stock
based compensation.
Consulting expense for the nine months ended September 30, 2005 was $813,000
compared to $1,632,088 for the nine months ended September 30, 2004. Consulting
expense related to the issuance of common stock for services to outside
consultants. For 2005, $808,025 was stock based consulting.
The debenture penalty of $30,000 for the nine months ended September 30, 2004
represents the accrued penalty under the provisions of the convertible
debentures. The penalties relate to the deadlines associated with the Company
filing a Registration Statement in connection with the convertible debentures
and liquidated damages penalty for not having enough authorized shares to allow
for the issuance of all dilutive securities based on a formula as stipulated in
the debenture agreement and a default penalty on the June 28, 2003 and August 8,
2003 maturity of $500,000 of debentures. There was no such expense in 2005 as
the debentures were repaid in 2004.
The debt issue cost amortization of $39,850 for the nine months ended September
30, 2004 represents the amortization of the cost we incurred to raise debt
capital. These fees are recorded debt discount and amortized over the loan term.
There was no such expense in 2005 as the debentures were repaid in 2004.
Professional fees for the nine months ended September 30, 2005 were $52,978
compared to $23,478 for the nine months ended September 30, 2004. The increase
is primarily related to accounting, legal and audit services regarding our SEC
filings.
Other selling, general and administrative expenses were $66,488 for the nine
months ended September 30, 2005 as compared to $110,445 for the nine months
ended September 30, 2004. The decrease in expenses is primarily due to the
Company's change in focus to that of a BDC.
Interest expense was $0 for the nine months ended September 30, 2005 compared to
$45,934 for the nine months ended September 30, 2004. Interest expense is
attributed to the loan payable and the convertible debenture offering and
includes accrued interest of the convertible debentures and amortization of the
debt discount as well as accrued interest on the convertible debentures due to
the default on payment. All debt was repaid or converted to equity in 2004.
Financing costs were $27,438 for the nine months ended September 30, 2005
compared to zero for the comparable nine months ended September 30, 2004. The
2005 amount relates to amortization of the Dutchess investment cash and non-cash
financing costs.
For the nine months ended September 30, 2004, we recognized an aggregate
settlement expense of $144,527 related to the redemption of the debentures.
As a result of these factors, we reported a net loss of $1,932,365 or $(.00) per
share for the nine months ended September 30, 2005 as compared to a net loss of
$3,548,772 or ($.03) per share for the nine months ended September 30, 2004.
18
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2005, we had an accumulated deficit of $10,378,511 and working
capital deficit of $6,221. Our investments were funded through a Stock Purchase
Agreement with Dutchess Private Equities Fund II, L.P. (Dutchess) to sell up to
five million dollars ($5,000,000) of the Company's common stock over a twenty
four (24) month period in accordance with the offering circular under Regulation
E (file number 095-00254). Our president advanced $40,000 during the fourth
quarter of 2004 and $56,500 during the first nine months of 2005.
We have no material commitments for capital expenditures.
Net cash used in operations during the nine months ended September 30, 2005 was
$165,044 and was substantially attributable to net loss of $1,932,365 offset
primarily by non-cash stock based expenses of $1,592,627 and net changes in
operating assets and liabilities of $55,769. In the comparable period of 2004,
we had net cash used in operations of $110,926 primarily relating to the net
loss of $3,548,772 primarily offset by stock-based consulting expense of
$3,096,871, non-cash debt discount amortization of $3,062, amortization of
deferred debt issuance costs of $39,850, a non-cash settlement expense of
$144,527 and net changes in operating assets and liabilities of $1,064,637.
Net cash used in investing activities for the nine months ended September 30,
2005 was $211,308 and consisted of $299,925 invested in portfolio companies less
$88,617 of Company expenses paid by a portfolio company investee. There were no
investing activities for the nine months ended September 30, 2004.
Net cash provided by financing activities for the nine months ended September
30, 2005 was $356,500 as compared to net cash provided by financing activities
of $9,600 for the nine months ended September 30, 2004. During the nine months
ended September 30, 2005, we received advances from our former CEO of $56,500
and net equity financing of $299,925. In the comparable period of 2004, we
received proceeds from a loan of $824,000, paid $71,400 in debt issuance costs
and repaid convertible debentures of $750,000.
For the fiscal year ended December 31, 2004, our independent registered public
accounting firm issued a going concern opinion in connection with their audit of
our financial statements. These conditions raise substantial doubt about our
ability to continue as a going concern if sufficient additional funding is not
acquired or alternative sources of capital developed to meet our working capital
needs.
CRITICAL ACCOUNTING POLICIES
A summary of significant accounting policies is included in Note 2 to the
unaudited financial statements included elsewhere in this Report. We believe
that the application of these policies on a consistent basis enables us to
provide useful and reliable financial information about our operating results
and financial condition.
OFF BALANCE SHEET ARRANGEMENTS
There are no off balance sheet arrangements that have or are reasonably likely
to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to investors.
Item 3. Controls and Procedures
As required by SEC rules, we have evaluated the effectiveness of the design and
operation of our disclosure controls and procedures at the end of the period
covered by this report. This evaluation was carried out under the supervision
and with the participation of our management, including our principal executive
officer and principal financial officer. Based on this evaluation, these
officers have concluded that the design and operation of our disclosure controls
and procedures are effective. There were no changes in our internal control over
financial reporting or in other factors that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
Our disclosure controls and procedures are designed to ensure that information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the SEC's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by us in the reports that we
file under the Exchange Act is accumulated and communicated to our management,
including principal executive officer and principal financial officer, as
appropriate, to allow timely decisions regarding required disclosure.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
None
19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
A. On May 13, 2005 the Company granted 150,000,000 shares of its previously
un-issued common stock to RTV Media Corp. an affiliate of outgoing officer and
director T. Joseph Coleman in exchange for settlement of loans totaling
$103,500. The shares were valued at $0.007 per share or $1,050,000 on May 13,
2005. The difference between the loan and value of the securities was recorded
as $946,500 as non-cash compensation. As a BDC, the Company is not permitted to
issue stock for services and is currently attempting to determine whether this
transaction is a violation of Section 23a of the Investment Company Act of 1940:
in the event that this transaction is not permitted, the Company intends to seek
recovery of the shares improperly issued and arrange alternate compensation to
this recipient, if warranted.
B. On May 26, 2005 the Company issued 20,000,000 shares of its previously
un-issued common stock to Big Apple Consulting USA, Inc. pursuant to a June 7,
2005 Consulting Agreement and recorded the issuance as non-cash compensation
valued at $0.004 per share or $80,000 of which $32,000 was expensed and $48,000
was deferred as of September 30, 2005. The term of the agreement is three
months. 12,000,000 shares were placed with an escrow agent for services in the
second and third months, 8,000,000 shares were delivered directly to Big Apple
Consulting USA, Inc. Big Apple Consulting USA, Inc. was also engaged by RTV
Media Corp. As a BDC, the Company is not permitted to issue stock for services
and is currently attempting to determine whether this transaction is a violation
of Section 23a of the Investment Company Act of 1940: in the event that this
transaction is not permitted, the Company intends to seek recovery of the shares
improperly issued and arrange alternate compensation to this recipient, if
warranted.
C. On May 26, 2005 the Company issued 30,000,000 shares of its previously
un-issued common stock to the Coleman Family Trust and recorded the issuance as
non-cash compensation valued at $0.004 per share or $120,000 which was expensed
immediately. The Coleman Family Trust is believed to be owned and / or
controlled by outgoing director T. Joseph Coleman. As a BDC, the Company is not
permitted to issue stock for services and is currently attempting to determine
whether this transaction is a violation of Section 23a of the Investment Company
Act of 1940: in the event that this transaction is not permitted, the Company
intends to seek recovery of the shares improperly issued and arrange alternate
compensation to this recipient, if warranted.
D. On May 26, 2005 the Company issued 32,000,000 shares of its previously
un-issued common stock to Vega 7 Entertainment and recorded the issuance as
non-cash compensation valued at $0.004 per share or $128,000 which was expensed
immediately. Vega 7 Entertainment is believed to be owned and / or controlled
by outgoing director T. Joseph Coleman. As a BDC, the Company is not permitted
to issue stock for services and is currently attempting to determine whether
this transaction is a violation of Section 23a of the Investment Company Act of
1940: in the event that this transaction is not permitted, the Company intends
to seek recovery of the shares improperly issued and arrange alternate
compensation to this recipient, if warranted.
E. On May 26, 2005 the Company issued 10,000,000 shares of its previously
un-issued common stock to Stephen Kern and recorded the issuance as non-cash
compensation valued at $0.004 per share or $40,000 which was expensed
immediately. Stephen Kern was a consultant to the Company providing investor
relations. As a BDC, the Company is not permitted to issue stock for services
and is currently attempting to determine whether this transaction is a violation
of Section 23a of the Investment Company Act of 1940: in the event that this
transaction is not permitted, the Company intends to seek recovery of the shares
improperly issued and arrange alternate compensation to this recipient, if
warranted.
F. On May 26, 2005 the Company issued 15,000,000 shares of its previously
un-issued common stock to Peter Klamka and recorded the issuance as non-cash
compensation valued at $0.004 per share or $60,000 which was expensed
immediately. Peter Klamka was an outgoing director of the Company. As a BDC,
the Company is not permitted to issue stock for services and is currently
attempting to determine whether this transaction is a violation of Section 23a
of the Investment Company Act of 1940: in the event that this transaction is not
permitted, the Company intends to seek recovery of the shares improperly issued
and arrange alternate compensation to this recipient, if warranted.
G. On May 26, 2005 the Company issued 20,000,000 shares of its previously
un-issued common stock to Mark Rolland and recorded the issuance as non-cash
compensation valued at $0.004 per share or $80,000 which was expensed
immediately. Mark Rolland was a consultant to the Company. As a BDC, the
Company is not permitted to issue stock for services and is currently attempting
to determine whether this transaction is a violation of Section 23a of the
Investment Company Act of 1940: in the event that this transaction is not
permitted, the Company intends to seek recovery of the shares improperly issued
and arrange alternate compensation to this recipient, if warranted.
H. On May 26, 2005 the Company issued 35,000,000 shares of its previously
un-issued common stock to Wilshire Capital LTD. and recorded the issuance as
non-cash compensation valued at $0.004 per share or $140,000 which was expensed
immediately. Wilshire Capital LTD. is believed to be owned and / or controlled
by outgoing director T. Joseph Coleman. As a BDC, the Company is not permitted
to issue stock for services and is currently attempting to determine whether
this transaction is a violation of Section 23a of the Investment Company Act of
1940: in the event that this transaction is not permitted, the Company intends
to seek recovery of the shares improperly issued and arrange alternate
compensation to this recipient, if warranted.
I. On May 26, 2005 the Company issued 10,000,000 shares of its previously
un-issued common stock to RTV Media Corp. an affiliate of outgoing officer and
director T. Joseph Coleman and recorded the issuance as non-cash compensation
valued at $0.004 per share or $40,000 which was expensed immediately. As a BDC,
the Company is not permitted to issue stock for services and is currently
attempting to determine whether this transaction is a violation of Section 23a
of the Investment Company Act of 1940: in the event that this transaction is not
permitted, the Company intends to seek recovery of the shares improperly issued
and arrange alternate compensation to this recipient, if warranted.
J. On May 27, 2005 the Company entered into a Stock Purchase Agreement with
Dutchess Private Equities Fund II, L.P. (Dutchess) to sell up to five million
dollars ($5,000,000) of the Company's common stock over a twenty four (24) month
period in accordance with the offering circular under Regulation E (file number
095-00254). The terms of the agreement call for the Company to submit a draw
request to Dutchess then transfer a number of shares to Dutchess based upon the
draw amount and current market value of the Company's shares. Dutchess is then
entitled to sell the shares at market to recoup the draw amount plus a fifteen
percent (15%) profit. If Dutchess has shares remaining after recouping the draw
amount and fifteen percent (15%) profit, Dutchess is obligated to return the
remaining shares to the Company. If Dutchess sells all of the transferred
shares before recouping the draw amount and fifteen percent (15%) profit the
Company is obligated to issue additional shares to Dutchess until the draw
amount and fifteen percent (15%) profit are received by Dutchess. There is an
anti-dilution paragraph (8.4) in the June 7, 2005 LLC Interest Purchase
Agreement which entitles Aventura Holdings, Inc. to additional shares in the
event additional shares are issued to Dutchess relating to the initial draw of
this Stock Purchase Agreement. Aventura Holdings, Inc. is entitled to 5 times
the additional shares Dutchess receives in the event additional shares are
issued pursuant to the initial draw. The May 27, 2005 Stock Purchase Agreement
also grants Dutchess right of first refusal for the issuance of new Company
securities and penalties for non-compliance with the terms of the agreement.
The Company was in violation of provisions of the Stock Purchase Agreement
relating to the timeliness of the filing of the June 30, 2005 quarterly report
(Form 10-Q). Dutchess agreed to waive penalties as the delay was related to
actions of past management and outside of the control of the Company. The
initial draw occurred on May 27, 2005 in the amount of three hundred fifteen
thousand dollars ($315,000). The Company transferred seventy five million
(75,000,000) shares to Dutchess. On June 3, 2005 the Company's portfolio
investee Aventura Networks, LLC received two hundred ninety nine thousand nine
hundred twenty five dollars ($299,925) directly from Dutchess after deduction of
fifteen thousand dollars ($15,000) for legal fees and seventy five dollars ($75)
in bank fees from the initial draw. The fifteen thousand dollars ($15,000) is
treated as a direct financing cost asset and amortized to operations based on
the ratio of Dutchess proceeds from sale of Company shares issued to them
compared to the total liability payable with common stock. On September 28,
2005 Dutchess received an additional fifty million (50,000,000) shares and on
November 3, 2005 an additional fifty million (50,000,000) shares to satisfy
obligations of the initial draw amount and the Company's Board approved their
issuance. The stock purchase transaction is recorded as a liability payable
with common stock due to the criteria of FASB Statement 150 (Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity (Issued 5/03)) at the fair value of the total guaranteed return of
$362,250. The $47,250 difference between the $362,250 and the $315,000
investment is treated as a deferred financing cost. As of September 30, 2005
$27,438 has been amortized as a cost of financing.
K. On June 7, 2005 the Company issued 880,000,000 shares of its previously
un-issued common stock to Aventura Holdings, Inc. in exchange for 100% interest
in Aventura Networks, LLC. The shares were valued at $0.00091 per share based
on a discounted quoted trading price. The investment is reflected on the
financial statements at $800,724.
L. On September 28, 2005 the Company issued 50,000,000 shares of its
previously un-issued common stock to Dutchess Private Equities Fund II LP
(Dutchess) pursuant to a $5,000,000 Stock Purchase Agreement. The Company was
obligated to issue these shares to Dutchess as additional re-payment of the May
27, 2005 $315,000 advance. As of September 30, 2005 Dutchess sold 60,390,004
shares for $159,667.
M. On September 28, 2005 250,000,000 shares became issuable under the
anti-dilution provision of the Aventura Networks, LLC acquisition agreement (See
Notes 3, 5J and 5K).
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
20
Item 6. Exhibits
Regulation
S-B Number Exhibit
31 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer and
Chief Financial Officer of the Company
32 Section 906 Certification by Chief Executive Officer and Chief Financial
Officer
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AVENTURA HOLDINGS, INC.
September 12, 2005 By: /s/ Craig A. Waltzer
-----------------------
Craig A. Waltzer
Chief Executive Officer, President, and
Director
21