Form 10-Q for period ended September 30, 2006
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2006
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________________ to ___________________
Commission File Number: 333-29903
SOVEREIGN EXPLORATION ASSOCIATES INTERNATIONAL, INC.
--------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Utah 30-0123229
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
503 East Washington Avenue, Suite 2D, Newtown, Pennsylvania 18940
--------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(215) 968-0200
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(Registrant's Telephone Number, Including Area Code)
N/A
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(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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.
[X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
The number of shares of the issuer's common stock, $0.001 par value, outstanding
as of November 21, 2006, was 26,203,166.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SOVEREIGN EXPLORATION ASSOCIATES INTERNATIONAL, INC.
(F/K/A - CALI Holdings, Inc.)
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2006 AND JUNE 30, 2006
September 30, 2006 June 30, 2006
UNAUDITED RESTATED
----------------------------------------------------
Assets
Cash and cash equivalents $ 2,115 $ 570
----------------------------------------------------
Total current assets 2,115 570
----------------------------------------------------
Other assets
Investments, net of allowance of $173,868 - -
Notes receivable, net of allowance of $832,849 - -
Capitalized costs and permits 2,694,394 2,365,870
----------------------------------------------------
Total other assets 2,694,394 2,365,870
----------------------------------------------------
Total assets $ 2,696,509 $ 2,366,440
====================================================
Liabilities and Shareholders' Equity (Deficit)
Current liabilities
Accounts payable and accrued expenses $ 577,298 $ 347,528
Due to related parties 797,856 817,929
Notes payable 124,182 121,840
----------------------------------------------------
Total current liabilities 1,499,336 1,287,297
----------------------------------------------------
Long-term liabilities
Related party note payables 1,130,897 763,630
Notes payable, convertible debt 800,000 800,000
----------------------------------------------------
Total long-term liabilities 1,930,897 1,563,630
----------------------------------------------------
Total liabilities 3,430,233 2,850,927
----------------------------------------------------
Commitments and contingencies - -
Shareholders' equity (deficit)
Common stock, $.001 par value, 250,000,000,000
shares authorized and 26,203,166 issued and
outstanding at 6/30/06, and 250,000,000 shares
authorized and 26,203,166 issued and
outstanding at 9/30/06 26,203 26,203
Additional paid-in capital 19,864,067 19,864,067
Minority interest (803,530) (803,530)
Accumulated deficit (19,820,464) (19,571,227)
----------------------------------------------------
Total shareholders' equity (deficit) (733,724) (484,487)
----------------------------------------------------
Total liabilities and shareholders' equity
(deficit) $ 2,696,509 $ 2,366,440
====================================================
SOVEREIGN EXPLORATION ASSOCIATES INTERNATIONAL, INC.
(F/K/A - CALI Holdings, Inc.)
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006
UNAUDITED
------------------------
9/30/2006
------------------------
REVENUE $ -
------------------------
OPERATING EXPENSES
Salaries and wages 61,013
General and administrative 86,033
Professional fees 87,849
------------------------
Total operating expenses 234,895
------------------------
OTHER INCOME (EXPENSE)
Interest expense (14,342)
------------------------
Total other income (expense) (14,342)
------------------------
OPERATING LOSS BEFORE INCOME TAXES (249,237)
------------------------
Provision for income taxes -
------------------------
LOSS BEFORE DEPRECIATION ON INVESTMENTS (249,237)
Net unrealized depreciation on investments -
------------------------
NET LOSS $ (249,237)
========================
NET OPERATING LOSS PER COMMON SHARE:
Basic $ (0.0095)
Diluted $ (0.0092)
========================
NET LOSS PER COMMON SHARE
Basic $ (0.0095)
Diluted $ (0.0092)
========================
WEIGHTED AVERAGE SHARES OF COMMON
STOCK OUTSTANDING:
Basic 26,203,166
Diluted 27,113,166
========================
DIVIDENDS DECLARED PER COMMON SHARE $ -
========================
SOVEREIGN EXPLORATION ASSOCIATES INTERNATIONAL, INC.
(F/K/A - CALI Holdings, Inc.)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006
UNAUDITED
Additional
Common Stock paid-in Minority Accumulated
Shares Par Value capital Interest Deficit Total
(1) (2)
-----------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2006, Restated 26,203,166 $ 26,203 $ 19,864,067 $ (803,530) $ (19,571,227) $ (484,487)
Net loss - - - (249,237) (249,237)
-----------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2006 26,203,166 $ 26,203 $ 19,864,067 $ (803,530) $ (19,820,464) $ (733,724)
=========================================================================================
(1) - Capital in excess of par value as of June 30, 2006 and includes the
Company and subsidiaries
(2) - Accumulated undistributed net income (loss) as of June 30, 2006
SOVEREIGN EXPLORATION ASSOCIATES INTERNATIONAL, INC.
(F/K/A - CALI Holdings, Inc.)
STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006
UNAUDITED
09/30/2006
----------------------
Operating activities:
Net loss $ (249,237)
Adjustments to reconcile net loss from operations to
net cash (used in) operating activities:
Capitalized costs and permits (326,182)
Increase (decrease) in:
Accounts payable and accrued expenses 229,770
Due to related parties (20,073)
----------------------
Net cash (used in) operating activities (365,722)
----------------------
Financing activities:
Proceeds from related party notes payable 500,000
Payments on related party notes payable (132,733)
----------------------
Net cash provided by financing activities 367,267
----------------------
Net increase in cash and cash equivalents 1,545
Cash, beginning of period 570
----------------------
Cash, end of period $ 2,115
======================
Supplemental disclosure of cash flow information:
Interest paid $ -
Taxes paid -
======================
SOVEREIGN EXPLORATION ASSOCIATES INTERNATIONAL, INC.
(F/K/A - CALI Holdings, Inc.)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
UNAUDITED
NOTE A - NATURE OF ORGANIZATION
Sovereign Exploration Associates International, Inc. (the "Company") was
incorporated in the state of Utah in 1980. The company was formerly known as
CALI Holdings, Inc. On October 26, 2005 the Company changed its name from CALI
Holdings, Inc. to Sovereign Exploration Associates International, Inc.
On January 13, 2004 the Company filed Form N-54A with the United States
Securities and Exchange Commission ("SEC") to become a business development
company ("BDC") pursuant to Section 54 of the Investment Company Act of 1940
(the "1940 Act"). As a result, the Company operated as an investment company and
acquired investments designed to build an investment portfolio to enhance the
Company's shareholder value. As a BDC, the Company was, in effect, a publicly
traded private equity fund, where stockholders provided public capital in a
regulated environment for private investment in smaller companies. Congressional
intent behind the creation of BDCs was to encourage the flow of public capital
to private and smaller public companies.
On September 8, 2006 the Company filed a definitive proxy statement (Schedule
14A) with the SEC indicating that the Company's shareholders were to vote on a
proposal to withdraw the Company's election to be a BDC under the 1940 Act by
filing Form N-54C with the SEC. The proposal was approved at a special meeting
of the Company's shareholders on September 20, 2006.
On September 22, 2006, the Company filed a notification of withdrawal of
business development company election on Form N-54C notifying the SEC that,
pursuant to the provisions of Section 54(c) of the 1940 Act, the Company
withdrew its election to be subject to Sections 55 through 65 of the 1940 Act.
Accordingly, the Company is no longer subject to the 1940 Act but will continue
as an operating reporting public company subject to the Securities Exchange Act
of 1934.
The net effect, as of June 30, 2006, of the Company's election to withdraw our
business development company status pursuant to the Investment Company Act of
1940 was as follows:
Additional paid in capital $ (550,705)
Deficit (425,068)
Unrealized depreciation on investments 1,015,273
------------------
Net adjustments $ 39,500
==================
As a result of the change in accounting principle because of the Company's
election to withdraw its business development company election, the Company
restated its June 30, 2006 Balance Sheet which is included in these financial
statements.
NOTE B - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 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 quarterly period presented. These financial statements
should be read in conjunction with the Company's financial statements for the
years ended June 30, 2006 and 2005 and notes thereto contained in the Company's
Annual Report on Form 10-K for the year ended June 30, 2006 as filed with the
SEC. See discussion of change in accounting principle below.
The results of operations for the three months ended September 30, 2006 are not
necessarily indicative of the results of operations to be achieved for the full
fiscal year ending June 30, 2007.
The election to withdraw the Company as a BDC under the 1940 Act has resulted in
a significant change in the Company's required method of accounting. BDC
financial statement presentation and accounting utilizes the fair value method
of accounting used by investment companies, which allows BDCs to recognize
income and value their investments at market value as opposed to historical
cost.
In addition, majority-owned subsidiaries are not consolidated and instead,
investments in those subsidiaries are reflected on the balance sheet as an
investment in and advances to affiliates, at fair value. As an operating
company, the required financial statement presentation and accounting for
securities held by the Company utilize either fair value or historical cost
methods of accounting, depending on the classification of the investment and the
Company's intent with respect to the period of time it intends to hold the
investment, and the Company and its subsidiaries are reflected for financial
accounting purposes as a consolidated entity. The change in accounting due to
the conversion to an operating company from a BDC is considered a change in
accounting principle.
As an operating company, the Company consolidates its financial statements with
subsidiaries, thus eliminating the investment in and advances to affiliates
account that was reflected on the Company's balance sheet as of June 30, 2006
and 2005, respectively.
Management has determined that with the lack of information available from prior
management of the Company, and because the Company no longer owns any of the
portfolio companies that were divested as a result of the Exchange Agreement
effective October 17, 2005 except for Gulf Coast Records, LLC, it is impractical
to comply with the retroactive application of prior periods being presented on
an operating and consolidated basis in accordance with Statement of Financial
Accounting Standards No. 154, Accounting for Changes and Error Corrections ("FAS
#154").
Pursuant to paragraph 11 of FAS #154: The Company has deemed it impracticable to
apply the effects of a change in accounting principle retroactively because the
following conditions apply as of September 30, 2006:
1. The Company has made every reasonable effort to apply the requirement;
however, we are unable to do.
2. Retrospective application of the change in accounting principle
requires assumptions about prior management's intent in prior periods
that cannot now be independently substantiated.
3. Retrospective application of the change in accounting principle
requires significant estimates of amounts, and at this time it is
impossible to distinguish objectively information about those
estimates that: (a) provides evidence of circumstances that existed on
the date(s) at which those amounts would be recognized, measured, or
disclosed under retrospective application, and (b) would have been
available when the financial statements for that prior period were
issued.
See Note Q for explanation of prior period financial statement presentation.
As of September 30, 2006, the Company's subsidiaries were development stage
enterprises, except for Gulf Coast Records, LLC, which is accounted for on the
equity method of accounting as described in Investments under Note B.
The Company's subsidiaries are development stage enterprises engaged in ocean
explorations and archaeologically sensitive recoveries of artifacts, treasure
trove and/or cargo from shipwrecks under various licenses.
Statement of Financial Accounting Standards No. 7, Accounting and Reporting by
Development Stage Enterprises, defines a development stage enterprise as one
that is devoting substantially all of its efforts to establishing a new business
and either planned principal operations have not commenced or planned principal
operations have commenced but there has been no significant revenue. Several
artifacts have been recovered, but for the three month period ended September
30, 2006, there was no revenue.
The accompanying financial statements have been prepared on a going-concern
basis, which contemplates the continuation of operations, realization of assets
and liquidation of liabilities in the ordinary course of business. The Company's
subsidiaries have capitalized all of their ocean explorations and
archaeologically sensitive recoveries of artifacts, treasure trove and/or cargo
from shipwrecks costs to-date. The Company plans to obtain additional financing
through the sale of publicly traded stock, limited liability company member
units of its subsidiaries, and/or debt financing. There is no assurance these
efforts will be successful. The financial statements do not include any
adjustments relating to the recoverability and classifications of reported asset
amounts or the amounts of liabilities that might result from the outcome of that
uncertainty. See Subsequent Events under Note O.
Principles of Consolidation
The accompanying consolidated financial statements, as presented herein, are
prepared on the accrual basis of accounting under the principles of
consolidation consisting of the accounts of the Company and its subsidiaries.
As of September 30, 2006, the Company's subsidiaries and the related equity
ownership are as follows:
Historic Discoveries, Inc.
Historic Discoveries is the Company's primary subsidiary and is wholly-owned by
the Company. Historic Discoveries has two wholly-owned subsidiaries, Artifact
Recovery & Conservation, Inc. ("ARC") and Sea Research, Inc. ("SRI").
Artifact Recovery & Conservation, Inc.
ARC is the managing member of Fantome Cove Treasure Trove 150, LLC, of which it
owns a 97.05% equity interest. ARC is also the managing member of Interspace
Exploration, LLC, of which it owns a 74% equity interest.
As of September 30, 2006, the minority interest in both of these entities is
$803,530.
The Company owns a 100% equity interest in Sovereign Exploration Associates
International of Spain, Inc.
Investments
The Company accounts for investments, where the Company holds from 20% up to 50%
of the common stock of an investee, using the equity method. The investment is
initially recorded at cost and the carrying amount is adjusted to recognize the
Company's proportionate share of the earnings or losses of the investee after
the date of acquisition. The amount of the adjustment is included in the
determination of net income or loss of the Company in the period of the
adjustment. Any dividends received from the investee reduce the carrying value
of the investment.
As of June 30, 2006, the Company determined its 49% equity investment in Gulf
Coast Records, LLC was fully impaired. During the fiscal year ended June 30,
2006, the Company had provided for a write-down of the investment in and
advances to this company of $1,015,273 to zero.
Revenue Recognition
The Company recognizes revenue using the accrual method of accounting wherein
revenue is recognized when earned and expenses and costs are recognized when
incurred.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect certain 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 revenues and expenses
during the reporting period. Accordingly, actual results could differ from those
estimates.
Consolidated Statement of Cash Flows
For the purpose of the Consolidated Statement of Cash Flows, the Company
considers cash equivalents to be all highly liquid securities with an original
maturity date of three months or less.
Net (Loss) Per Common Share
Net (Loss) per common share is computed using the weighted average of shares
outstanding during the periods presented in accordance with Statement of
Financial Accounting Standards No. 128, Earnings Per Share.
The fully diluted weighted average number of common shares outstanding as of
June 30, 2006 includes the 910,000 common shares that the Company has agreed to
issue pursuant to the Settlement Agreement effective June 30, 2006. As of
September 30, 2006, these common shares, which are subject to a Leak-Out
Agreement, have yet to be issued.
Segments
The Company operates as one segment as defined by the Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information.
Foreign Currency Translation
The accompanying financial statements are stated in United States Dollars (USD).
NOTE C - FIXED ASSETS
Fixed assets are stated at cost. The cost of equipment is charged against income
over its estimated useful life, using the straight-line method of depreciation.
Repairs and maintenance which are considered betterments and do not extend the
useful life of equipment are charged to expense as incurred. When property or
equipment is retired or otherwise disposed of, the asset and accumulated
depreciation is removed from the accounts and the resulting profit and loss are
reflected in income.
NOTE D - CAPITALIZED COSTS
As of September 30, 2006, the Company accounted for its ocean exploration and
archaeologically sensitive recoveries of artifacts, treasure trove and/or cargo
from shipwrecks costs incurred to-date as capitalized costs.
NOTE E - STOCK ISSUED FOR SERVICES
During the three months ended September 30, 2006 and the year ended June 30,
2006, the Company did not issue any stock for services.
NOTE F- INCOME TAXES
Pursuant to the Exchange Agreement dated October 17, 2005, substantial ownership
of the Company was transferred and according to provisions of the Internal
Revenue Code, this transaction eliminated all of the loss carryforwards for
federal income tax purposes starting with the fiscal year that ended June 30,
2006.
NOTE G - LEASE ARRANGEMENTS
The Company maintains shared office space in Pennsylvania and Massachusetts with
unrelated companies controlled by certain officers of the Company. These
companies sublet space to the Company on a month-to-month basis with monthly
rent of $4,010, with no formal subleases.
Rent expense for the three months ended September 30, 2006 was $12,030.
NOTE H - NOTES PAYABLE
The following are convertible debentures as of September 30, 2006:
8% convertible debenture to an individual dated May 27, 2005
with an initial principal balance of $21,000 due no later
than May 27, 2006; outstanding principal and interest. This
convertible debenture is currently in dispute.
$ 24,087
5.25% convertible debenture to a company dated June 29, 2005
with an initial principal balance of $40,000 due no later
than June 29, 2008; outstanding principal and interest. This
convertible debenture is currently in dispute.
$ 89,988
8% convertible debenture to an individual dated May 18, 2005
with an initial principal balance of $35,000 due no later
than May 18, 2006; outstanding principal and interest. This
convertible debenture is currently in dispute.
$ 10,107
---------
Total notes payable $124,182
=========
The Company incurred interest expense on these convertible debentures of $2,342
for the three months ended September 30, 2006.
NOTE I - OPERATING AGREEMENTS
Prior to the Exchange Agreement of October 17, 2005, there is a Revenue
Agreement as outlined in Exhibit B of the Exchange Agreement, that requires 20%
revenue participation payable to the original owners of the permits from the net
recovery of the shipwrecks for the permits that have been assigned to the
subsidiaries of one of the Company's subsidiaries, Historic Discoveries, Inc.
The 20% revenue participation allows Historic Discoveries, Inc. to defer permit
transfer fees and align site permit cost with revenue generation, eliminating
the exposure associated with sites that do not produce a material number of
artifacts.
Historic Discoveries, Inc. is only required to pay the 20% revenue participation
when sites produce net revenue. The 20% revenue participation also provides
Historic Discoveries, Inc. the right of first refusal on future sites, creating
a mechanism for Historic Discoveries, Inc. and its operating companies to build
site inventory while deferring the associated cost and reducing financial risk.
The Revenue Agreement with the original owners was executed prior to October 17,
2005. The original owners of these permits are the beneficial owners of the
controlling interest in the stock received in the Exchange Agreement.
Additionally, officers and directors of the Company hold certain executive
positions in Historic Discoveries, Inc. and its subsidiaries.
The Fantome project (Fantome Cove Treasure Trove License 150, LLC. a subsidiary
of ARC) sold a 2.05% equity interest for a capital investment of $411,530, and
the LeChameau project (Interspace Explorations, LLC, a subsidiary of ARC) sold a
26.0% ownership interest and 40% profit participation interest for $392,000.
Management intends to assess the Company's liability under these agreements on a
periodic basis. No liability has been recorded for these agreements as of
September 30, 2006.
NOTE J - SETTLEMENT AGREEMENT AND GENERAL RELEASE
The Company on June 30, 2006, entered into a Settlement Agreement and General
Release (the "Settlement Agreement") with Former Management, KMA Capital
Partners, Inc., and CF Holdings, LLC (collectively, the "Settlement Agreement
Parties") in order to reach a comprehensive resolution of their disputes. The
Settlement Agreement provides that the Settlement Agreement Parties release all
claims that they may have against the Company, its parents, subsidiaries,
affiliates, predecessors, successors, assigns, partners, agents,
representatives, and attorneys (collectively, "affiliated parties") and that the
Company releases all claims it may have against the Settlement Agreement Parties
and their respective affiliated parties.
The Company has agreed to issue the Settlement Agreement Parties 910,000 common
shares subject to a Leak-Out Agreement; however, as of September 30, 2006, these
common shares had yet to be issued.
NOTE K - SHAREHOLDERS' EQUITY
As of September 30, 2006, the authorized capital of the Company was 250,000,000
shares of common stock (with voting rights), par value $.001.
The Company is also authorized to issue up to 100,000,000 shares of Preferred
Stock, par value $.001, in one or more series, with the terms and rights of each
such series to be as determined by the Board; no such series have been
authorized by the Board to date.
NOTE L - ISSUANCE OF STOCK
For the three months ended September 30, 2006, the Company did not issue any
stock for any securities transactions.
NOTE M - CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially expose the Company to concentrations of
credit risk, consist principally of cash. As of September 30, 2006, the Company
maintains its cash accounts with financial institutions located in Pennsylvania
and Canada. The Federal Deposit Insurance Corporation (FDIC) guarantees the
Company's deposits in US-based financial institutions up to $100,000 per
account.
The Company's deposits with financial institutions that exceeded federally
insured guarantees amounted to $0 as of September 30, 2006. Historically, the
Company has not experienced any losses on its deposits in excess of federally
insured guarantees.
As of September 30, 2006, the Company accounts for its investment in Gulf Coast
Records, LLC on the equity method of accounting. The amount of $832,849 was
offset by an allowance to reduce the market value of this note and investment to
zero from Gulf Coast Records as of June 30, 2006. Current management is
reviewing its options regarding this company and whether it wants to maintain
its position or divest its holdings in the future, while actively negotiating
with the management of Gulf Coast Records, LLC regarding the recovery of the
Company's investment. Prior to June 30, 2006, the Company received information
from the management of Gulf Coast Records, LLC that has caused the Company to
reduce the fair market value to zero.
NOTE N - RELATED PARTY TRANSACTIONS
ACCRUED PAYROLL AND EXPENSES; DUE TO RELATED PARTIES
As of September 30, 2006, $797,856 was owed to certain officers of the Company
for accrued payroll and unreimbursed expenses.
RELATED PARTY NOTE PAYABLE
In connection with the Exchange Agreement on October 17, 2005, Historic
Discoveries, Inc. agreed to pay an aggregate of $600,000 to the Company's former
management in partial consideration for the termination of executive management
contracts and a consulting contract with the Company. Sea Hunt, Inc., a related
party to the Company, advanced $300,000 at the closing of the Exchange Agreement
and Venture Planning, Inc. provided, and subsequently paid, a note for the
remaining $300,000. Both Sea Hunt, Inc. and Venture Planning Inc. are controlled
by the Company's Chairman, Peter Knollenberg. Because the underlying prior
executive management and consulting contracts were obligations of the Company,
the Company has agreed to repay the full $600,000 plus accrued interest to Sea
Hunt, Inc. and Venture Planning Inc.
Effective July 10, 2006, the President of the Company advanced $500,000 to the
Company for working capital purposes. The loan is due on demand and the interest
requirements and stated rate are a direct pass-through from Nova Savings Bank.
OFFICERS AND DIRECTORS OF THE COMPANY
Certain officers and directors of the Company hold certain executive positions
in Historic Discoveries, Inc. and Sea Hunt, Inc. and their respective
subsidiaries.
NOTE O - SUBSEQUENT EVENTS
Effective November 15, 2006, the Chairman of the Company advanced the Company
$160,000 under a note agreement that requires an interest rate of the lesser of
0.9% or the legal rate under Texas law and is due, in full, with principal and
interest on November 15, 2007.
Effective November 15, 2006, the $600,000 note, as described in Note O under
Related Party Notes Payable due to Sea Hunt, Inc. and Venture Planning, Inc.,
related parties to the Chairman of the Company, was renegotiated with a new due
date of November 15, 2007 along with an interest rate of the lesser of 0.9% or
the legal rate under Texas law and is due, in full, with principal and interest
on November 15, 2007.
NOTE P - PRIOR PERIOD FINANCIAL STATEMENT PRESENTATION
Pursuant to paragraph 11 of FAS #154, the Company has deemed it impracticable to
apply the effects of a change in accounting principle retroactively because
certain conditions apply as of September 30, 2006. See Note B.
Since the Company does not possess the information necessary to restate the
financial statements as of September 30, 2005 as an operating company, the
following are the financial statements and corresponding footnotes for the
Company, as of September 30, 2005 and for the three months then ended, presented
as on the basis of accounting utilized by BDCs:
SOVEREIGN EXPLORATION ASSOCIATES INTERNATIONAL, INC.
F/K/A CALI HOLDINGS INC.
BALANCE SHEET
SEPTEMBER 30, 2005
UNAUDITED
ASSETS 09/30/05
------------
Cash $ 33,397
Investments, at fair value 1,112,800
Accounts receivable 25,057
Other assets 129,372
Fixed assets, net of accumulated depreciation 9,023
Goodwill 489,000
Notes receivable 1,580,437
Security deposit 5,572
------------
TOTAL ASSETS $ 3,384,658
============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 214,610
Notes payable 281,700
------------
TOTAL LIABILITIES 496,310
------------
STOCKHOLDERS' EQUITY
Class A - Preferred stock, no par value, 10,000,000 shares
authorized, 3,725,000 issued and outstanding -
Class B - Preferred stock, no par value, 10,000,000 shares
authorized, none issued and outstanding -
Class C - Convertible Preferred stock, $.001 par value,
10,000,000 shares issued and outstanding 10,000
Class D - Preferred stock, no par value, 10,000,000 shares
authorized, none issued and outstanding -
Common stock, $.001 par value, 2,000,000,000 shares
authorized; 622,030,283 and 53,430,283 issued; and
472,030,283 and 53,430,283 outstanding respectively 472,030
Additional paid-in capital 17,377,563
Stock subscription receivable 25,240
Accumulated deficit (14,996,485)
------------
TOTAL STOCKHOLDERS' EQUITY 2,888,348
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,384,658
============
SOVEREIGN EXPLORATION ASSOCIATES INTERNATIONAL, INC.
F/K/A CALI HOLDINGS INC.
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005
UNAUDITED
9/30/2005
--------------
REVENUES $ 396,366
OPERATING EXPENSES
Depreciation and amortization 615
Professional fees 48,746
General and administrative 206,884
--------------
256,245
--------------
NET OPERATING INCOME (LOSS) 140,121
--------------
NET UNREALIZED DEPRECIATION ON INVESTMENTS (199,600)
--------------
OTHER INCOME (EXPENSE)
Interest income 23,515
Interest expense (931)
Realized loss on sale of investment (94,843)
Other 24,114
--------------
(48,145)
--------------
INCOME (LOSS) BEFORE INCOME TAX (107,623)
DEFERRED INCOME TAX (EXPENSE) -
--------------
NET (LOSS) $ (107,623)
==============
NET (LOSS) PER SHARE BASIC AND FULLY DILUTED $ NIL
==============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 239,140,609
==============
SOVEREIGN EXPLORATION ASSOCIATES INTERNATIONAL, INC.
F/K/A CALI HOLDINGS INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
SEPTEMBER 30, 2005 AND JUNE 30, 2005
Preferred Stock Common Stock Additional Stock Accumulated
Par Par paid-in Subscription Income
Shares Value Shares Value capital receivable (Deficit) Total
BALANCE JUNE 30,
2005 10,000,000 $ 10,000 53,430,283 $ 53,430 $ 17,262,963 $ (4,760) $ (14,888,862) $ 2,432,771
STOCK ISSUED FOR
DEBENTURES - - 418,600,000 418,600 114,600 - - 533,200
STOCK SUBSCRIPTION
RECEIVABLE - - - - - 30,000 - 30,000
NET LOSS - - - - - - (107,623) (107,623)
---------- -------- ------------- --------- ------------ ----------- -------------- -------------
BALANCE SEPTEMBER
30, 2005 10,000,000 $ 10,000 472,030,283 $ 472,030 $ 17,377,563 $ 25,240 $ (14,996,485) $ 2,888,348
========== ======== ============= ========= ============ =========== ============== =============
SOVEREIGN EXPLORATION ASSOCIATES INTERNATIONAL, INC.
F/K/A CALI HOLDINGS INC.
STATEMENT OF CASH FLOWS
SEPTEMBER 30, 2005
UNAUDITED
CASH FLOWS FROM OPERATING ACTIVITIES: 9/30/2005
NET INCOME (LOSS) $ (107,623)
RECONCILIATION OF NET INCOME (LOSS) TO CASH FLOWS
(USED IN) PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization 615
Stock issued for services -
Unrealized depreciation on investments 199,600
Loss on sale of investments 94,843
Loss on disposal of asset 444
Investments received in lieu of cash (345,000)
(Increase) decrease in receivables (21,368)
(Increase) decrease in other assets 135,292
Increase in accounts payable and accrued expenses 136,623
--------------
CASH FLOWS (USED IN) OPERATING ACTIVITIES 93,426
--------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable (439,339)
Disposition of property and equipment -
Purchase of property and equipment (424)
Sale (purchase) of investments 3,700
--------------
CASH FLOWS (USED IN) PROVIDED BY INVESTING ACTIVITIES (436,063)
--------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable 315,000
Proceeds from stock subscription 30,000
Issuance of common stock -
--------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 345,000
--------------
NET INCREASE (DECREASE) IN CASH 2,363
CASH, BEGINNING OF THE PERIOD 31,034
--------------
CASH, END OF THE PERIOD $ 33,397
==============
Supplementary Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 10
==============
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with our financial
statements and notes thereto appearing elsewhere in this report.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Form 10-Q for the quarter ended September 30, 2006 contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended
("Exchange Act"). 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 are 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.
The reader of this discussion, the related financial statements and notes
thereto, and other recent Company filings should understand that the portfolio
companies, the senior management team, the Board of Directors, and the Company's
method of accounting upon its withdrawal of its election to be treated as a
business development company ("BDC") under the Investment Company Act of 1940
("1940 Act"), have all materially changed.
RECENT DEVELOPMENTS
REASONS FOR CEASING TO BE A BUSINESS DEVELOPMENT COMPANY
Following the change in control of Sovereign Exploration Associates
International, Inc. (the "Company") on October 17, 2005, we determined that many
of the regulatory, financial reporting and other requirements imposed by the
1940 Act were too restrictive and prevented the Company from operating in the
manner in which it desires. Among these restrictions are the following:
o A BDC is an investment company and is engaged in the business of
investing, reinvesting, owning, holding, or trading in securities. We
instead intend to carry on our marine recovery and explorations
business through subsidiaries and controlled companies.
o In carrying on our business, from time to time we expect to enter into
joint venture and other transactions with affiliates, subject to the
oversight and approval of the Board of Directors. BDCs generally are
unable to enter into such transactions without the approval of the
Securities and Exchange Commission (the "SEC"), and such approvals
generally cannot be obtained without undue time and expense.
o BDCs are subject to restrictions in the 1940 Act on the type and
amount of securities, other than Common Stock, that they can issue. We
believe that the Company would be better served by greater flexibility
in our capital structure.
o The closely regulated nature of BDCs causes them to be subject to
greater legal and accounting expenses.
o Because of restrictions on the Company's ability to issue stock, we
were unable to comply with the Settlement Agreement effective June 30,
2006, while the Company was a BDC. We believe that the comprehensive
settlement embodied in the Settlement Agreement is in the Company's
best interests.
The Company's Board of Directors agreed with our assessment and determined that
it was no longer feasible for the Company to operate as a BDC. The appropriate
course of action was to withdraw the Company's election to be regulated as a BDC
by filing a Form N-54C with the SEC. Following the withdrawal of the election,
the Company will continue to be a reporting company under the Exchange Act, but
will be managed so that it will not be subject to the provisions of the 1940
Act.
EFFECT ON SHAREHOLDERS
Upon the Company's withdrawal of its election to be treated as a BDC, the
Company will no longer be subject to regulation under the 1940 Act, which is
designed to protect the interests of investors in investment companies.
Specifically, our shareholders will no longer have the following protections of
the 1940 Act:
o We will no longer be subject to the requirement in Section 61 of the
1940 Act that we maintain a ratio of assets to senior securities (such
as senior debt or preferred stock) of at least 200%.
o We will no longer be 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 that
person's office.
o We will no longer be required to provide and maintain a bond issued by
a reputable fidelity insurance company to protect the Company against
larceny and embezzlement.
o We will no longer be required to ensure that a majority of our
directors are persons who are not "interested persons," as that term
is defined in section 56 of the Investment Company Act, and certain
persons that would be prevented from serving on our board if we were a
BDC (such as investment bankers) would be able to serve on our board.
o We will no longer be subject to provisions of the 1940 Act regulating
transactions between BDCs and certain affiliates.
o We will no longer be subject to provisions of the 1940 Act restricting
our ability to issue shares, warrants and options.
o We will be able to change the nature of our business and fundamental
investment policies without having to obtain the approval of our
shareholders.
EFFECT ON FINANCIAL STATEMENTS AND TAX STATUS
The election to withdraw the Company as a BDC under the 1940 Act results in a
significant change in the Company's required method of accounting. BDC financial
statement presentation and accounting utilizes the value method of accounting
used by investment companies, which allows BDCs to recognize income and value
their investments at market value as opposed to historical cost.
Operating companies use either the fair-value or historical-cost methods of
accounting for financial statement presentation and accounting for securities
held, depending on how the investment is classified and how long the company
intends to hold the investment. Because of an absence of reliable market data as
to the value of its assets, the Company has used historical cost as a proxy for
fair value, mitigating the immediate impact of the change from fair-value to
historical-cost accounting. In the future, however, changing our method of
accounting could reduce the market value of our investments in privately held
companies by eliminating our ability to report an increase in value of our
holdings as they occur. Also, as an operating company, we will have to
consolidate our financial statements with subsidiaries, thus eliminating the
portfolio company reporting benefits available to BDCs.
We do not believe that the withdrawal of the Company's election to be treated as
a BDC will have any impact on its federal income tax status, since we never
elected to be treated as a regulated investment company under Subchapter M of
the Internal Revenue Code. (Electing treatment as a regulated investment company
under Subchapter M generally allows a qualified investment company to avoid
paying corporate level federal income tax on income it distributes to its
shareholders.) Instead, we have always been subject to corporate level federal
income tax on our income (without regard to any distributions we make to our
shareholders) as a "regular" corporation under Subchapter C of the Code.
CHANGE IN ACCOUNTING PRINCIPLE
The Company's financial statements for the quarter ended September 30, 2005, as
presented herein, were prepared using the method of accounting applicable to
investment companies, while our financial statements, as presented herein, for
the three months ended September 30, 2006, are prepared using the method of
accounting applicable to operating companies. Our financial statements for these
periods are not comparable. We have determined it is impractical to comply with
the retroactive application of prior periods being presented on an operating and
consolidated basis in accordance with Statement of Financial Accounting
Standards No. 154, Accounting for Changes and Error Corrections ("FAS #154").
Pursuant to paragraph 11 of FAS #154, we have deemed it impracticable to apply
the effects of a change in accounting principle retroactively because the
following conditions apply as of September 30, 2006:
1. We have made every reasonable effort to apply the requirement, but are
unable to do.
2. Retrospective application of the change in accounting principle
requires assumptions about prior management's intent in prior periods
that cannot now be independently substantiated.
3. Retrospective application of the change in accounting principle
requires significant estimates of amounts, and at this time it is
impossible to distinguish objectively information about those
estimates that: (a) provides evidence of circumstances that existed on
the date(s) at which those amounts would be recognized, measured, or
disclosed under retrospective application, and (b) would have been
available when the financial statements for that prior period were
issued.
REVENUES
Revenue for the three months ended September 30, 2006 was $0.
OPERATING AND OTHER EXPENSES
Operating expenses for the three months ended September 30, 2006 was $249,237,
consisting of salaries and wages, general and administrative expenses, and
professional fees. All of our employees, including officers, have agreed to a
50% reduction in their respective salaries and wages effective July 1, 2006.
CAPITALIZED COSTS
The Company's subsidiaries are development stage enterprises engaged in ocean
explorations and archaeologically sensitive recoveries of artifacts, treasure
trove and/or cargo from shipwrecks under various licenses. FAS #7 defines a
development stage enterprise as one that is devoting substantially all of its
efforts to establishing a new business and either planned principal operations
have not commenced or planned principal operations have commenced but there has
been no significant revenue.
As of September 30, 2006, the Company accounted for $2,344,394 of its ocean
exploration and archaeologically sensitive recoveries of artifacts, treasure
trove and/or cargo from shipwrecks costs incurred to-date as capitalized costs.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2006, we had an accumulated deficit of $19,820,464.
Each year diving operations for ocean explorations and archaeologically
sensitive recoveries of artifacts, treasure trove and/or cargo from shipwrecks
must be funded. In order to fund the 2006 diving operations which ran from July
through October 2006, the President of the Company advanced the Company
$500,000, of which $265,000 was directly used for diving operations in Nova
Scotia. The remaining funds of approximately $235,000 were used for working
capital purposes of the Company, primarily for legal and professional fees as an
SEC registrant.
The net effect, as of June 30, 2006, of the Company's election to withdraw our
business development company status pursuant to the Investment Company Act of
1940 was as follows:
Additional paid in capital $ (550,705)
Deficit (425,068)
Unrealized depreciation on investments 1,015,273
------------------
Net adjustments $ 39,500
==================
As a result of the change in accounting principle because of the Company's
election to withdraw its BDC election, the Company restated its June 30, 2006
Balance Sheet, which is included in the accompanying financial statements.
In October 2006, the Company prepared a private placement memorandum for Fantome
Cove Treasure Trove 150, LLC under which the Company is seeking to raise $4
million in equity investments from accredited investors. The Company, through
the efforts of management, is actively pursuing potential private investors. The
securities offered will not be registered under the Securities Act of 1933 and
may not be offered or sold in the United States absent registration or an
applicable exemption from registration requirements.
Effective November 15, 2006, the Chairman of the Company advanced the Company
$160,000 under a note agreement that requires an interest rate of the lesser of
0.9% or the legal rate under Texas law and is due, in full, with principal and
interest on November 15, 2007.
Effective November 15, 2006, the $600,000 note due to Sea Hunt, Inc. and Venture
Planning, Inc., related parties to the Chairman of the Company, was renegotiated
with a new due date of November 15, 2007 along with an interest rate of the
lesser of 0.9% or the legal rate under Texas law and is due, in full, with
principal and interest on November 15, 2007.
NOTES PAYABLE
The convertible debentures as outlined in Note H of the accompanying financial
statements continue to be in dispute. We have no additional information
regarding the resolution to these disputed convertible debentures which were
entered into by prior management before October 17, 2005.
COMMITMENTS AND CONTINGENCIES:
Prior to the Exchange Agreement, there is a Revenue Agreement as outlined in
Exhibit B of the Exchange Agreement, that requires 20% revenue participation
payable to the original owners of the permits from the net recovery of the
shipwrecks for the permits that have been assigned to the subsidiaries of the
Company's portfolio company, Historic Discoveries, Inc. The 20% revenue
participation allows Historic Discoveries, Inc. to defer permit transfer fees
and align site permit cost with revenue generation, eliminating the exposure
associated with sites that do not produce a material number of artifacts.
Historic Discoveries, Inc. is only required to pay the 20% revenue participation
when sites produce net revenue. The 20% revenue participation also provides
Historic Discoveries, Inc. the right of first refusal on future sites, creating
a mechanism for Historic Discoveries, Inc. and its operating companies to build
site inventory while deferring the associated cost and reducing financial risk.
The Revenue Agreement with the original owners was executed prior to October 17,
2005.
As of September 30, 2006, we have determined that no liability exists under this
agreement.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of September 30, 2006, the Company did not have any off-balance sheet
investments or hedging investments.
The Company does not believe that its business was materially affected by
inflation, other than the impact inflation may have on the securities markets,
the valuations of business enterprises, and the relationship of such valuation
to underlying earnings, all of which will influence the value of the Company's
assets.
Item 4. 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
and principal financial officer. Based on this evaluation, this officer has
concluded that the design and operation of our disclosure controls and
procedures are effective. In addition, 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 our principal executive and principal financial officer, as
appropriate, to allow timely decisions regarding required disclosure.
Part II. Other Information
Item 1. Legal Proceedings
Not applicable.
Item 1A. Risk Factors
An investment in our common stock is highly speculative, involves a high degree
of risk, and should be considered only by those persons who are able to bear the
economic risk of their investment for an indefinite period. In addition to other
information in this Quarterly Report on Form 10-Q, you should carefully consider
the risks described below before investing in our publicly-traded securities.
The risks described below are not the only ones facing us. Our business is also
subject to the risks that affect many other companies, such as competition,
technological obsolescence, labor relations, general economic conditions and
geopolitical changes. Additional risks not currently known to us or that we
currently believe are immaterial also may impair our business operations and our
liquidity.
Our Business Is Inherently Risky and Speculative
Our business of historic shipwreck exploration and recovery is inherently risky,
and the risks predominate at each step of the Corporation's business model.
The value of the Company is largely dependent on permits giving to us, through
our subsidiaries and controlled companies, the exclusive right to exploration
for historical shipwrecks in specified areas. The value of these permits is
dependent, to a substantial degree, upon our research and data assembled
indicating that a historical shipwreck is likely to be in the area. Although we
have access to a substantial amount of research and data, which has been
compiled during various projects, all such research and data regarding
shipwrecks is imprecise, incomplete and unreliable, as it is often composed of,
or affected by, numerous assumptions, rumors, "legends," historical and
scientific inaccuracies, and inaccurate interpretations that have become a part
of such research and data over time. The shipwrecks we seek generally have long
disintegrated, and confirming their locations is difficult. Even if the
shipwrecks are accurately located in waters covered by our permits, the
shipwrecks may have been salvaged or may not have had anything of value on board
at the time of the sinking.
Underwater recovery operations are inherently difficult and dangerous and may be
delayed or suspended by weather, sea conditions or other natural hazards.
Further, such operations may be undertaken more safely during certain months of
the year than during others. These risks are particularly great in the waters
off Nova Scotia, where many of the shipwrecks we seek are believed to be
located. There can be no assurances that we will be able to conduct search
and/or recovery operations only during such favorable periods. In addition, even
though sea conditions in a particular search location may be somewhat
predictable, the possibility exists that unexpected conditions in a search area
may occur and that such unexpected conditions might adversely affect operations.
Further, it is possible that natural hazards may prevent or significantly delay
search and recovery operations.
From time to time, it will be necessary to contract with third parties for
additional equipment and/or labor necessary for the location and recovery of
wreck sites. There can be no assurance that third party contracts will be
available to us. The availability of specialized recovery equipment may present
a problem, and the cost of obtaining the use of such equipment to conduct
recovery operations is uncertain and will depend on, in part, the location and
condition of the wreckage to be recovered.
Persons and entities other than the Company and its affiliates may claim title
to the shipwrecks. Even if we are successful in locating and recovering
shipwrecks, there is no assurance of establishing the rights to property
recovered as against governmental entities, prior owners, or other attempted
salvers claiming an interest therein. There is also a risk of theft of valuable
items at sea, both before and after their recovery, by pirates or poachers and
while in transit to a safe destination.
Even after the location of a historical shipwreck has been confirmed, it may
require a period of years before we can realize revenue from salvage operations.
We generally must obtain a recovery permit before we can make any substantial
recoveries from the site.
Salvage operations generally require a substantial period of time to complete.
Recovered items must be carefully examined by our science team. We then must
negotiate with applicable government authorities, which generally are entitled
to retain a portion of the recovered items. The issuance of recovery permits and
negotiations with governmental authorities may result in delays, particularly if
there is public sentiment against salvage, there are multiple governmental
claims to the shipwreck, or the recovered items are especially valuable or
historically significant.
Even if valuable items can be located and recovered, it is difficult to predict
the price that may be realized for these items. The items may have been damaged
by salt water or by natural sea conditions. The value of the recovered items
will fluctuate with a precious metals market that has been highly volatile in
recent years. Moreover, the entrance into the market of a large supply of
similar items from shipwrecks, including those we have located and recovered,
could itself depress the market for these items. The methods and channels that
may be used in the disposition of the recovered items are uncertain at present
and may include one or a combination of several alternatives. Ready access to
buyers for disposition of any artifacts or other valuable items recovered cannot
be assured and delays in the disposition of such items are very possible.
You May Be Diluted by Future Issuances of Equity or Debt Securities
In the future, we may attempt to increase our capital resources by making
additional public offerings or private placements of equity or debt securities,
including medium-term notes, senior or subordinated notes, one or more classes
of preferred stock, additional common stock, warrants, or equity or debt
securities convertible into common stock. Additional equity offerings by us
reduce the value of our common stock. Any preferred stock we may issue would
have a preference on distributions that could limit our ability to make
distributions to the holders of our common stock. Upon our liquidation, holders
of our debt securities, if any, and shares of preferred stock, if any, and
lenders with respect to other borrowings, if any, will receive a distribution of
our available assets prior to the holders of our common stock. Because our
decision to issue securities in any future offering will depend on market
conditions and other factors beyond our control, we cannot predict or estimate
the amount, timing or nature of our future offerings. Thus, our shareholders
bear the risk of our future offerings reducing the market price of our common
stock and diluting their stock holdings in the Company.
Need for Additional Capital
Although we have recovered a number of valuable items in our salvage operations
to-date, we have not yet realized any revenues from these salvage operations,
and any revenues we realize in the near future are unlikely to be sufficient to
fund our operations. In addition, we have minimal financial resources.
Accordingly, we can continue our operations only if we can raise additional
working capital.
Legal and Political Risks
Historical shipwreck recovery is highly regulated and can be a high-profile
political issue, due to jurisdictional disputes, public concern over
historically significant shipwrecks, and archaeological and environmental
concerns.
A localized group in Nova Scotia has forwarded the idea to repeal the Nova
Scotia Treasure Trove Act. This action remains on the horizon. However, our
legal representation in Nova Scotia indicates the likelihood that it will not
move forward and if it does that we may be "grandfathered" for a period of time.
The United Kingdom has filed a formal notice on the H.M.S. Fantome that could
represent a challenge to our plans for a recovery in Fantome Cove. Our
subsidiary ARC was notified on August 31, 2006, by the Nova Scotia Department of
Tourism, Culture & Heritage that its application for a Class B recovery permit
for the Fantome Cover treasure trove site has not been approved. A Class B
permit is required before ARC can make any substantial recoveries from the site.
The Department has recommended that permission be secured from the United
Kingdom. We are considering our options.
Increasing international interest in the protection of underwater cultural
heritage has been indicated by the United Nations Educational, Scientific and
Cultural Organization (UNESCO) Convention on the Protection of the Underwater
Cultural Heritage. The Convention generally would raise standards in terms of
conduct of exploration and salvage and focus on improving science and archeology
efforts. The Convention was adopted by UNESCO in 2001 but has not yet been
widely adopted by the nations of the world, including Canada or the United
States, and has not yet entered into force with respect to the nations that have
adopted it. We believe that we will be able to comply with the Convention if it
comes into force, although compliance may increase our costs.
Legal Exposure
In the period leading up to the change in control of the Company on October 17,
2005, the Company, under its prior management, disposed of a number of its
assets for aggregate consideration of $20 and issued 800,000,000 shares (800,000
shares on a split-adjusted basis) for consideration the receipt of which the
Company's present management has been unable to confirm. In addition, in the
period from October 17, 2005, to September 22, 2006, although we had elected
treatment as a business development company under the 1940 Act, we may not have
met all of the requirements for treatment as a business development company, and
some of our activities or those of our affiliates raised questions under the
1940 Act. We accordingly could face legal exposure in the event of either
private litigation or a SEC enforcement action with respect to events either
before or after the change in control. Neither the SEC nor any private litigant
has expressed a present intention of bringing such an action against us.
Dependence on Key Personnel
Our success will depend largely on the skills of our key management personnel,
who currently function without employment contacts. The loss of one or more of
our key management personnel may materially and adversely affect our business
and results of operations. We cannot guarantee that we will be able to replace
any key management personnel in the event that their services become
unavailable.
Loss of Certain Protections Because of Non-BDC Status
When the Company ceased to be a BDC regulated under the Investment Company Act
of 1940 ("1940 Act") in September 2006, the shareholders lost certain
protections, including, but not limited to, the following:
o The Company is no longer be subject to the requirement that it
maintain a ratio of assets to senior securities of at least 200%.
o The Company is no longer prohibited from protecting any director or
officer against any liability to the Company or the Company's
shareholders arising from willful malfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the
conduct of that person's office.
o The Company is no longer required to ensure that a majority of the
directors are persons who are not "interested persons," as that term
is defined in section 56 of the 1940 Act, and certain persons that
would be prevented from serving on the Company's board if it were a
BDC (such as investment bankers) will be able to serve on the
Company's board.
o The Company is no longer subject to provisions of the 1940 Act
regulating transactions between BDCs and certain affiliates and
restricting the Company's ability to issue warrants and options.
o The Company is no longer obligated to subject a material change in its
fundamental investment policies to the approval of its shareholders.
o The Company is no longer subject to provisions of the 1940 Act
prohibiting the issuance of securities at below net asset value.
o The withdrawal of the Company's election to be regulated as a BDC
results in a change in its method of accounting. BDC financial
statement presentation and accounting uses the value method of
accounting used by investment companies, which allows BDCs to
recognize income and value their investments at market value as
opposed to historical cost. Operating companies use either the
fair-value or historical-cost methods of accounting for financial
statement presentation and accounting for securities held, depending
on how the investment is classified and how long the company intends
to hold the investment. Changing the Company's method of accounting
could reduce the market value of its investments in privately held
companies by eliminating the Company's ability to report an increase
in value of its holdings as they occur.
o Because the Company's securities are not registered under Section 12
of the Exchange Act, it is not subject to the obligation to provide
investors with proxy or information statements, and its insiders are
not required to report their trades and holdings. However, the Company
continues to be a reporting company and files periodic and current
reports on Form 10-K, Form 10-Q, and Form 8-K. The Company's Board of
Directors is still subject to customary principles of fiduciary duty
with respect to the Company and its shareholders, and investors will
benefit from a number of protections and corporate governance
requirements under the Sarbanes-Oxley Act of 2002.
OTC Bulletin Board
Our common stock is quoted on the OTC Bulletin Board ("OTCBB"). The OTCBB is an
inter-dealer, over-the-counter market that provides significantly less liquidity
than the NASDAQ Stock Market or national or regional exchanges. Securities
traded on the OTCBB are typically thinly traded, highly volatile, have fewer
markets and are not followed by analysts. The SEC's order handling rules, which
apply to NASDAQ-listed securities, do not apply to securities quoted on the
OTCBB. Quotes for stocks included on the OTCBB are not listed in newspapers,
although they are available on the Internet.
Penny Stock Rules
Trading in our securities will be subject to the "penny stock" rules for the
foreseeable future. The SEC has adopted regulations that generally define a
penny stock to be any equity security that has a market price of less than $5.00
per share, subject to certain exceptions. These rules require that any
broker-dealer who recommends our securities to persons other than prior
customers and accredited investors must, prior to the sale, make a special
written suitability determination for the purchaser and receive the purchaser's
written agreement to execute the transaction. Unless an exception is available,
the regulations require the delivery, prior to any transaction involving a penny
stock, of a disclosure schedule explaining the penny stock market and the risks
associated with trading in the penny stock market. In addition, broker-dealers
must disclose commissions payable to both the broker-dealer and the registered
representative and current quotations for the securities they offer. The
additional burdens imposed upon broker-dealers by such requirements may
discourage broker-dealers from recommending transactions in our securities,
which could severely limit the liquidity of our common stock and consequently
adversely affect the market price of our common stock.
No Dividends
Holders of our securities will only be entitled to dividends when, as and if
declared by our Board of Directors. The Company has never paid dividends, and we
do not expect to have profits or a cash surplus available for dividends in the
foreseeable future.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held a special meeting of its shareholders on September 20, 2006, to
consider a proposal for the company to withdraw its election to be a business
development company under the 1940 Act. The withdrawal was approved by a vote of
91.33% of the company's outstanding common stock, with 23,931,879 shares voted
in favor, 20,665 shares voted against, and 252 abstentions.
Item 5. Other Information
Not applicable.
ITEM 6. EXHIBITS
Exhibits
1. Articles of Incorporation are incorporated by reference to Exhibit
3(i) of Form 10-K as filed electronically with the SEC on October 13,
2006.
2. By-Laws are incorporated by reference to Exhibit 3(ii) of Form 10-K as
filed electronically with the SEC on October 13, 2006.
3. Exchange Agreement is incorporated by reference to Exhibit 10.1 of
Form 10-K as filed electronically with the SEC on October 13, 2006.
4. Settlement Agreement is incorporated by reference to Exhibit 10.2 of
Form 10-K as filed electronically with the SEC on October 13, 2006.
5. Letter re: Change in Accounting Principles is filed herewith as EX-18.
6. Section 302 CEO and CFO Certification is filed herewith as EX-31.1.
7. Section 906 CEO and CFO Certification is filed herewith as EX-32.1.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sovereign Exploration Associates
International, Inc.
Date: November 21, 2006 By: /s/Robert D. Baca
Robert D. Baca
President, Chief Executive Officer,
and Chief Financial Officer
Exhibit Index
Exhibit No. Description
EX-18 Letter regarding Change in Accounting Principles
EX-31.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Rule 13a-14(a)/15d-14(a) Certification,
as adopted pursuant to Section 302 of the Sarbanes Oxley Act
of 2002
EX-32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes Oxley Act of 2002