UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
COMMISSION FILE NUMBER 814-00703
AVENTURA HOLDINGS, INC.
(Exact name of issuer as specified in its charter)
Florida 65-0254624
(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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS
COMMON STOCK, PAR VALUE
$0.001 PER SHARE
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 March 28, 2006 was
2,319,657,813.
The aggregate market value of common stock held by non-affiliates of the
Registrant on December 31, 2005 based on the closing price on that date of
$0.0005 on the Over the Counter Bulletin Board was $469,829. For the purposes of
calculating this amount only, all directors and executive officers of the
Registrant have been treated as affiliates. There were 2,019,657,813 shares of
the Registrant's common stock outstanding as of December 31, 2005.
1
INDEX
Page
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PART I
Item 1 Business 3
Item 2 Properties 10
Item 3 Legal Proceedings 10
Item 4 Submission of Matters to a Vote of Security Holders 10
PART II
Item 5 Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 11
Item 6 Selected Financial Data 14
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 7A Quantitative and Qualitative Disclosures about Market Risk 28
Item 8 Financial Statements and Supplementary Data 29
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 62
Item 9A Controls and Procedures 62
Item 9B Other Information 62
PART III
Item 10 Directors and Executive Officers of the Registrant 63
Item 11 Executive Compensation 64
Item 12 Security Ownership of Certain Beneficial Owners and Management 64
Item 13 Certain Relationships and Related Transactions 64
Item 14 Principal Accountant Fees and Services 65
PART IV
Item 15 Exhibits and Financial Statement Schedules 66
SIGNATURES 67
EX-31.1 Certification
EX-31.2 Certification
EX-32.1 Certification
2
PART I
ITEM 1. BUSINESS
On March 15, 2005, Aventura Holdings, Inc. (the "Company") filed form N-54A with
the 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 of its new status, the Company is operating as an
investment holding company, has acquired and plans to announce a number of
acquisitions and investments which will be designed to build an investment
portfolio to enhance the Company's shareholder value. The Company provides
equity, capital and advisory services for management buyouts, recapitalizations,
and the growth and needs of emerging companies. (See the following section for a
broader discussion of the operating environment of BDCs. See also "Risk
Factors.") As a BDC, the Company is, in effect, a publicly traded private equity
fund, where stockholders provide capital in a regulated environment for private
investment in a pool of short and long-term investments. Congressional intent
behind the creation of BDCs was to encourage the flow of public capital to
private and smaller public companies.
The Company has concentrated its investment strategies in the telephony sector
based upon experience and exposure to opportunities but plans to expand
acquisitions and investments to other lines of business and industry to enhance
value to stockholders through capital appreciation and payments of dividends to
the Company by its portfolio investments.
BDC regulation was created in 1980 by Congress to encourage the flow of public
equity capital to small businesses in the United States. BDCs, like all mutual
funds and closed-end funds, are regulated under the 1940 Act. BDCs report to
stockholders like traditional operating companies and file regular quarterly and
annual reports with the Securities and Exchange Commission. BDCs are required
to make available significant managerial assistance to their portfolio
companies.
Before the election of BDC status, the Company held a 50% investment in Radio X
Network. The original cost basis was $110,000. Radio X net assets are unknown
to the current Board and are considered abandoned. The Board assigned a $0 fair
market value of the Radio X investment at December 31, 2005.
The Company also held a 100% investment in Radio TV Network, Inc. before
electing BDC status. The net assets of Radio TV Network, Inc. are unknown to
the current Board and are considered abandoned. The original cost basis was $0
and the Board assigned a $0 fair market value of the Radio TV Network, Inc.
investment at December 31, 2005.
For the period between March 15, 2005 (commencement of our status as a BDC) and
December 31, 2005, the Company explored several investment opportunities and
made two investments.
On June 3, 2005 the Company purchased ten percent of VoIPBlue.com, Inc.
(VoIPBlue) pursuant to a private offering memorandum of April 22, 2005.
VoIPBlue.com, Inc. developed software and was structured as a telecommunications
exchange serving Voice over Internet Protocol (VoIP) wholesale carriers.
Research and development, software, operating and other costs dissolved
investment capital and Company management was unable to further assist in
day-to-day operations. Local operations ceased in December, 2005 and moved to
Riga, Latvia in an effort to have the VoIPBlue shareholder / developer assume
operational control. Latvian management was unsuccessful and a decision was
made in 2006 to cease operations. VoIPBlue is attempting to sell its developed
and purchased software, the success of which is difficult to determine as there
is no liquid market. An independent accredited business valuation firm was
hired by the Company to assign a fair market value to the $100,000 investment in
VoIPBlue at December 31, 2005. Advanced Business Valuations determination of
value was $0 at December 31, 2005.
3
On June 7, 2005 the Company issued 880,000,000 shares of its previously
un-issued restricted common stock in an exempt issuance in exchange for 100%
interest in Aventura Networks, LLC. The shares were valued at a discounted price
of $0.00091 per share and the purchase is reflected on the financial statements
at $800,724. During 2005, the Company provided $299,925 in advances to Aventura
Networks, LLC and Aventura Networks, LLC paid obligations of $108,479 for the
Company and made an investment on behalf of the Company in VoIPBlue.com, Inc. in
the amount of $100,000. Aventura Networks was originally a wholesale VoIP buyer
and seller of routes predominantly in third-world countries where rates were
high and margins were wide. Increased competition led to lower prices, reduced
margins and Aventura Networks exit from the VoIP wholesale carrier market.
Aventura Networks changed direction and began to further develop and sell
developed and third party VoIP switching and internet protocol private branch
exchange software. An independent accredited business valuation firm was hired
by the Company to assign a fair market value to the $800,724 investment in
Aventura Networks as well as the likelihood of satisfaction of amounts owed to
the Company at December 31, 2005. Advanced Business Valuations determination of
value was $0 at December 31, 2005 and an indeterminable likelihood of repayment
of the debt owed to the Company. Although the valuation firm was unable to
determine a likelihood of debt repayment, Aventura Networks continues to pay
Company expenses in 2006 through sales and conversion of its assets to cash. The
Company expensed $50,912 to bad debt expense representing part of the amount
Aventura Networks owes the Company at December 31, 2005 and carries the net
amount of the receivable at $40,532 representing Company expenses paid and
expectations of payments by Aventura Networks in 2006.
On October 17, 2005 the Company merged with Aventura Holdings, Inc. Aventura
Holdings, Inc. was the former owner of Aventura Networks, LLC and its sole net
assets were 880,000,000 shares of Company stock and anti-dilution rights
acquired in the LLC purchase agreement with the Company. Immediately prior to
the merger, Aventura Holdings, Inc. transferred its net assets to Melissa Apple,
Trustee of the Maria Lopez Irrevocable Trust UTD March 29, 2004 (its sole
shareholder). Subsequent to the merger the Company adopted the name Aventura
Holdings, Inc and the former company was dissolved.
On February 23, 2006, the Company announced that it entered into a Memorandum of
Understanding and Intent (MOU) with Horvath Holdings, LLC ("Horvath") to acquire
30% of Ohio Funding Group, Inc. in exchange for 200,000,000 shares of previously
un-issued restricted common stock in an exempt issuance to Horvath Holdings.
Integrated into the MOU is a one year option for Horvath to purchase a
controlling interest in Aventura through the sale of other Horvath controlled
entities to Aventura either in a single transaction or a series of transactions.
Once we enter into a binding agreement with Horvath Holdings, LLC our future
operating business and ownership will change. Therefore, management determined
that continuing as a BDC is not practical and that it is in the Company's best
interest to un-elect BDC status in the second fiscal quarter of 2006.
Un-electing this status requires a shareholder vote but, inasmuch as one
shareholder holds a majority of our stock, we determined that we can make this
election upon submitting the matter to this one shareholder then filing an
information statement (Form 14C). Therefore, in order to withdraw from its BDC
status, the Company will first be required to file a Form 14C Preliminary
Information Statement regarding the proposed shareholder vote to withdraw its
BDC election, and any other matters to be voted on by shareholders. The company
will not be seeking proxies as the Company believes that a majority of its
outstanding stock is controlled by one shareholder who will vote in favor of the
BDC withdrawal. Upon completion of the Preliminary Information Statement, the
Company will then file a Form 14C Definitive Information Statement, setting the
shareholder meeting to vote on the BDC withdrawal. The Company will then hold
the shareholder meeting. Assuming majority shareholder approval to withdraw the
BDC election, the Company will then file a Form N-54C notifying the Securities
and Exchange Commission that, pursuant to the provisions of Section 54(c), it is
withdrawing its election to be subject to Sections 55 through 65 of the
Investment Company Act of 1940 ("Investment Company Act" or "1940 Act"). Upon
completion of this process, the Company will no longer be subject to the
Investment Company Act but will continue as an operating reporting public
company, and will still be subject to the Securities Exchange Act of 1934.
Under the rules of the Securities and Exchange Commission, the election to
terminate status as a BDC cannot become effective until at least 20 days after
the accompanying Information Statement has been distributed to the stockholders
of the Company. We expect the termination of such status, and the appropriate
filing to be made with the Securities and Exchange Commission, on or about April
25, 2006.
Management conducted its due diligence on Ohio Funding Group, Inc. and other
Horvath Holdings, LLC investments. Horvath owns and operates successful
automobile dealerships and finance companies concentrating in the sub-prime
market. Horvath executives have decades of automobile industry experience
including key public company positions. If Horvath exercises their option
discussed in our MOU and takes control of Aventura, we expect to pursue a
different business model consistent with their experience including possible
further acquisitions within the automobile industry. We believe management's
plan will allow the Company to continue as a going concern.
4
Operating and Regulatory Structure
Our investment activities are managed by our executive officers and supervised
by our board of directors, a majority of whom are independent. As a BDC, we are
required to comply with certain regulatory requirements. For example, we
generally cannot co-invest in any portfolio company with any of our affiliates
without an exemptive order from the Securities and Exchange Commission, or the
"SEC." Also, while we are permitted to finance investments using debt, our
ability to use debt is limited in certain significant respects. We are not
currently in compliance with all of the rules and regulations related to
operating as a BDC.
In March 2005, we filed an election to become subject to the1940 Act, 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 offering, we filed a Form 1-E with the SEC,
which was reviewed in the ordinary course and a comment letters were issued. 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. In May
2005 under the 1-E filing we entered into and in 2006 completed a Stock Purchase
Agreement with Dutchess Private Equities Fund II LP involving the sale of
Company stock in exchange for cash. In May 2005, we also issued shares
identified in the 1-E filing to outgoing officers, directors and their
affiliates. Current management on behalf of the Company filed a lawsuit in US
District Court seeking the return of the shares issued to outgoing officers,
directors and their affiliates as we believe these shares were issued for
services in contradiction to rules governing BDCs.
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.
Investment Objectives and Policies
Our investment objective as a BDC is to achieve capital gains and, to a lesser
extent, current income. In order to achieve this objective, we currently intend
to invest in public and private companies in various industries. We may also
invest to a limited extent in selected transactions world-wide, to the extent
that such investments are consistent with the limitations on such investing by
BDCs under the 1940 Act. Furthermore, we plan to target emerging growth
companies that have an executable business plan for growth and a well-managed
infrastructure.
Investment Strategy
The Company intends to seek to invest in companies that it believes present
opportunities for superior performance through liquidity events, internal
growth, product, or geographic expansion, the completion of complementary add-on
acquisitions, or industry consolidations. The Company currently expects to
invest, providing both subordinated debt and equity, to certain portfolio
companies and only subordinated debt or equity to others.
The Company would be comfortable as either a majority or minority investor,
without a fixed time horizon for the investments. This should allow for
long-term commitments. The Company can continue to provide capital for add-on
acquisitions that help build value after the initial closing. The Company's
investment objectives and policies are subject to change by a majority
affirmative vote of the Company's Board of Directors.
Managerial Assistance
As a BDC, we are generally required to make managerial assistance available to
our portfolio companies. When requested, the Company will provide guidance and
counseling concerning their management, operations, business objectives, and
policies. Additionally, it our current intention to provide advisory services
for management buyouts, recapitalizations, and the growth and capital needs of
emerging growth companies.
5
The Company's management has little in-depth experience in the US public
capital markets and can provide little assistance to portfolio companies with
the process of going public or seeking liquidity events, or developing
strategies for creating stockholder value once those companies are public or
liquidity events are achieved. The Company has no relationships with potential
service providers in this process.
Investment Process
Management has little experience in mergers and acquisitions and plans to work
with outside consultants in both buy and sell-side portfolio companies to
accomplish their individual goals by implementing the following steps:
(A) Develop detailed understanding of management's expected outcomes;
(B) Develop a timetable for transaction;
(C) Validate proposed transaction terms with select buyers or sellers and
select institutional investors or lenders;
(D) Finalize financing strategy and market positioning;
(E) Perform due diligence;
(F) Prepare executive summary and presentation materials - including
financial model;
(G) Pre-screen and contact potential buyers or sellers;
(H) Coordinate principal meetings;
(I) Coach management on how to communicate and negotiate with buyers
and sellers and generally facilitate the interactions between
management and buyers or sellers;
(J) Assist with the preparation of responses to due diligence requests;
(K) Assist with the negotiation of term sheets with interested parties; and
(L) Work with management and the investor or lender to complete due
diligence process and negotiate final closing documents.
Due Diligence
We conduct diligence on prospective portfolio companies consistent with what our
management believes to be the best practices approach adopted by others in the
industries in which such opportunities exist. We believe that our management
has the ability and knowledge to conduct appropriate and extensive due diligence
investigations prior to our investing in a prospective portfolio company. In
conducting our due diligence, we use publicly available information, as well as
information derived from former and current management, consultants,
competitors, and investment bankers and the direct experience of our management
and consultants.
Our due diligence may typically include:
* review of historical and prospective financial information;
* on-site visits;
* interviews with management, employees, customers and vendors of the
potential portfolio company;
* review of senior loan documents;
* background checks on management; and
* research relating to the company's management, industry, markets,
products and services, and competitors.
6
Upon the completion of due diligence and a decision to proceed with an
investment in a company, our management presents the opportunity to our board of
directors, which determines whether to pursue the potential investment.
Additional due diligence with respect to any investment may be conducted on our
behalf by attorneys and independent accountants prior to the closing of the
investment, as well as other outside advisers, as appropriate.
Valuation Policies
Valuation of Portfolio Investments
As a business development company, the Company's business plan calls for it to
invest primarily in illiquid securities issued by private companies ("Private
Investments"). These Private Investments are generally subject to restrictions
on resale and generally have no established trading market. The Company values
its Private Investments at fair value as determined in good faith by the
Company's board of directors in accordance with the Company's valuation policy
during interim reporting periods and annually by an independent valuation firm
with Board ratification. The Company determines fair value to be the amount for
which an investment could be sold in an orderly disposition over a reasonable
period of time between willing parties other than in a forced or liquidation
sale. The Company's valuation policy is intended to provide a consistent basis
for establishing the fair value of the portfolio. The Company intends to record
unrealized depreciation on investments when it believes that an asset has been
impaired and full collection for the loan or realization of an equity security
is doubtful. Conversely, the Company intends to record unrealized appreciation
if it has a clear indication that the underlying portfolio company has
appreciated in value and, therefore, the Company's security has also appreciated
in value. Under this valuation policy, the Company does not consider temporary
changes in the capital markets, such as interest rate movements or changes in
the public equity markets, in order to determine whether an investment in a
private company has been impaired or whether a private investment has increased
in value. The value of investments in public securities is determined using
quoted market prices discounted for restrictions on resale.
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.
Determining the enterprise value of a portfolio company, as if that portfolio
company were to be sold in a "current sale," is a very complex process where we
must analyze the historical and projected financial results of the portfolio
company and analyze the public trading market and private M&A market to
determine appropriate purchase price multiples. In addition, a reasonable
discount to the value of our securities must also be reflected when we may have
restrictions such as vesting periods for warrants or other factors.
There is no one methodology to determine enterprise value. Typically in the
private equity business, companies are bought and sold based upon multiples of
EBITDA, cash flow, revenues and in limited instances book value. In determining
a multiple to use for valuation purposes, we look to private M&A statistics,
discounted public trading multiples or industry practices. In determining the
right multiple, one needs to consider not only the fact that our portfolio
company may be private relative to a peer group, but one must consider the size
and scope of our portfolio company and its specific strengths and weaknesses.
In some cases, when a portfolio company is at EBITDA breakeven or slightly below
but has excellent future prospects, the best valuation methodology may be a
discounted cash flow analysis based upon future projections. If a company is
distressed, a liquidation analysis may provide the best indication of enterprise
value.
Our methodology includes the examination of, among other things, the underlying
investment performance, financial condition, and market-changing events that
impact valuation. Because of the type of investments that we make and the
nature of our business, this valuation process requires an analysis of various
factors. In our valuation process, we use the AICPA's definition of "current
sale," which means an "orderly disposition over a reasonable period of time
between willing parties other than in a forced or liquidation sale."
7
Specific Considerations
The valuation of illiquid private securities is inherently subjective, and as a
result we must exercise good judgment in our valuation process. The ultimate
goal is a reasonable estimate of fair value determined in good faith and applied
consistently.
When we are the controlling shareholder, the discount imposed should generally
be less than in the case of a minority position. We may still contemplate the
need to discount for the current state of the M&A market or restrictions we may
have imposed on us due to our relationship with management or other capital
providers.
Ultimately, we refer the valuation process to certified experts at annual
reporting periods. The Board of Directors reviews the experts report and
ratifies their reasonable conclusions.
Equity Securities
Equity interests in portfolio companies for which there is no liquid public
market are valued based on the enterprise value of the portfolio company, which
is determined using various factors, including cash flow from operations of the
portfolio company and other pertinent factors such as recent offers to purchase
a portfolio company's securities or other liquidation events. The determined
fair values are generally discounted to account for restrictions on resale and
minority control positions.
The value of the Company's equity interests in public companies for which market
quotations are readily available is based upon the closing public market price
for the last day up to and including the balance sheet date. Securities that
carry certain restrictions on sale are typically valued at a discount from the
public market value of the security.
Loans and Debt Securities
For loans and debt securities, to the extent that we invest in them, fair value
generally approximates cost unless the borrower's condition or external factors
lead to a determination of fair value at a lower amount. When the Company
receives nominal cost warrants or free equity securities ("nominal cost
equity"), the Company allocates its cost basis in its investment between its
debt securities and its nominal cost equity at the time of origination. At that
time, the original issue discount basis of the nominal cost equity is recorded
by increasing the cost basis in the equity and decreasing the cost basis in the
related debt securities.
Competition
Virtually all of our existing and potential competitors are substantially larger
and have considerably greater financial, technical, and marketing resources than
we do and, due to our current limited capital, it may be difficult for us to
compete successfully with these other companies. For example, some competitors
may have a lower cost of funds and access to funding sources that are not
available to us. In addition, some of our competitors may have higher risk
tolerances or different risk assessments, which could allow them to consider a
wider variety of investments and establish more relationships than us.
Furthermore, many of our competitors are not subject to the regulatory
restrictions that the 1940 Act imposes on us as a BDC.
Certain Government Regulations
We operate in a highly regulated environment. The following discussion
generally summarizes certain government regulations applicable to business
development companies.
8
Business Development Company.
A BDC is defined and regulated by the 1940 Act. A BDC must be organized in the
United States for the purpose of investing in or lending to primarily private
companies and making managerial assistance available to them. BDCs generally
are designed to provide stockholders with the ability to retain the liquidity of
a publicly traded stock, while sharing in the possible benefits, if any, of
investing in primarily privately owned companies. As a BDC, we may not acquire
any asset other than "qualifying assets" unless, at the time we make the
acquisition, the value of our qualifying assets represent at least 70% of the
value of our total assets. The principal categories of qualifying assets
relevant to our business are:
* Securities purchased in transactions not involving any public offering, the
issuer of which is an eligible portfolio company;
* Securities received in exchange for or distributed with respect to
securities described in the bullet above or pursuant to the exercise of
options, warrants or rights relating to such securities; and
* Cash, cash items, government securities or high quality debt securities
(within the meaning of the 1940 Act), maturing in one year or less from the
time of investment.
An eligible portfolio company" means any issuer that:
(A) Is organized under the laws of, and has its principle business in, any
state or states:
(B) Is neither an investment company as defined in section 3 of the
1940 Act (other than a Small business investment company which is
licensed by the Small Business Administration to operate under the
Small Business Investment Act of 1958 and which is a wholly owned
subsidiary of the business development company) nor a company which
would be an investment company except for the exclusion from the
definition of investment company in section 3(c) of the 1940 Act, and
(C) Satisfies one the following:
(i) It does not have any class of securities with respect to
which a member of a national securities exchange, broker, or
dealer may extend or maintain credit to or for a customer
pursuant to rules or regulations adopted by the Board of
Governors of the Federal Reserve System under section 7 of the
Securities Exchange Act of 1934;
(ii) It is controlled by a business development company, either
alone or as part of a group acting together, and such business
development company in fact exercises a controlling influence
over the management or policies of such Eligible Portfolio
Company and, as a result of such control, has an affiliated
person who is a director of such Eligible Portfolio Company;
(iii) It has total assets of not more than $4,000,000, and
capital and surplus (shareholders' equity less retained earnings)
of not less than $2,000,000, except that the SEC may adjust such
amounts by rule, regulation, or order to reflect changes in one
or more generally accepted indices or other indicators for small
businesses; or
(iv) It meets such other criteria as the SEC may, by rule,
establish.
As a business development company, we are entitled to issue senior securities in
the form of stock or senior securities representing indebtedness, including debt
securities and preferred stock, as long as each class of senior security has
asset coverage of at least 200% immediately after each such issuance. In
addition, while any senior securities remain outstanding, we must make
provisions to prohibit any distribution to our stockholders unless we meet the
applicable asset coverage ratio at the time of the distribution. See "Risk
Factors."
We may also be prohibited under the 1940 Act from knowingly participating in
certain transactions with our affiliates without the prior approval of our Board
of Directors who are not interested persons and, in some cases, prior approval
by the SEC.
As with other companies regulated by the 1940 Act, a business development
company must adhere to certain substantive regulatory requirements. A majority
of our directors must be persons who are not interested persons, as that term is
defined in the 1940 Act. Additionally, as a business development company, we
are prohibited from protecting any director or officer against any liability to
us or our stockholders arising from willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of such
person's office.
9
We maintain a code of ethics that establishes procedures for personal investment
and restricts certain transactions by our personnel. Our code of ethics
generally does not permit investment by our employees in securities that may be
purchased or held by us.
We may not change the nature of our business so as to cease to be, or withdraw
our election as, a business development company unless authorized by vote of a
"majority of the outstanding voting securities," as defined in the 1940 Act. A
majority of the outstanding voting securities of a company is defined under the
1940 Act as the lesser of: (i) 67% or more of such company's shares present at a
meeting if more than 50% of the outstanding
shares of such company are present and represented by proxy or (ii) more than
50% of the outstanding shares of such company.
We expect that we will be periodically examined by the SEC for compliance with
the 1940 Act.
Employees
As of March 24, 2006, we had one full-time employee, not represented by a
union. We believe that our relationship with our employee is good.
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. Based on this evaluation,
management has 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.
Name Changes
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.
ITEM 2. PROPERTIES
We do not own any real estate or other physical properties materially important
to our operation. Our administrative and principal executive offices are
located at 2650 Biscayne Boulevard, 1st Floor, Miami, Florida 33137. We believe
that our office facilities are suitable and adequate for our business as it is
contemplated to be conducted.
ITEM 3. LEGAL PROCEEDINGS
On December 30, 2005, the Company filed a complaint in US District Court for
the Southern District of Florida against its former management and directors
alleging inappropriate issuance of Company shares to themselves and their
affiliates. On March 22, 2006 the Company settled the lawsuit in exchange for
former management's agreement to relinquish all rights to approve, authorize or
consent to current managements decisions as contained in the LLC Purchase
Agreement between the Company and the owners of Aventura Networks LLC. The
Company believes the complaint had merit but did not wish to harm innocent third
parties in the event these shares were further distributed. Furthermore,
previous management refused to relinquish their aforementioned rights and
indicated their intention to block our acquisition of Ohio Funding Group, Inc.
as announced in our February 21, 2006 Memorandum of Understanding and Intent
with Horvath Holdings, LLC unless we settled by dismissing the lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during our fourth fiscal
quarter ended December 31, 2005.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Price Range of Common Stock
Our common stock is quoted by Over the Counter Bulletin Board under the symbol
"AVNT". The following table sets forth the high and low bid prices for our
common stock for the periods indicated, as reported by Over the Counter Bulletin
Board. Such quotations reflect inter-dealer prices, without retail mark-up,
mark-down, or commissions, and may not necessarily represent actual
transactions.
BID
---
HIGH LOW
------- -------
Year Ended December 31, 2005:
First Quarter $0.0090 $0.0030
Second Quarter $0.0070 $0.0020
Third Quarter $0.0034 $0.0008
Fourth Quarter $0.0012 $0.0003
Year Ended December 31, 2004:
First Quarter $0.0500 $0.0240
Second Quarter $0.0450 $0.0200
Third Quarter $0.0350 $0.0180
Fourth Quarter $0.0150 $0.0030
Year Ended December 31, 2003:
First Quarter $0.0600 $0.0200
Second Quarter $0.0450 $0.0150
Third Quarter $0.0300 $0.0150
Fourth Quarter $0.0900 $0.0350
CLOSING
BID PRICE
Year Ended December 31, 2005:
Premium of Premium or
High Sales Discount of Low
Price to Sales Price to
NAV 2 High Low NAV 3 NAV 3 Dividends
--------- ------- ------- ----------- ---------------- ----------
2nd Quarter (commencing
March 15, 2005) 1 $ 0.0033 $0.0450 $0.0200 1377% 612% $ -
3rd Quarter $ 0.0004 $0.0350 $0.0180 7871% 4048% $ -
4th Quarter $(0.0001) $0.0150 $0.0030 -10861% -2172% $ -
1 Date of our election to become regulated as a BDC under the 1940 Act.
2 NAV per share is determined as of the last day in the relevant quarter and therefore may not reflect the NAV per share
on the date of the high and low sales prices. The NAVs shown are based on outstanding shares at the
end of each period.
3 Calculated as of the respective high or low closing sales price divided by the quarter end NAV.
While shares of our common stock currently trade in excess of our net asset
value, there can be no assurance, however, that our shares will continue to
trade at such a premium (to net asset value). On March 28, 2006, the last sales
price of our common stock was $0.0031. As of March 28, 2006, there were
approximately 346 holders of record of our common stock.
Penny Stock Rules
The SEC has adopted rules that regulate broker-dealer practices in connection
with transactions in penny stocks. Penny stocks are generally equity securities
with a market price of less than $5.00, other than securities registered on
certain national securities exchanges or traded on the NASDAQ system, if current
price and volume information with respect to transactions in such securities is
provided by the exchange or system. The penny stock rules require a
broker-dealer, prior to a transaction (by a person other than an established
customer or an "accredited investor") in a penny stock, among certain other
restrictions, to deliver a standardized risk disclosure document prepared by the
SEC, that: (a) contains a description of the nature and level of risk in the
market for penny stocks in both public offerings and secondary trading; (b)
contains a description of the broker's or dealer's duties to the customer and of
the rights and remedies available to the customer with respect to a violation of
such duties or other requirements of the securities laws; (c) contains a brief,
clear, narrative description of a dealer market, including bid and ask prices
for penny stocks and the significance of the spread between the bid and ask
price; (d) contains a toll-free telephone number for inquiries on disciplinary
actions; (e) defines significant terms in the disclosure document or in the
conduct of trading in penny stocks; and (f) contains such other information and
is in such form, including language, type, size and format, as the SEC shall
require by rule or regulation. In addition, the penny stock rules require a
uniform two day waiting period following delivery of the standardized risk
disclosure document and receipt of a signed and dated acknowledgement of receipt
of such disclosure document before the penny stock transaction may be completed.
The broker-dealer also must provide, prior to effecting any transaction (by a
person other than an established customer or an "accredited investor") in a
penny stock, the customer with (a) bid and offer quotations for the penny stock;
(b) the compensation of the broker-dealer and its salesperson in the
transaction; (c) the number of shares to which such bid and ask prices apply, or
other comparable information relating to the depth and liquidity of the market
for such stock; and (d) a monthly account statement showing the market value of
each penny stock held in the customer's account.
11
In addition, the penny stock rules require that prior to a transaction in a
penny stock not otherwise exempt from those rules; the broker-dealer must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser's written acknowledgment of the receipt
of a risk disclosure statement, a written agreement as to transactions involving
penny stocks, and a signed and dated copy of a written suitability statement.
These disclosure requirements may have the effect of reducing the trading
activity for our common stock. Therefore, stockholders may have difficulty
selling our securities.
Dividends
We have never declared or paid cash dividends on our common stock and do not
anticipate paying cash dividends in the foreseeable future. We anticipate
reinvesting profits, if any, into the business. As of the end of our 2005
fiscal year, our board had not declared any dividends.
We may not be able to achieve operating results that will allow us to make
dividends and distributions at a specific level or to increase the amount of
these dividends and distributions from time to time. In addition, we may be
limited in our ability to make dividends and distributions due to the asset
coverage test for borrowings when applicable to us as a business development
company under the 1940 Act and due to provisions in future credit facilities.
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 an
RIC. We cannot assure stockholders that they will receive any dividends and
distributions or dividends and cash or stock distributions at a particular
level.
Recent Sale of Unregistered Securities
A. On May 13, 2005 the Company granted 150,000,000 shares of its previously
un-issued unrestricted free-trading 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 believes 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 unrestricted free-trading 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 $48,000 was expensed. The term of the agreement was three months and
the agreement was cancelled after two months. 6,000,000 shares were
returned to the Company and retired. As a BDC, the Company is not permitted
to issue stock for services and believes 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 unrestricted free-trading 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 believes 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 unrestricted free-trading 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 believes 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.
12
E. On May 26, 2005 the Company issued 10,000,000 shares of its previously
un-issued unrestricted free-trading 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 believes 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 unrestricted free-trading 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 believes 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 unrestricted free-trading 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 believes 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 unrestricted free-trading 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 believes 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 unrestricted free-trading 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 believes 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.
13
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 previously un-issued
unrestricted free-trading 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
the sellers of Aventura Networks, LLC to additional shares in the event
additional shares are issued to Dutchess relating to the initial draw of
this Stock Purchase Agreement. By virtue of the LLC Purchase Agreement, the
former owner of Aventura Networks LLC is entitled to 5 times the additional
shares issued to Dutchess 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 waived 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) previously un-issued unrestricted
free-trading 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) previously un-issued unrestricted free-trading shares, an
additional fifty million (50,000,000) previously un-issued unrestricted
free-trading shares on November 3, 2005 and an additional sixty million
(60,000,000) previously un-issued unrestricted free-trading shares on
December 29, 2005 towards satisfaction of the obligations for the initial
draw amount and the Company's Board approved the issuances. 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 December 31, 2005 $40,544.53
has been amortized as a cost of financing. For financial reporting
purposes, all shares issued to Dutchess are not considered issued or
outstanding until a final settlement date is achieved. At December 31, 2005
however the issued shares to Dutchess are considered dilutive for purposes
of the computation of diluted earnings per share. In February 2006 an
additional fifty million (50,000,000) previously un-issued unrestricted
free-trading shares were issued to Dutchess and in March 2006 a final
fifteen million (15,000,000) previously un-issued unrestricted free-trading
shares were issued to Dutchess. After Dutchess sold the last of the shares
issued in March 2006 our loan balance was $978.11. Aventura Networks, LLC
issued a check to Dutchess on behalf of the Company to fully satisfy the
debt. Immediately after satisfying our Debt with Dutchess we exchanged a
mutual release.
K. On June 7, 2005 the Company issued 880,000,000 shares of its previously
un-issued restricted common stock in an exempt issuance to Aventura
Holdings, Inc. - old 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. Aventura Holdings, Inc. - old distributed its
shares and anti-dilution rights to its sole shareholder (Melissa Apple,
Trustee of the Maria Lopez Irrevocable Trust UTD March 29, 2004) then
merged with the Company on October 17, 2005. The Company adopted the name
Aventura Holdings, Inc. - new and Aventura Holdings, Inc. - old was
dissolved.
L. On December 29, 2005 the Company issued 500,000,000 shares of its
previously un-issued restricted common stock in an exempt issuance to
Melissa Apple, Trustee of the Maria Lopez Irrevocable Trust UTD March 29,
2004 as additional shares due the owners of Aventura Networks, LLC under
the anti-dilution provision contained in the May 27, 2005 LLC Purchase
Agreement (See Item 5J and 5K).
M. On December 29, 2005 300,000,000 additional shares of restricted common
stock became issuable under the anti-dilution provision of the Aventura
Networks, LLC Purchase Agreement (See Item 5J and 5K).
ITEM 6. SELECTED FINANCIAL DATA
The Statement of Operations, Per Share, and Balance Sheet data for the periods
ended December 31, 2005, and 2004, are derived from our financial statements
that have been audited by Salberg & Company, PA, our independent registered
public accounting firm. This selected financial data should be read in
conjunction with our financial statements and related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Annual Report.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following analysis of our financial condition and results of operations
should be read in conjunction with our financial statements and the notes
thereto contained elsewhere in this Annual Report. We may use words such as
"anticipates," "believes," "expects," "intends", "will", "should," "may" and
similar expressions to identify forward-looking statements. Such statements are
based on currently available operating, financial and competitive information
and are subject to various risks and uncertainties that could cause actual
results to differ materially from our historical experience and our present
expectations. Undue reliance should not be placed on such forward-looking
statements, as such statements speak only as of the date on which they are made.
Should one or more risks or uncertainties occur, or should underlying
assumptions prove incorrect, actual results may vary materially and adversely
from those anticipated, believed, expected, planned, intended, estimated,
projected or otherwise indicated. We caution you not to place undue reliance on
these forward-looking statements, which we have made as of the date of this
Annual Report on Form 10-K. We undertake no duty to update any forward-looking
statements made herein. Additional information regarding these and other risks
and uncertainties is also contained in our other periodic filings with the SEC.
Certain statements in this report that relate to estimates or expectations of
our future performance or financial condition may constitute "forward-looking
statements." The forward-looking statements involve risks and uncertainties,
including, but not limited to, statements as to:
* our future operating results;
* our business prospects and the prospects of our portfolio companies;
* the impact of investments that we expect to make;
* the dependence of our future success on the general economy and its impact
on the industries in which we invest;
* the ability of our portfolio companies to achieve their objectives;
* our expected financings and investments;
* the adequacy of our cash resources and working capital; and
* the timing of cash flows, if any, from the operations of our portfolio
companies.
Overview
Aventura Holdings, Inc. ("Aventura", "we", "us", "our", or the "Company") is a
publicly held Miami, Florida based Business Development Company engaged in
making investments in operating companies that desire to go public or
engage in a liquidity event but that otherwise lack the institutional
infrastructure, capital resources, or management
expertise necessary to accomplish such liquidity events. For many companies,
going public or engaging in a liquidity event is a challenging process. We have
developed investment and due diligence processes that we believe will allow us
to identify companies that possess the qualities and characteristics necessary
to undertake such liquidity events successfully.
On March 15, 2005, we filed Form N-54A with the SEC and elected to be regulated
as a BDC pursuant to Section 54 of the Investment Company Act of 1940. As a
result of our new status, we now operate as an investment company and plan to
announce a number of investments in the future, each of which will be designed
to build an investment portfolio and enhance the Company's shareholder value. It
was our intention to provide capital and advisory services for management
buyouts, recapitalizations, and the growth and capital needs of emerging growth
companies. As a BDC, we expect to derive our revenues through direct investments
into private companies, start-up companies, and through the opportunities
provided by turn around companies. Additionally, we intend to provide fee based
business expertise through in-house consultants and contract consultants.
As a BDC, we can be structured in a manner more consistent with our business
strategy. As a result, we believe we were positioned to raise capital in a more
efficient manner and to develop and expand our business interests. We did not
intend to limit potential investments to just one line of business or industry,
as the investments, in total, will enhance value to stockholders through capital
appreciation and payments of dividends to us by our investee companies.
15
BDC regulation was created in 1980 by Congress to encourage the flow of public
equity capital to private and small public companies in the United States.
BDCs, like all closed-end funds (and mutual funds), are regulated by the 1940
Act. BDCs report to stockholders like traditional operating companies and file
regular quarterly and annual reports with the SEC. BDCs are required to make
available significant managerial assistance to their portfolio companies.
On March 7, 2006 management completed its offering under Regulation 1-E and
recommended the Board file a Preliminary Information Statement to propose a
shareholder vote to withdraw its BDC election. Pending the Board's concurrence
and completion of the Preliminary Information Statement, the Company will file a
Definitive Information Statement setting the shareholder meeting to vote on the
BDC withdrawal. Assuming shareholder approval the Company will file Form 54C
notifying the Commission that pursuant to provisions of form 54(c), we will be
withdrawing our election to be subject to Sections 55 through 65 of the
Investment Company Act.
The results of operations for 2005 are divided into two periods. The two and
one half month period, representing the period January 1, 2005 through March 15,
2005, reflects the Company's results prior to operating as a BDC. The nine and
one half month period from March 15, 2005 through December 31, 2005, reflects
our results as a BDC.
Accounting principles used in the preparation of the financial statements
beginning March 15, 2005 are different from those of prior periods and,
therefore, the financial position and results of operations of this period is
not directly comparable. The primary differences in accounting principles
relate to the carrying value of investments -
see corresponding notes later for further discussion.
As reflected in the accompanying financial statements, we have a net loss of
$2,782,265 from March 16, 2005 through December 31, 2005 as a BDC, a net loss of
$178,840 from January 1, 2005 through March 15, 2005 prior to election as a BDC
and net cash used in operations of $184,906 for the year ended December 31,
2005. Additionally, we have a working capital deficiency of $20,355, a
stockholders' deficiency of $320,368 and an accumulated deficit of $11,407,252
at December 31, 2005.
Our ability to continue as a going concern is dependent on the ability to
further implement our business plan, raise capital, and generate revenues. We
presently do not have sufficient revenues to cover our incurred expenses. Our
management recognizes that we must generate additional resources to enable us to
pay our obligations as they come due, and that we must ultimately successfully
implement our business plan and achieve profitable operations. We cannot assure
you that we will be successful in any of these activities. Should any of these
events not occur, our financial condition will be materially adversely affected.
The time required for us to become profitable from operations is highly
uncertain, and we cannot assure you that we will achieve or sustain operating
profitability or generate sufficient cash flow to meet our planned capital
expenditures, working capital and debt service requirements. If required, our
ability to obtain additional financing from other sources also depends on many
factors beyond our control, including the state of the capital markets and the
prospects for our business. The necessary additional financing may not be
available to us or may be available only on terms that would result in further
dilution to the current owners of our common stock.
We cannot assure you that we will generate sufficient cash flow from operations
or obtain additional financing to meet scheduled debt payments and financial
covenants. If we fail to make any required payment under the agreements and
related documents governing our indebtedness or fail to comply with the
financial and operating covenants contained in them, we would be in default.
The financial statements do not include any adjustments to reflect the possible
effects on recoverability and classification of assets or the amounts and
classification of liabilities, which may result from the inability of the
Company to continue as a going concern.
16
Recent Developments
On February 23, 2006, the Company announced that it entered into a Memorandum of
Understanding and Intent (MOU) with Horvath Holdings, LLC to acquire 30% of Ohio
Funding Group, Inc. in exchange for 200,000,000 shares of restricted Company
stock. Integrated into the MOU is a one year option for Horvath to purchase a
controlling interest in Aventura through the sale of other Horvath controlled
entities to Aventura either in a single transaction or a series of transactions.
Once we enter into a binding agreement with Horvath Holdings, LLC our future
operating business and ownership will change. Therefore, management determined
that continuing as a BDC is not practical or appropriate and that it is in the
Company's best interest to un-elect BDC status in the second fiscal quarter of
2006. Un-electing this status requires a shareholder vote but, inasmuch as one
shareholder holds a majority of our stock, we have determined that we can make
this election upon submitting the matter to this one shareholder and then filing
an information statement (a "Form 14C"). Therefore, in order to withdraw from
its BDC status, the Company will first be required to file a Form 14C
Preliminary Information Statement regarding the proposed shareholder vote to
withdraw its BDC election, and any other matters to be voted on by shareholders.
The company will not be seeking proxies as the Company believes that a majority
of its outstanding stock is controlled by one shareholder who will vote in favor
of the BDC withdrawal. Upon completion of the Preliminary Information Statement,
the Company will then file a Form 14C Definitive Information Statement, setting
the shareholder meeting to vote on the BDC withdrawal. The Company will then
hold the shareholder meeting. Assuming majority shareholder approval to withdraw
the BDC election, the Company will then file a Form N-54C notifying the
Securities and Exchange Commission that, pursuant to the provisions of Section
54(c), it is withdrawing its election to be subject to Sections 55 through 65 of
the Investment Company Act. Upon completion of this process, the Company will no
longer be subject to the Investment Company Act but will continue as an
operating reporting public company, and will still be subject to the Securities
Exchange Act of 1934. Under the rules of the Securities and Exchange Commission,
the election to terminate status as a BDC cannot become effective until at least
20 days after the accompanying Information Statement has been distributed to the
stockholders of the Company. We expect the termination of such status, and the
appropriate filing to be made with the Securities and Exchange Commission, on or
about April 25, 2006.
Management conducted its due diligence on Ohio Funding Group, Inc. and other
Horvath Holdings, LLC investments. Horvath owns and operates successful
automobile dealerships and finance companies concentrating in the sub-prime
market. Horvath executives have decades of automobile industry experience
including key public company positions. If Horvath exercises their option
discussed in our MOU and takes control of Aventura, we expect to pursue a
different business model consistent with their experience including possible
further acquisitions within the automobile industry. We believe management's
plan will allow the Company to continue as a going concern.
Going Concern
As discussed in Note 2 to the financial statements, the Company's recurring
losses from operations, net loss of $2,782,265 for the nine and one half months
ended December 31, 2005 as a BDC; a net loss of $178,840 for the two and one
half months ended March 15, 2004 prior to election as a BDC and net cash used in
operations of $184,906 for the year ended December 31, 2005; working capital
deficiency of $20,355, a stockholders' deficiency of $320,368 and an accumulated
deficit of $11,407,252 at December 31, 2005, raise substantial doubt about our
ability to continue as a going concern. Our financial statements do not include
any adjustments to reflect the possible effects on recoverability and
classification of assets or the amounts and classification of liabilities that
may result from our inability to continue as a going concern.
Critical Accounting Estimates and Policies
The methods, estimates, and judgment we use in applying our most critical
accounting policies have a significant impact on the results we report in our
financial statements. The SEC has defined the most critical accounting policies
as the ones that are most important to the portrayal of our financial condition
and results, and require us to make our most difficult and subjective judgments,
often as a result of the need to make estimates of matters that are inherently
uncertain. Based upon this definition, our most critical estimates include
valuation of common stock for services, the valuation of our investments and the
valuation allowance for deferred tax assets. We also have other key accounting
estimates and policies, but we believe that these other policies either do not
generally require us to make estimates and judgments that are as difficult or as
subjective, or it is less likely that they would have a material impact on our
reported results of operations for a given period. For additional information
see Note 3 "Summary of Significant Accounting Policies" in the notes to our
audited financial statements contained in our Annual Report on Form 10-K for the
year ended December 31, 2005. Although we believe that our estimates and
assumptions are reasonable, they are based upon information presently available.
Actual results may differ significantly from these estimates.
17
Fair Value of Financial Instruments
We define the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The carrying value of accounts receivable, accounts payable and accrued
liabilities approximates fair value because of the short maturity of those
instruments. The estimated fair value of our other obligations is estimated
based on the current rates offered to us for similar maturities. Based on
prevailing interest rates and the short-term maturity of all of our
indebtedness, management believes that the fair value of our obligations
approximates book value at December 31, 2005.
Valuation of Common Stock Issued For Services
The Company issued common stock to several parties during the years ended
December 31, 2005 and 2004. For all of these issuances, valuation was
determined based upon the stock closing price on the date of grant.
Valuation of Investments
As a business development company, the Company's business plan calls for it to
invest primarily in illiquid securities issued by private companies ("Private
Investments"). These Private Investments are generally subject to restrictions
on resale and generally have no established trading market. The Company values
its Private Investments at fair value as determined in good faith by the
Company's board of directors in accordance with the Company's valuation policy
during interim reporting periods and annually by an independent valuation firm
with Board ratification. The Company determines fair value to be the amount for
which an investment could be sold in an orderly disposition over a reasonable
period of time between willing parties other than in a forced or liquidation
sale. The Company's valuation policy is intended to provide a consistent basis
for establishing the fair value of the
portfolio. The Company intends to record unrealized depreciation on investments
when it believes that an asset has
been impaired and full collection for the loan or realization of an equity
security is doubtful. Conversely, the Company intends to record unrealized
appreciation if it has a clear indication that the underlying portfolio company
has appreciated in value and, therefore, the Company's security has also
appreciated in value. Under this valuation policy, the Company does not
consider temporary changes in the capital markets, such as interest rate
movements or changes in the public equity markets, in order to determine whether
an investment in a private company
has been impaired or whether a private investment has increased in value. The
value of investments in public securities is determined using quoted market
prices discounted for restrictions on resale.
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.
Valuation Allowance For Deferred Tax Assets And Liabilities
In assessing the recoverability of deferred tax assets and liabilities,
management considers whether it is more likely than not that some portion or all
of the deferred tax assets and liabilities will be realized.
AVENTURA HOLDINGS, INC.
(F/K/A SUN NETWORK GROUP, INC.)
STATEMENTS OF OPERATIONS
POST BDC ELECTION PRE BDC ELECTION FOR THE YEAR FOR THE YEAR
FROM MARCH 16 FROM JANUARY 1 ENDED ENDED
THRU DECEMBER 31 THRU MARCH 15 DECEMBER 31 DECEMBER 31
-------------- -------------- -------------- --------------
2005 2005 2004 2003
-------------- -------------- -------------- --------------
INVESTMENT AND PRE-BDC OPERATING INCOME:
Operating Revenues - Pre-BDC $ - $ 5,000 $ 8,090 $ 42,398
Investment Income - Portfolio Investments
Dividends - N/A N/A N/A
Interest - N/A N/A N/A
EXPENSES:
Compensation 979,500 - 1,547,708 153,486
Amortization - - - 10,192
Bad debt 50,912 10,000 6,600
Consulting 664,000 149,000 2,209,725 162,177
Debenture penalties - - 30,000 485,245
Debt issuance cost amortization - - 92,400 13,000
Impairment loss - - - 20,910
Investor Relations 42,852 - - -
Professional Fees 66,820 2,729 33,603 74,387
Finance cost 40,545 - -
General & Administrative Expenses 36,912 34,960 159,676 135,799
-------------- -------------- -------------- --------------
Total Expenses 1,881,541 186,689 4,083,112 1,061,796
-------------- -------------- -------------- --------------
Net Investment and Pre-BDC Operating Loss (1,881,541) (181,689) (4,075,022) (1,019,398)
REALIZED AND UNREALIZED GAIN (LOSS) FROM
INVESTMENTS AND OTHER INCOME (EXPENSES) - PRE-BDC:
Unrealized (loss) on investments (900,724) N/A N/A N/A
Settlement expense - - (144,527) (36,500)
Interest expense - - (58,812) (329,965)
Interest income - - - 6,600
Loss on foreclosure of loan payable - - (1,008,885) -
Recovery of bad debt - 2,849 9,462 19,129
-------------- -------------- -------------- --------------
Total Other Income and (Expenses) - Pre-BDC (900,724) 2,849 (1,202,762) (340,736)
Minority Interest in Subsidiary Loss - - - 5,097
NET LOSS $ (2,782,265) $ (178,840) $ (5,277,784) $ (1,355,037)
============== ============== ============== ==============
NET LOSS PER SHARE:
Net Loss Per Common Share -
Basic and Diluted $ - $ - $ (0.03) $ (0.04)
============== ============== ============== ==============
Weighted Average Common Shares Outstanding -
Basic and Diluted 1,959,700,621 323,657,813 172,367,734 30,210,585
============== ============== ============== ==============
Note: To help the reader better understand our 2005 results, 2005 is a
combination of the nine and one half months ended December 31, 2005 (operations
as a BDC) and the two and one half months ended March 15, 2005 (operations prior
to becoming a BDC). All references to 2004 and 2003 represent the year ended
December 31, 2004 and 2003 as operations prior to becoming a BDC.
2005 versus 2004
Revenues:
Revenue decreased $4,090 or 51%, to $5,000 for 2005 from $8,090 for 2004.
18
Operating Expenses:
Operating expenses decreased $2,014,882, or 49%, to $2,068,230 for 2005 from
$4,083,112 for 2004. The decrease was primarily the result of a $1,396,725
decrease in consulting and a $568,208 decrease in compensation. The decrease in
consulting and compensation was primarily from the issuance of stock for
services.
Income Tax Expense:
Income tax expense was not accrued in 2005 or 2004. The Company continues to
suffer net losses and the certainty of benefiting from the income tax effects
from the net losses is unclear due to our ability to continue as a going
concern.
Unrealized Loss on Investments:
We reported an unrealized loss of $900,724 resulting from the unrealized
decrease in the carrying value of our investments at December 31, 2005. At
December 31, 2004 we did not account for investments in the same manner as we
did in 2005 as a BDC.
Loss on Foreclosure of Loan Payable
We incurred a loss when our creditor foreclosed on collateralized shares in
2004. The loss was the difference between the fair market value of the shares
and the value of the debt.
As a result of these factors, we reported a net loss of $2,9611,105 or $(nil)
per share for the year ended December 31, 2005 as compared to a net loss of
$5,277,784 or ($.03) per share for the year ended December 31, 2004.
2004 versus 2003
Revenue:
Revenues for the year ended December 31, 2004 were $8,090 as compared to
revenues for the year ended December 31, 2003 of $42,398 and were derived from
our consolidated subsidiary, Radio X Network.
Operating Expenses:
Compensation was $1,547,708 for the year ended December 31, 2004 compared to
$153,486 for the comparable period in 2003. Compensation relates solely to
compensation under our employment agreement with our president and additional
stock based compensation valued at $1,410,500 in the third quarter of 2004.
Additionally, in May 2004, the Company recorded additional non-cash compensation
of $57,208 due to the issuance of 10,000,000 common shares for accrued
compensation.
Amortization of radio programs of $0 and $10,192 for the years ended December
31, 2004 and 2003, respectively, results from amortizing the radio programs
intangible assets that resulted from the investment by our subsidiary, RadioTV
Network, Inc, in the Radio X Network.
Consulting expense for the year ended December 31, 2004 was $2,209,725 compared
to $162,177 for the year ended December 31, 2003. During the year ended December
31, 2004, consulting expense related to the issuance of common stock for
services to outside consultants.
The debenture penalty of $30,000 and $485,245 for the years ended December 31,
2004 and 2003, respectively, 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.
19
The debt issue cost amortization of $92,400 and $13,000 for the years ended
December 31, 2004 and 2003, respectively, represents the amortization of the
cost we incurred to raise debt capital. These fees are recorded debt discount
and amortized over the loan term. Due to the foreclosure (see below) of the
$824,000 loan payable in 2004, the entire unamortized portion of these debt
discounts were expensed during the year ended December 31, 2004.
For the year ended December 31, 2003, the Company had an impairment loss of
$20,910 as compared to $0 for the year ended December 31, 2004. The impairment
relates to certain capital stock received in a German private company in lieu of
a refund of a prepaid expense paid to a service provider. Since there was no
objective valuation data supporting the value of the capital stock received, the
Company elected to impair this asset.
Professional fees for the year ended December 31, 2004 were $33,603 compared to
$74,387 for the year ended December 31, 2003. The decrease is primarily related
to accounting and legal, audit and registration statement related services
regarding our filing a SB-2 in the 2003 period.
Other selling, general and administrative expenses were $159,676 for the year
ended December 31, 2004 as compared to $135,799 for the year ended December 31,
2003. The increase in expenses is primarily due to an increase in travel related
expense for the year ended December 31, 2004 as compared to the year ended
December 31, 2003.
Interest expense was $58,812 for the year ended December 31, 2004 compared to
$329,965 for the year ended December 31, 2003. 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.
For the year ended December 31, 2004, we recognized settlement expense of
$144,527 related to the redemption of the debentures. On February 4, 2003, the
Company settled a lawsuit by issuing 1,000,000 common shares and $6,500 in cash.
The shares were valued at the quoted trading price of $0.03 per share on the
settlement date resulting in a total settlement expense of $36,500.
For the year ended December 31, 2004, we recognized a loss on the foreclosure of
our loan payable in the amount of $1,008,885. We defaulted on the $824,000 loans
payable in June and October 2004 due to non-payment of required interest
payments. In November 2004, the lender took possession of 56,000,000 collateral
common shares. As a result of this foreclosure by the lender, we recorded the
value of the 56,000,000 shares of $1,869,000 and removed the loan payable and
accrued interest balances of $824,000 and $36,115, respectively, resulting in a
loss on foreclosure of $1,008,885. The value of the 56,000,000 shares was
determined using the market price of the shares on the date they were granted as
collateral.
As a result of these factors, we reported a net loss of $5,277,784 or $(.03) per
share for the year ended December 31, 2004 as compared to a net loss of
$1,355,037 or ($.04) per share for the year ended December 31, 2003.
Income Tax Expense:
Income tax expense was not accrued in 2004 or 2003. The Company continues to
suffer net losses. It is not certain whether the Company will benefit from the
carry-forward of these cumulative net losses for the income tax effects to be
realized due to our ability to continue as a going concern.
Liquidity and Capital Resources:
Cash was $0 at December 31, 2005 as compared to $19,852 at December 31, 2004 and
working capital deficit was $20,355 at December 31, 2005 as compared to $51,011
at December 31, 2004. The decrease in the working capital deficit was primarily
the result that in 2005 the Company decreased its current debt utilizing
non-current financing. Net assets decreased $231,230 from $89,138 at December
31, 2004 to a net liability position of $320,368 at December 31, 2005. As a
result, the Company may not be in compliance with the 1940 Act asset coverage
requirements for a BDC.
20
Operating Activities
Cash used in operating activities was $184,906 for 2005 as compared to $161,627
for 2004.
Investing Activities
Cash used in investing activities was $191,446 for 2005 compared to cash used in
investing activities of $0 for 2004. The change relates to the Company's BDC
investments in portfolio companies in 2005 whereas the Company was not a BDC in
2004.
Financing Activities
Cash flows provided by financing activities was $356,500 for 2005 compared to
$79,600 for 2004. The increase in cash provided by financing activities was
primarily due to $299,925 of cash proceeds received by the Company from the
Dutchess Stock Purchase Agreement.
Our principal uses of cash to date have been for operating activities.
Debt
Equity Financing
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 previously un-issued unrestricted
free-trading 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 the sellers of Aventura Networks, LLC to additional
shares in the event additional shares are issued to Dutchess relating to the
initial draw of this Stock Purchase Agreement. By virtue of the LLC Purchase
Agreement, the former owners of Aventura Networks LLC are entitled to 5 times
the additional shares issued to Dutchess 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 waived 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)
previously un-issued unrestricted free-trading 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) previously un-issued unrestricted free-trading shares, an
additional fifty million (50,000,000) previously un-issued unrestricted
free-trading shares on November 3, 2005 and an additional sixty million
(60,000,000) previously un-issued unrestricted free-trading shares on December
29, 2005 towards satisfaction of the obligations for the initial draw amount and
the Company's Board approved the issuances. 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 December
31, 2005 $40,545 has been amortized as a cost of financing. For financial
reporting purposes, all shares issued to Dutchess are not considered issued or
outstanding until a final settlement date is achieved. At December 31, 2005
however the issued shares to Dutchess are considered dilutive for purposes of
the computation of diluted earnings per share. In February 2006 an additional
fifty million (50,000,000) previously un-issued unrestricted free-trading shares
were issued to Dutchess and in March 2006 a final fifteen million (15,000,000)
previously un-issued unrestricted free-trading shares were issued to Dutchess.
After Dutchess sold the last of the shares issued in March 2006 our loan balance
was $978.11. Aventura Networks, LLC issued a check to Dutchess on behalf of the
Company to fully satisfy the debt. Immediately after satisfying our Debt with
Dutchess we exchanged a mutual release.
21
Liquidity
To continue with our business plan, we will require additional short-term
working capital and we have not generated sufficient cash from our planned BDC
operations to fund our operating activities through the end of 2005. Presently,
our only source of cash is from external financing in the form of debt or the
issuance of our common stock. We cannot assure you that we can obtain
sufficient proceeds, if any, and borrowings or the sale of our common stock
under any financing structures we are able to secure that will be sufficient to
meet our projected cash flow needs.
Our ability to obtain additional financing depends on many factors beyond our
control, including the state of the capital markets, the implied market value of
our Common Stock and the prospects for our business. The necessary additional
financing may not be available to us or may be available only on terms that
would result in further dilution to the current owners of our Common Stock.
Failure to obtain commitments for financing would have a material adverse effect
on our business, results of operations and financial condition. If the financing
we require to sustain our working capital needs is unavailable or insufficient
or we do not receive the necessary financing, we may be unable to continue as a
going concern.
As a result of the above items, we believe that we will have sufficient
operating cash to meet our required expenditures for the next 12 months. For a
further discussion related to our ability to have sufficient cash flow to meet
our planned expenditures, please see "2006 Outlook," below.
Contractual Obligations and Commercial Commitments
We have no contractual obligations or commitments which we expect to utilize
liquid assets.
Off-Balance Sheet Arrangements
On February 23, 2006, the Company announced that it entered into a Memorandum of
Understanding and Intent (MOU) with Horvath Holdings, LLC to acquire 30% of Ohio
Funding Group, Inc. in exchange for 200,000,000 shares of restricted Company
stock. Integrated into the MOU is a one year option for Horvath to purchase a
controlling interest in Aventura through the sale of other Horvath controlled
entities to Aventura either in a single transaction or a series of transactions.
We have no other Off-Balance Sheet arrangements at either December 31, 2005 or
2004.
Recent Accounting Developments
The Financial Accounting Standards Board ("FASB") has recently issued several
new accounting pronouncements, which may apply to the Company.
In December 2004, the FASB issued SFAS No. 153, entitled Exchanges of
Non-monetary Assets - An Amendment of APB Opinion No.29. SFAS No. 153 amends
Opinion 29 to eliminate the exception for non-monetary exchanges of non-monetary
assets that do not have commercial substance. A non-monetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. The adoption of SFAS 153 did
not impact the financial statements.
22
In December 2004, the FASB issued SFAS No. 123 (Revised), entitled Share-Based
Payment. This revised Statement eliminates the alternative to use APB Opinion
No. 25's intrinsic value method of accounting that was provided in SFAS No. 123
as originally issued. Under Opinion 25, issuing stock options to employees
generally resulted in recognition of no compensation cost. This Statement
requires entities to recognize the cost of employee services received in
exchange for awards of equity instruments based on the grant-date fair value of
those awards.
For public companies that file as a small business issuer, this Statement is
effective as of the beginning of the first interim or annual reporting period
that begins after December 15, 2005. The adoption of SFAS 123 (Revised) will
have an impact the financial statements if the Company issues stock options to
the employees in the future.
2006 Outlook
The ability to implement our business plan successfully will be heavily
dependent on securing additional capital from the issuance of our common stock
or through debt. There is no assurance that additional equity or debt financing
will be available on terms acceptable to our management.
In March 2005, we filed an election to become subject to Sections 55 through 65
of the 1940 Act, 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 offering, we filed a Form 1-E with the SEC,
which was reviewed in the ordinary course and a comment letter was issued. 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. We have not sold or
issued any new shares which we were not contractually committed under our
proposed offering and, until the completion of this process; we have voluntarily
suspended the proposed offering. 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, under the direction of prior management granted and issued common
stock to prior management both before and after its election as a BDC on March
15, 2005 which may have violated certain sections of the 1940 Act. Current
management is taking action to remedy such potential violations. As the result
of the improper issuances the Company may incur liabilities 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.
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 Annual Report on Form 10-K, the following specific
risks, not listed in any particular order of priority, should be considered
carefully in evaluating the Company, its business, and its common stock.
We are highly dependent upon management, none of whom has significant experience
in managing a BDC.
The Company's future success depends on the continued contribution of key
management, some of whom would be difficult to replace. The Company's growth
and profitability depend on its ability to attract and retain skilled employees
and on the ability of its officers and key personnel to manage the assets
successfully and to provide management assistance to the Company's investee
companies. If the services of these individuals would be unavailable to the
Company for any reason, the Company would be required to obtain other executive
personnel to manage and operate the Company and to provide management assistance
to the Company's investee companies. In such event, there can be no assurance
that the Company would be able to employ qualified persons on terms favorable to
the Company. Further, none of our directors or executive officers have
experience in corporate finance and mergers and acquisitions transactions nor
any significant operational BDC experience or experience in investing on behalf
of BDCs.
23
This is a highly speculative investment.
Ownership of our common stock is extremely speculative and involves a high
degree of economic risk, which may result in a complete loss of investment.
Only persons who have no need for liquidity and who are able to withstand a loss
of all or substantially all of their investment should purchase our common
stock.
We suffered a significant operating loss in 2005.
During the period from March 16, 2005 to December 31, 2005 operating as a BDC,
our net loss was $2,782,265. Although we believe that we are now adequately
capitalized to carry out our business plan (subject to the risks inherent in
such plan), there can be no assurance that we have sufficient economic resources
or that such resources will be available to us on terms and at times that are
necessary or acceptable, if at all. There is no assurance that future revenues
of the Company will ever be significant or that the Company's operations will
ever be profitable.
Risk involved in new, developing businesses in which the Company will invest.
The Company's initial investment portfolio is expected to consist primarily of
high-risk investments in new and developing companies. Successful achievement
of the investment objectives of the Company is dependent upon the growth in
value of the securities of these unseasoned companies. Whether this
appreciation in value will occur depends upon numerous factors outside the
control of the Company. The Company anticipates that it may take significant
investment positions in companies that are listed or to be listed on US Equity
Markets, and the OTC Bulletin Board. Moreover, the Company's task of
identifying and helping to build successful new and emerging enterprises is
difficult. In light of the Company's lack of operating history as a BDC, the
likelihood of the future success of the Company must be evaluated in light of
the problems, expenses, difficulties, risks, and complications
frequently encountered in connection with similarly situated companies. There
can be no assurance that the Company will be successful in identifying and
developing these ventures.
Current management controls our outstanding Common Stock.
Our officers and directors and related entities own a majority of the issued and
outstanding Common Stock. It can be expected that the officers and directors
will be able to continue to control the Company's Board of Directors and its
policies. However, control of Aventura may be acquired by Horvath Holdings, LLC
if the Horvath agreement follows the terms of the Memorandum of Understanding
and Intent and Horvath exercises certain options (see the MOU discussion in Part
I).
You will be diluted if we issue additional Common Stock.
From time to time, the Company may issue additional equity securities. There
can be no assurance that the pricing of any such additional securities will not
be lower than the price at which you purchased your securities in the open
market.
Management has discretionary use of Company assets.
We are not currently engaged in any substantive business activities. We
continue to look for and investigate other business opportunities that are
consistent with our business plan. Accordingly, management has broad discretion
with respect to the investments. Although management intends to apply any
proceeds it may receive through the future issuance of stock or debt to a
suitable acquired business, it will have broad discretion in allocating these
funds. There can be no assurance that the management's use or allocation of
such proceeds will allow it to achieve its business objectives.
24
We expect that each of our investments initially will be illiquid.
We expect that we will generally acquire our investments directly from the
issuer in privately negotiated transactions. We expect that the majority of the
investments in our portfolio will typically have no established trading market.
We expect that we will exit much of each of our investments when the portfolio
company has a liquidity event, such as a public offering of the portfolio
company. The illiquidity of our investments may adversely affect our ability,
to dispose of equity securities of our portfolio companies at times when it may
be otherwise advantageous for us or our stockholders to liquidate such
securities. In addition, if we, or our stockholders, were forced to liquidate
some or all of the investments immediately, the proceeds of such liquidations
could be significantly less than otherwise.
Economic recessions or downturns could impair our portfolio companies and harm
our operating results.
Many of the companies in which we might make investments may be susceptible to
economic slowdowns or recessions. An economic slowdown may affect the ability
of a company to engage in a meaningful liquidity event, such as a public
offering. The value of our portfolio is likely to decrease during these
periods. These conditions could lead to financial losses in our portfolio and a
decrease in our revenues, net income, and assets.
We may not borrow money unless we maintain asset coverage for indebtedness of at
least 200%, which may affect returns to stockholders.
We must maintain asset coverage for total borrowings of at least 200%. Our
ability to achieve our investment objective may depend in part on our continued
ability to maintain a leveraged capital structure by borrowing funds from
various sources on favorable terms. There can be no assurance that we will not
borrow funds in an amount, which, when compared to the aggregate value of our
assets, will permit us to maintain such leverage. As of December 31, 2005 the
Company may not be in compliance with the asset coverage requirements for a BDC.
If we do not maintain such minimum 200% asset coverage ratio and our asset
coverage declines to less than 200%, we may be required to sell a portion of our
investments when it is disadvantageous to do so.
We operate in a competitive market for investment opportunities.
We compete for investments with a large number of private equity funds and
mezzanine funds, other business development companies, investment banks, other
equity and non-equity based investment funds, and other sources of financing,
including specialty finance companies and traditional financial services
companies such as commercial banks. Some of our competitors may have greater
resources than we do. Increased competition would make it more difficult for us
to purchase or originate investments at attractive prices. As a result of this
competition, sometimes we may be precluded from making otherwise attractive
investments.
Changes in the law or regulations that govern us could have a material impact on
us or our operations.
We are regulated by the SEC and other federal and state regulatory agencies. In
addition, changes in the laws or regulations that govern business development
companies, regulated investment companies, real estate investment trusts, and
small business investment companies may significantly affect our business. Any
change in the law or regulations that govern our business could have a material
impact on us or our operations. Laws and regulations may be changed from time
to time, and the interpretations of the relevant laws and regulations also are
subject to change, which may have a material effect on our operations.
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 cannot be treated as qualifying assets. This result is dictated
by the definition of "eligible portfolio company" under the 1940 Act, which in
part looks to whether a company has outstanding marginable securities.
25
Amendments promulgated in 1998 by the Federal Reserve 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 as an "eligible
portfolio company" under the 1940 Act.
Results may fluctuate and may not be indicative of future performance.
Our operating results may fluctuate and, therefore, you should not rely on
current or historical period results to be indicative of our performance in
future reporting periods. Factors that could cause operating results to
fluctuate include, but are not limited to, variations in the investment
origination volume and fee income earned, variation in timing of prepayments,
variations in and the timing of the recognition of net realized gains or losses
and changes in unrealized appreciation or depreciation, the degree to which we
encounter competition in our markets, and general economic conditions.
Our common stock price may be volatile.
The trading price of our common stock may fluctuate substantially. The price of
the common stock may be higher or lower than the price you pay for your shares,
depending on many factors, some of which are beyond our control and may not be
directly related to our operating performance. These factors include, but are
not limited to, the following:
* price and volume fluctuations in the overall stock market from time to
time;
* significant volatility in the market price and trading volume of securities
of business development companies or other financial services companies;
* volatility resulting from trading in derivative securities related to our
common stock including puts, calls, long-term equity anticipation
securities, or LEAPs, or short trading positions;
* changes in regulatory policies or tax guidelines with respect to business
development companies or regulated investment companies;
* actual or anticipated changes in our earnings or fluctuations in our
operating results or changes in the expectations of securities analysts;
* general economic conditions and trends;
* loss of a major funding source; or
* Departures of key personnel.
We have a limited operating history as a BDC which may affect our ability to
manage our business and may impair your ability to assess our prospects.
We were incorporated in 1990 but only commenced business and investment
operations as a BDC in mid-March 2005. We are subject to all of the business
risks and uncertainties associated with any new business enterprise, including
the risk that we will not achieve our investment objective and that the value of
our common stock or other securities could decline substantially. We have
limited operating history. As a result, we have few operating results under
these regulatory frameworks that can demonstrate either their effect on the
business or our ability to manage the business within these frameworks. If we
fail to maintain our status as a BDC, our operating flexibility would be
significantly reduced.
26
Our business model depends to a significant extent upon strong referral
relationships with venture capital, private equity fund sponsors and other
investment banking and financial institutions, and our inability to develop or
maintain these relationships, or the failure of these relationships to generate
investment opportunities, could adversely affect our business.
We expect that members of our management team will maintain relationships with
venture capital, private equity firms, and investment banking and financial
institutions, and we will rely to a significant extent upon these relationships
to provide us with our deal flow. If we fail to maintain our existing
relationships or to develop new relationships with other firms or sources of
investment opportunities, then we will not be able to grow our investment
portfolio. In addition, persons with whom members of our management team have
relationships are not obligated to provide us with investment opportunities,
and, therefore, there is no assurance that such relationships will lead to the
origination of equity or debt investments.
Regulations governing our operations as a BDC affect our ability to and the
manner in which we raise additional capital, which may expose us to risks.
Our business will require a substantial amount of capital. We may acquire
additional capital from the issuance of senior securities, including borrowings
or other indebtedness, or the issuance of additional shares of our common stock.
However, we may not be able to raise additional capital in the future on
favorable terms or at all. We may issue debt securities, other evidences of
indebtedness, or preferred stock, and we may borrow money from banks or other
financial institutions (collectively "senior securities") up to the maximum
amount permitted by the 1940 Act. The 1940 Act permits us to issue senior
securities in amounts such that our asset coverage, as defined in the 1940 Act,
equals at least 200% after each issuance of senior securities. Our ability to
pay dividends or issue additional senior securities would be restricted if our
asset coverage ratio were not at least 200%. If the value of our assets
declines, we may be unable to satisfy this test. If that happens, we may be
required to liquidate a portion of our investments and repay a portion of our
indebtedness at a time when such sales may be disadvantageous. As a result of
issuing senior securities, we would also be exposed to typical risks associated
with leverage, including an increased risk of loss. If we issue preferred
stock, the stock would rank "senior" to common stock in our capital structure,
preferred stockholders would have separate voting rights and might have rights,
preferences, or privileges more favorable than those of our common stockholders,
and the issuance of preferred stock could have the effect of delaying,
deferring, or preventing a transaction or a change of control that might involve
a premium price for holders of our common stock or otherwise be in your best
interest.
To the extent that we are constrained in our ability to issue debt or other
senior securities, we will depend on issuances of common stock to finance
operations. As a BDC, we are generally not able to issue our common stock at a
price below net asset value without first obtaining required approvals from
stockholders and independent directors. If we raise additional funds by issuing
more common stock or senior securities convertible into, or exchangeable for,
our common stock, then the percentage ownership of our stockholders at that time
would decrease and you might experience dilution.
Future offerings of debt securities, which would be senior to our common stock
upon liquidation, or equity securities, which could dilute our existing
stockholders and be senior to our common stock for the purposes of
distributions, may have an adverse effect on the value of our common stock.
In the future, we may attempt to increase our capital resources by making
additional offerings of equity or debt securities, including medium-term notes,
senior or subordinated notes and classes of preferred stock or 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. Additional equity offerings by us may dilute the holdings of our
existing stockholders or reduce the value of our common stock, or both. 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.
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
stockholders bear the risk of our future offerings reducing the market price of
our common stock and diluting their stock holdings in us.
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 two periods. The period
from January 1, to March 15, 2005 represents the period prior to BDC election
and the period from March 16, 2005 to December 31, 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.
27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Because we had no long-term debt other than the Dutchess debt payable with
equity and do not expect that, in the next 12 months we will incur any (although
there can be no assurance that the funds that we will require to operate our
business during that period will be available to us through sales of our equity
or through short-term borrowings), we do not consider a principal risk to be
interest rate fluctuations. If, in the future, we incur, or consider incurring,
a material amount of long-term debt, the occurrence of such event could result
in interest rate fluctuations becoming a principal risk. Currently, we consider
our principal market risk to be the fluctuations of the valuations of the
investment portfolio.
Our investments are carried at fair value, as determined by independent
valuation experts and ratified by the Board of Directors. We expect to value
publicly traded investments at the closing price on the valuation date. We
expect to value debt and equity securities that are not publicly traded, or that
we are restricted from trading, at fair value as determined by independent
valuation experts and ratified by the Board of Directors. In making such
determination, we expect that the Board of Directors will value non-convertible
debt securities at cost plus amortized original issue discount, if any, unless
adverse factors lead to a determination of a lesser valuation. In valuing
convertible debt, equity, or other securities, we expect that the independent
valuation experts will determine the fair value based on the collateral, the
issuer's ability to make payments, the current and forecasted earnings of the
issuer, sales to third parties of similar securities, the comparison to publicly
traded securities, and other pertinent factors. Due to the uncertainty inherent
in the valuation process, such estimates of fair value may differ significantly
from the values that would have been used had a ready market for the securities
existed, and the differences could be material. Additionally, changes in the
market environment and other events that may occur over the life of the
investments may cause the gains or losses ultimately realized on these
investments to be different than the valuations assigned at other times.
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AVENTURA HOLDINGS, INC.
(F/K/A SUN NETWORK GROUP, INC.)
TABLE OF CONTENTS
PAGE
----
Report of Independent Registered Public Accounting Firm F-1
Balance Sheets at December 31, 2005 and 2004 F-2
Statements of Operations from January 1, 2005 through March 15,
2005, (Pre-BDC) from March 16, 2005 through December 31, 2005,
(Post-BDC) and for the Years Ended December 31, 2004 and 2003 F-3
Statements of Cash Flows From January 1, 2005 through March 15,
2005, (Pre-BDC) From March 16, 2005 through December 31, 2005,
(Post-BDC) and for the Years Ended December 31, 2004 and 2003 F-4
Statements of Changes in Stockholders' Equity (Deficiency) for
the years ended December 31, 2005, 2004 and 2003 F-5
Statement of Changes in Net Assets From March 16, 2005 through
December 31, 2005 F-6
Schedule of Investments at December 31, 2005 F-7
Schedule of Financial Highlights From March 16, 2005 through F-8
December 31, 2005
Notes to Financial Statements F-9
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of:
Aventura Holdings, Inc.
We have audited the accompanying balance sheets of Aventura Holdings, Inc.,
including the schedule of investments, as of December 31, 2005 and 2004, and the
related statements of operations, changes in stockholders' equity (deficiency),
and cash flows for the period from January 1, 2005 to March 15, 2005 (pre-BDC),
period from March 16, 2005 to December 31, 2005 (post -BDC) and for the years
ended December 31, 2004 and 2003 and the schedule of changes in net assets and
schedule of financial highlights for the period from March 16, 2005 to December
31, 2005. These financial statements and financial highlights are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As more fully discussed in Note 1 to the financial statements, accounting
principles used in the preparation of the financial statements beginning March
16, 2005 (upon conversion of the Company to a Business Development Company under
the Investment Company Act of 1940) are different than those of prior periods
and therefore are not directly comparable to those prior periods.
As more fully discussed in Note 4 to the financial statements, securities
amounting to zero (0% of total assets and 0% of net assets) have been valued at
fair value as determined by the Board of Directors. We have reviewed the
procedures applied by the directors in valuing such securities and have
inspected underlying documentation; while in the circumstances the procedures
appear to be reasonable and the documentation appropriate, determination of fair
values involves subjective judgment which is not susceptible to substantiation
by auditing procedures.
In our opinion, subject to the effect on the financial statements of the
valuation of securities determined by the Board of Directors as described in the
preceding paragraph, the financial statements referred to above present fairly,
in all material respects, the financial position of Aventura Holdings, Inc. at
December 31, 2005 and 2004, and the results of its operations, and its cash
flows for the period from January 1, 2005 to March 15, 2005 (pre-BDC), period
from March 16, 2005 to December 31, 2005 (post -BDC) and for the years ended
December 31, 2004 and 2003 and the changes net assets and financial highlights
for the period from March 16, 2005 to December 31, 2005 in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company's recurring losses from operations and net loss for the
period from March 16, 2005 to December 31, 2005 of $2,782,265, net loss for the
period from January 1, 2005 to March 15, 2005 of $178,840, cash used in
operation of $184,906 in 2005, working capital deficiency of $20,355,
stockholders' deficiency of $320,368 and accumulated deficit of $11,407,252 at
December 31, 2005 raise substantial doubt about its ability to continue as a
going concern. Management's plans as to these matters are also described in Note
2. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
SALBERG & COMPANY, P.A.
Boca Raton, Florida
March 27, 2006
F-1
AVENTURA HOLDINGS, INC.
(F/K/A SUN NETWORK GROUP, INC.)
BALANCE SHEET
DECEMBER 31
2004
2005 (PRE-BDC)
-------------- --------------
ASSETS:
Current Assets:
Cash and cash equivalents $ - $ 19,852
-------------- --------------
Total Current Assets - 19,852
-------------- --------------
Investments in and Advances to Affiliates:
Majority owned affiliates 40,532 -
Minority owned other non-controlled affiliates - -
-------------- --------------
Total Investments in Affiliates 40,532 -
-------------- --------------
Other Assets:
Deferred finance costs 21,705 -
-------------- --------------
TOTAL ASSETS $ 62,237 $ 19,852
============== ==============
LIABILITIES & SHAREHOLDERS' EQUITY:
Current Liabilities:
Accounts payable $ 20,355 $ 23,863
Due to stockholder - 47,000
-------------- --------------
Total Current Liabilities 20,355 70,863
-------------- --------------
Other Liabilities:
Liability payable with common stock 362,250 -
-------------- --------------
Total Other Liabilities 362,250 -
-------------- --------------
Total Liabilities 382,605 70,863
-------------- --------------
Minority Interest - 38,127
-------------- --------------
Commitments and Contingencies (Note 9)
Shareholder Equity:
Common Stock; $0.001 par value; 5,000,000,000
shares authorized; 2,019,657,813 shares
issued and 2,019,657,813 outstanding at
December 31, 2005 and 323,657,813 shares
issued and outstanding at December 31, 2004 2,019,658 323,658
Common stock issuable (300,000,000 shares) 300,000 -
Additional Paid in Capital 8,767,226 8,180,375
Accumulated Deficit (11,407,252) (8,446,146)
Deferred consulting - (147,025)
-------------- --------------
Total Shareholders' Equity (320,368) (89,138)
-------------- --------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 62,237 $ 19,852
============== ==============
Net Asset Value Per Share (NAV) $ (0.00) $ N/A
============== ==============
The accompanying notes are an integral part of these financial statements.
F-2
AVENTURA HOLDINGS, INC.
(F/K/A SUN NETWORK GROUP, INC.)
STATEMENTS OF OPERATIONS
POST BDC ELECTION PRE BDC ELECTION FOR THE YEAR FOR THE YEAR
FROM MARCH 16 FROM JANUARY 1 ENDED ENDED
THRU DECEMBER 31 THRU MARCH 15 DECEMBER 31 DECEMBER 31
-------------- -------------- -------------- --------------
2005 2005 2004 2003
-------------- -------------- -------------- --------------
INVESTMENT AND PRE-BDC OPERATING INCOME:
Operating Revenues - Pre-BDC $ - $ 5,000 $ 8,090 $ 42,398
Investment Income - Portfolio Investments
Dividends - N/A N/A N/A
Interest - N/A N/A N/A
EXPENSES:
Compensation 979,500 - 1,547,708 153,486
Amortization - - - 10,192
Bad debt 50,912 10,000 6,600
Consulting 664,000 149,000 2,209,725 162,177
Debenture penalties - - 30,000 485,245
Debt issuance cost amortization - - 92,400 13,000
Impairment loss - - - 20,910
Investor Relations 42,852 - - -
Professional Fees 66,820 2,729 33,603 74,387
Finance cost 40,545 - -
General & Administrative Expenses 36,912 34,960 159,676 135,799
-------------- -------------- -------------- --------------
Total Expenses 1,881,541 186,689 4,083,112 1,061,796
-------------- -------------- -------------- --------------
Net Investment and Pre-BDC Operating Loss (1,881,541) (181,689) (4,075,022) (1,019,398)
REALIZED AND UNREALIZED GAIN (LOSS) FROM
INVESTMENTS AND OTHER INCOME (EXPENSES) - PRE-BDC:
Unrealized (loss) on investments (900,724) N/A N/A N/A
Settlement expense - - (144,527) (36,500)
Interest expense - - (58,812) (329,965)
Interest income - - - 6,600
Loss on foreclosure of loan payable - - (1,008,885) -
Recovery of bad debt - 2,849 9,462 19,129
-------------- -------------- -------------- --------------
Total Other Income and (Expenses) - Pre-BDC (900,724) 2,849 (1,202,762) (340,736)
Minority Interest in Subsidiary Loss - - - 5,097
NET LOSS $ (2,782,265) $ (178,840) $ (5,277,784) $ (1,355,037)
============== ============== ============== ==============
NET LOSS PER SHARE:
Net Loss Per Common Share -
Basic and Diluted $ - $ - $ (0.03) $ (0.04)
============== ============== ============== ==============
Weighted Average Common Shares Outstanding -
Basic and Diluted 1,959,700,621 323,657,813 172,367,734 30,210,585
============== ============== ============== ==============
The accompanying notes are an integral part of these financial statements.
F-3
AVENTURA HOLDINGS, INC.
(F/K/A SUN NETWORK GROUP, INC.)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31
---------------------------
2005 2004 2003
-------------- -------------- --------------
Cash flows from operating activities:
Net loss $ (2,961,105) $ (5,277,784) $ (1,355,037)
Adjustments to reconcile net loss to net
cash used in operating activities:
Amortization of deferred finance costs 40,545 - -
Amortization of deferred issuance costs - 92,400 13,000
Amortization of debt discounts to interest
expense - 3,062 13,211
Amortization of deferred consulting fees 147,025 - -
Amortization of intangible asset - - 10,192
Bad dept expense 50,914 10,000 6,600
Contributed services 30,000 - -
Impairment loss - - 20,910
Interest expense of beneficial conversion
feature - - 246,500
Loss on foreclosure of loan payable - 1,008,885 -
Stock based consulting expense 664,000 3,817,326 127,000
Stock based compensation to officer 946,500 - -
Settlement expense - 144,527 36,500
Allocation of loss to minority interest - - (5,097)
Write down of investment 900,724 - -
Write off of stock subscription receivable - 102,500 -
(Increase) decrease in:
Prepaids - 34,000 (34,000)
Increase (decrease) in:
Accounts payable (3,509) 17,952 (11,050)
Accrued interest - 53,997 70,254
Accrued penalties - 30,000 485,245
Accrued compensation, related party - (188,492) 129,742
Interest receivable - (10,000) (6,600)
-------------- -------------- --------------
Net cash used in operating activities (184,906) (161,627) (252,630)
-------------- -------------- --------------
Cash flows from investing activities:
Investment in portfolio companies (191,446) - -
-------------- -------------- --------------
Net cash used in investing activities (191,446) - -
-------------- -------------- --------------
Cash flows from financing activities:
Proceeds from loans payable 56,500 824,000 -
Proceeds from convertible debentures - - 226,000
Proceeds from the sale of common stock - 30,000 -
Proceeds from loan from joint venture partner - - 50,000
Liability payable with common stock - net 315,000 - -
Debt issuance costs (15,000) (71,400) -
Payments on convertible debenture - (750,000) -
Proceeds from stockholder advance - 47,000 (3,242)
-------------- -------------- --------------
Net cash provided by financing activities 356,500 79,600 272,758
-------------- -------------- --------------
Net decrease in cash (19,852) (82,027) 20,128
Cash at beginning of year 19,852 101,879 81,751
-------------- -------------- --------------
Cash at end of period $ - $ 19,852 $ 101,879
============== ============== ==============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ - $ - $ -
============== ============== ==============
Income Taxes $ - 4 - $ -
============== ============== ==============
Non-Cash investing and financing activities:
Common stock issued for debentures payable $ - $ 62,188 $ 20,005
============== ============== ==============
Debt issuance costs deferred in connection with
convertible debentures $ - $ 49,000 $ 24,000
============== ============== ==============
Common stock issued for accrued compensation $ - $ - $ -
============== ============== ==============
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.
F-4
AVENTURA HOLDINGS, INC.
(F/K/A SUN NETWORK GROUP, INC.)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
Additional
Common Stock Common Stock Issuable Paid-in Accumulated Deferred
--------------------- ---------------------
Shares Amount Shares Amount Capital Deficit Consulting Total
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2002 22,448,487 $ 22,448 5,000,000 $ 5,000 $1,290,041 $(1,813,325) - $(495,836)
Common stock issued in exchange of debt 8,898,328 8,898 - - 16,107 - - 25,005
Common stock issued for settlement 1,000,000 1,000 - - 35,500 - - 36,500
Common stock issued for services rendered 18,000,000 18,000 - - 245,000 - (136,000) 127,000
Warrant issued with convertible debentures - - - - 3,500 - - 3,500
Beneficial conversion value of convertible
debenture - - - - 246,500 - - 246,500
Issuance of previously issuable stock 5,000,000 5,000 (5,000,000) (5,000) - - - -
Net loss - - - - - (1,355,037) -(1,355,037)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2003 55,346,815 55,346 - - 1,836,648 (3,168,362) (136,000)(1,412,368)
Common stock issued for cash and services 53,000,000 53,000 - - 371,000 - (291,500) 132,500
Common stock issued in exchange of debt 6,260,998 6,261 - - 55,927 62,188
Common stock issued for settlement 20,000,000 20,000 - - 700,000 - - 720,000
Common stock issued for services rendered 133,050,000 133,051 - - 3,403,800 - (758,000) 2,778,851
Common stock issued upon foreclosure of
loans payable 56,000,000 56,000 - - 1,813,000 - - 1,869,000
Amortization of deferred consulting - - - - - - 1,038,475 1,038,475
Net loss - - - - - (5,277,784) - (5,277,784)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2004 323,657,813 323,658 - - 8,180,375 (8,446,146) (147,025) (89,138)
Recharacterization of minority interest
upon conversion to a BDC - - - - 38,127 - - 38,127
Amortization of deferred consulting - - - - - - 147,025 147,025
Common stock issued in exchange of debt
and services 150,000,000 150,000 - - 900,000 - - 1,050,000
Common stock issued for services rendered 166,000,000 166,000 - - 498,000 - - 664,000
Common stock issued in exchange of debt 235,000,000 235,000 - - 80,000 - - 315,000
Common stock classified as liability (235,000,000) (235,000) - - (80,000) - - (315,000)
Common stock issued in exchange for
portfolio company (Aventura Networks
LLC) acquisition 1,380,000,000 1,380,000 - - (579,276) - - 800,724
Common stock issuable in exchange for
portfolio company (Aventura Networks
LLC) acquisition - - 300,000,000 300,000 (300,000) - - -
Contributed services of Chief Executive
Officer - - - - 30,000 - - 30,000
Net loss - - - - - (2,961,105) -(2,961,105)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2005 2,019,657,813 $2,019,658 300,000,000$ 300,000 $8,767,226$(11,407,251)$ - $(320,367)
========== ========== ========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-5
AVENTURA HOLDINGS, INC.
(F/K/A SUN NETWORK GROUP, INC.)
STATEMENT OF CHANGES IN NET ASSETS
DECEMBER 31, 2005
FROM MARCH 16
THROUGH
DECEMBER 31, 2005
-----------------
Decrease in net assets from operations:
Net operating loss (2,782,265)
-----------------
Net decrease in net assets from operations (2,782,265)
Common stock transactions 2,514,724
-----------------
Total (decrease) in net assets (267,541)
Net Assets:
Beginning of Period ( 82,826)
-----------------
End of Period (320,368)
=================
The accompanying notes are an integral part of these financial statements.
F-6
AVENTURA HOLDINGS, INC.
(F/K/A SUN NETWORK GROUP, INC.)
SCHEDULE OF INVESTMENTS
DECEMBER 31, 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. Inactive Common Stock 100% $ - $ -
Aventura Networks, LLC Telecommunications Member Units 100% 912,032 40,532
---------- ----------
TOTAL MAJORITY OWNED AFFILIATE INVESTMENTS $ 912,032 $ 40,532
========== ==========
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 $ -
---------- ----------
TOTAL MINORITY OWNED OTHER NON-CONTROLLED AFFILIATE INVESTMENTS $ 100,000 $ -
========== ==========
TOTAL INVESTMENTS IN AFFILIATES $1,122,032 $ 40,532
========== ==========
(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.
F-7
AVENTURA HOLDINGS, INC.
(F/K/A SUN NETWORK GROUP, INC.)
SCHEDULE OF FINANCIAL HIGHLIGHTS
FROM MARCH 16 THROUGH DECEMBER 31, 2005
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) (d) -286.80%
Shares outstanding at end of period 2,319,657,813
Ratio/Supplemental Data:
Net assets at end of period $ (320,368)
Ratio of operating expenses to average net assets (annualized) -587.31%
Ratio of net operating income to average net assets (annualized) -4470.44%
(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.
(d) Total return is based on the net return from operations and net increase (decrease) from
common stock transactions - for further information see the Statement of Changes in Net Assets
(e) All per share amounts are rounded to two decimal places.
The accompanying notes are an integral part of these financial statements.
F-8
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 is operating as an investment holding company and
has acquired and plans to announce a number of acquisitions and investments
which will be designed to build an investment portfolio to enhance the Company's
shareholder value. The Company provides equity, capital and advisory services
for management buyouts, recapitalizations, and the growth and needs of emerging
companies. As a BDC, the Company is, in effect, a publicly traded private
equity fund, where stockholders provide capital in a regulated environment for
private investment in a pool of short and long-term investments. Congressional
intent behind the creation of BDCs was to encourage the flow of public capital
to private and smaller public companies.
The Company has concentrated its investment strategies in the telephony sector
based upon experience and exposure to opportunities but plans to expand
acquisitions and investments to other lines of business and industry to enhance
value to stockholders through capital appreciation and payments of dividends to
the Company by its portfolio investments.
BDC regulation was created in 1980 by Congress to encourage the flow of public
equity capital to small businesses in the United States. BDCs, like all mutual
funds and closed-end funds, are regulated under the 1940 Act. BDCs report to
stockholders like traditional operating companies and file regular quarterly and
annual reports with the Securities and Exchange Commission. BDCs are required
to make available significant managerial assistance to their portfolio
companies.
Before the election of BDC status, the Company held a 50% investment in Radio X
Network. The original cost basis was $110,000. Radio X net assets are unknown
to the current Board and are considered abandoned. The Board assigned a $0 fair
market value of the Radio X investment at December 31, 2005.
The Company also held a 100% investment in Radio TV Network, Inc. before
electing BDC status. The net assets of Radio TV Network, Inc. are unknown to
the current Board and are considered abandoned. The original cost basis was $0
and the Board assigned a $0 fair market value of the Radio TV Network, Inc.
investment at December 31, 2005.
The results of operations for 2005 are divided into two periods. The period
from January 1, to March 15, 2005 represents the period prior to BDC election
and the period from March 16, 2005 to December 31, 2005 represent the
period 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.
For the period between March 15, 2005 (commencement of our status as a BDC) and
December 31, 2005, the Company explored several investment opportunities and
made two investments. (see Note 4)
On October 17, 2005 the Company merged with Aventura Holdings, Inc. Aventura
Holdings, Inc. was the former owner of Aventura Networks, LLC and its sole net
assets were 880,000,000 shares of restricted Company stock and anti-dilution
rights acquired in the LLC purchase agreement with the Company. Immediately
prior to the merger, Aventura Holdings, Inc. transferred its net assets to
Melissa Apple, Trustee of the Maria Lopez Irrevocable Trust UTD March 29, 2004
(its sole shareholder). Subsequent to the merger the Company adopted the name
Aventura Holdings, Inc and the former company was dissolved.
On February 23, 2006, the Company announced that it entered into a Memorandum of
Understanding and Intent (MOU) with Horvath Holdings, LLC to acquire 30% of Ohio
Funding Group, Inc. in exchange for 200,000,000 shares of restricted common
stock in an exempt issuance to Horvath Holdings. Integrated into the MOU is a
one year option for Horvath to purchase a controlling interest in Aventura
through the sale of other Horvath controlled entities to Aventura either in a
single transaction or a series of transactions.
F-9
NOTE 2 - GOING CONCERN
As reflected in the accompanying financial statements, the Company's recurring
losses from operations, net loss of $2,782,265 for the nine and one half months
ended December 31, 2005 as a BDC; a net loss of $178,840 for the two and one
half months ended March 15, 2005 prior to election as a BDC and net cash used in
operations of $184,906 for the year ended December 31, 2005; working capital
deficiency of $20,355, a stockholders' deficiency of $320,368 and an accumulated
deficit of $11,407,252 at December 31, 2005, raise substantial doubt about our
ability to continue as a going concern. Our financial statements do not include
any adjustments to reflect the possible effects on recoverability and
classification of assets or the amounts and classification of liabilities that
may result from our inability to continue as a going concern.
Our ability to continue as a going concern is dependent on the ability to
further implement our business plan, raise capital, and generate revenues. We
presently do not have sufficient revenues to cover our incurred expenses. Our
management recognizes that we must generate additional resources to enable us to
pay our obligations as they come due, and that we must ultimately successfully
implement our business plan and achieve profitable operations. We cannot assure
you that we will be successful in any of these activities. Should any of these
events not occur, our financial condition will be materially adversely affected.
The time required for us to become profitable from operations is highly
uncertain, and we cannot assure you that we will achieve or sustain operating
profitability or generate sufficient cash flow to meet our planned capital
expenditures, working capital and debt service requirements. If required, our
ability to obtain additional financing from other sources also depends on many
factors beyond our control, including the state of the capital markets and the
prospects for our business. The necessary additional financing may not be
available to us or may be available only on terms that would result in further
dilution to the current owners of our common stock.
We cannot assure you that we will generate sufficient cash flow from operations
or obtain additional financing to meet our obligations.. The financial
statements do not include any adjustments to reflect the possible effects on
recoverability and classification of assets or the amounts and classification of
liabilities, which may result from the inability of the Company to continue as a
going concern.
Management's Plans
On February 23, 2006, the Company announced that it entered into a Memorandum of
Understanding and Intent (MOU) with Horvath Holdings, LLC to acquire 30% of Ohio
Funding Group, Inc. in exchange for 200,000,000 shares of previously un-issued
restricted Company stock. Integrated into the MOU is a one year option for
Horvath to purchase a controlling interest in Aventura through the sale of other
Horvath controlled entities to Aventura either in a single transaction or a
series of transactions.
Once we enter into a binding agreement with Horvath Holdings, LLC our future
operating business and ownership will change. Therefore, management determined
that continuing as a BDC is not practical or appropriate and that it is in the
Company's best interest to un-elect BDC status in the second fiscal quarter of
2006. Un-electing this status requires a shareholder vote but, inasmuch as one
shareholder holds a majority of our stock, we have determined that we can make
this election upon submitting the matter to this one shareholder and then filing
an information statement (Form 14C). Therefore in order to withdraw from its BDC
status, the Company will first be required to file a Form 14C Preliminary
Information Statement regarding the proposed shareholder vote to withdraw its
BDC election, and any other matters to be voted on by shareholders. The company
will not be seeking proxies as the Company believes that a majority of its
outstanding stock is controlled by one shareholder who will vote in favor of the
BDC withdrawal. Upon completion of the Preliminary Information Statement, the
Company will then file a Form 14C Definitive Information Statement, setting the
shareholder meeting to vote on the BDC withdrawal. The Company will then hold
the shareholder meeting. Assuming majority shareholder approval to withdraw the
BDC election, the Company will then file a Form N-54C notifying the Securities
and Exchange Commission that, pursuant to the provisions of Section 54(c), it is
withdrawing its election to be subject to Sections 55 through 65 of the
Investment Company Act. Upon completion of this process, the Company will no
longer be subject to the Investment Company Act but will continue as an
operating reporting public company, and will still be subject to the Securities
Exchange Act of 1934.
F-10
Under the rules of the Securities and Exchange Commission, the election to
terminate status as a BDC cannot become effective until at least 20 days after
the accompanying Information Statement has been distributed to the stockholders
of the Company. We expect the termination of such status, and the appropriate
filing to be made with the Securities and Exchange Commission, on or about April
25, 2006.
Management conducted its due diligence on Ohio Funding Group, Inc. and other
Horvath Holdings, LLC investments. Horvath owns and operates successful
automobile dealerships and finance companies concentrating in the sub-prime
market. Horvath executives have decades of automobile industry experience
including key public company positions. If Horvath exercises their option
discussed in our MOU and takes control of Aventura, we expect to pursue a
different business model consistent with their experience including possible
further acquisitions within the automobile industry. We believe management's
plan will allow the Company to continue as a going concern.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying 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 investments. Prior to filing our
election as a BDC Aventura's consolidated financial statements included the
accounts of its wholly owned subsidiary, Radio TV Network, Inc., and its
controlled subsidiary Radio X Network, Inc. All significant inter-company
accounts and transactions were eliminated in consolidation.
Use of Estimates
In preparing financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and revenues and expenses during the reported period. Actual
results may differ from these estimates.
Significant estimates included in the accompanying financial statements include
valuation of portfolio investments (FY 2005), impairment losses on long lived
assets, valuation of non-cash stock based transactions and valuation of the
deferred tax assets.
Cash and Cash Equivalents
For the purpose of the consolidated cash flow statement, the Company considers
all highly liquid investments with original maturities of three months or less
at the time of purchase to be cash equivalents.
Notes and Other Receivables
The Company assesses the probability of collections on loans, notes and other
receivables and records an allowance for loan loss accordingly.
The Company recognizes interest income on notes and loans receivable in default,
and records an appropriate allowance for loan loss on the resulting interest
receivable.
F-11
Fair Value of Financial Instruments
We define the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The carrying value of accounts payable and other debt approximates fair value
because of the short maturity of those instruments. The estimated fair value of
our other obligations is estimated based on the current rates offered to us for
similar maturities. Based on prevailing interest rates and the short-term
maturity of all of our indebtedness, management believes that the fair value of
our obligations approximates book value at December 31, 2005 and 2004.
Intangible Assets
Intangible assets consisted of purchased or acquired investments in programming,
and facility usage rights and management services acquired upon the formation of
the Company's controlled subsidiary, Radio X. The Company recorded the assets
pursuant to SFAS 141 and determined the continuing accounting treatment in
accordance as to SFAS 142. For years prior to 2005 the Company recorded
amortization of facility usage rights over five years, management services on a
usage basis, and amortization of radio programs over one year.
Long-Lived Assets
The Company accounts for the impairment of long-lived assets in accordance with
Statement of Financial Accounting Standards No. 144, "Accounting for Impairment
or Disposal of Long-Lived Assets". Impairment is the condition that exists when
the carrying amount of a long-lived asset (asset group) exceeds its fair value.
An impairment loss is recognized only if the carrying amount of a long-lived
asset (asset group) is not recoverable and exceeds its fair value. The carrying
amount of a long-lived asset (asset group) is not recoverable if it exceeds the
sum of the undiscounted cash flows expected to result from the use and eventual
disposition of the asset (asset group). That assessment is based on the carrying
amount of the asset (asset group) at the date it is tested for recoverability,
whether in use or under development. An impairment loss shall be measured as the
amount by which the carrying amount of a long-lived asset (asset group) exceeds
its fair value.
Minority Interest
The minority interest in the net income or loss of the Company's consolidated
subsidiary, Radio X, is reflected in the consolidated statements of operations
for years prior to 2005 after allocation of the minority interest proportionate
share of losses of the Radio X subsidiary.
Stock-Based Compensation
The Company accounts for stock options issued to employees in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. As
such, compensation cost is measured on the date of grant as the excess of the
current market price of the underlying stock over the exercise price. Such
compensation amounts are amortized over the respective vesting periods of the
option grant. The Company adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" and SFAS No. 148, "Accounting for
Stock Based Compensation - Transition and Disclosure," which permits entities to
provide pro forma net income (loss) and pro forma earnings (loss) per share
disclosures for employee stock option grants as if the fair-valued based method
defined in SFAS No. 123 had been applied.
The Company accounts for stock options issued to non-employees for goods or
services in accordance with SFAS 123.
F-12
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 who engaged independent valuation experts and ratified 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.
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."
Income Taxes
Income taxes are accounted for under the asset and liability method of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes
("SFAS109")." Under SFAS 109, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
SFAS 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
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, 2004 and 2003, diluted
loss per share is the same as basic loss per share since the effect of all
common stock equivalents was anti-dilutive due to the net loss. At December 31,
2005 there were two hundred thirty five million shares issued that were
considered to be dilutive securities that will dilute future earnings per share.
F-13
Concentrations
The Company maintains its cash in bank deposit accounts, which, at times, exceed
federally insured limits. At December 31, 2005, the Company had no cash in
United States bank deposits. The Company has not experienced any losses in such
accounts through December 31, 2005.
Revenues of $0 and $30,000 were derived from one customer in 2004 and 2003,
respectively.
NOTE 4 - INVESTMENTS
At December 31, 2005, the Company held a 50% investment in Radio X Network.
The original cost basis was $110,000 and the fair market value at December 31,
2005 was zero.
At December 31, 2005 the Company held a 100% investment in Radio TV Network,
Inc. The original cost basis was $0 and the fair market value at December 31,
2005 was zero.
On June 3, 2005 the Company purchased ten percent of VoIPBlue.com, Inc.
(VoIPBlue) pursuant to a private offering memorandum of April 22, 2005.
VoIPBlue.com, Inc. developed software and was structured as a telecommunications
exchange serving Voice over Internet Protocol (VoIP) wholesale carriers.
Research and development, software, operating and other costs dissolved
investment capital and Company management was unable to further assist in
day-to-day operations. Local operations ceased in December, 2005 and moved to
Riga, Latvia in an effort to have the VoIPBlue shareholder / developer assume
operational control. Latvian management was unsuccessful and a decision was
made in 2006 to cease operations. VoIPBlue is attempting to sell its developed
and purchased software, the success of which is difficult to determine as there
is no liquid market. An independent accredited business valuation firm was
hired by the Company to assign a fair market value to the $100,000 investment in
VoIPBlue at December 31, 2005. Advanced Business Valuations determination of
value was zero at December 31, 2005
On June 7, 2005 the Company issued 880,000,000 shares of its previously
un-issued restricted common stock in an exempt issuance in exchange for 100%
interest in Aventura Networks, LLC. The shares were valued at a discounted price
of $0.00091 per share and the purchase were initially reflected on the financial
statements at $800,724. During 2005, the Company provided $299,925 in advances
to Aventura Networks, LLC and Aventura Networks, LLC paid obligations of
$108,479 for the Company and made an investment on behalf of the Company in
VoIPBlue.com, Inc. in the amount of $100,000. Aventura Networks was originally a
wholesale VoIP buyer and seller of routes predominantly in third-world countries
where rates were high and margins were wide. Increased competition led to lower
prices, reduced margins and Aventura Networks exit from the VoIP wholesale
carrier market. Aventura Networks changed direction and began to further develop
and sell developed and third party VoIP switching and internet protocol private
branch exchange software. An independent accredited business valuation firm was
hired by the Company to assign a fair market value to the $800,724 investment in
Aventura Networks as well as the likelihood of satisfaction of amounts owed to
the Company at December 31, 2005. Advanced Business Valuations determination of
value was zero at December 31, 2005 and an indeterminable likelihood of
repayment of the debt owed to the Company. Although the valuation firm was
unable to determine a likelihood of debt repayment, Aventura Networks continues
to pay Company expenses in 2006 through sales and conversion of its assets to
cash. The Company expensed $50,912 to bad debt expense representing part of the
amount Aventura Networks owes the Company at December 31, 2005 and carries the
net amount of the receivable at $40,532 representing Company expenses paid and
expectations of payments by Aventura Networks in 2006.
F-14
On February 23, 2006, the Company announced that it entered into a Memorandum of
Understanding and Intent (MOU) with Horvath Holdings, LLC to acquire 30% of Ohio
Funding Group, Inc. in exchange for 200,000,000 shares of restricted Company
Stock in an exempt issuance to Horvath Holdings. Integrated into the MOU is a
one year option for Horvath to purchase a controlling interest in Aventura
through the sale of other Horvath controlled entities to Aventura either in a
single transaction or a series of transactions.
NOTE 5 DUE FROM JOINT VENTURE PARTNER, NOTE RECEIVABLE AND ADVANCES
RECEIVABLE
Upon formation of the joint venture, the joint venture partner did not establish
a separate bank account for the joint venture. At December 31, 2003, management
could not ascertain the collectability of $24,372 of the balance due or $14,910
due at December 31, 2004. Accordingly, the $24,372 was charged to bad debt
expense in 2002 and an additional $10,000 charged to bad debt expense in 2004
related to an advance made in the 4th quarter of 2004 and has been fully
reserved as an allowance at December 31, 2004.
On September 17, 2002, the Company loaned $10,000 to a third party limited
liability company ("LLC"). The loan carries annual interest at 10% and matured
on November 16, 2002. During the term of the loan, the Company may convert the
principal and accrued interest into a 0.3% membership interest in the LLC. If
the Company elects to convert, no interest due shall be payable to the Company.
If the Company converts and holds the 0.3% membership interest, it will be
entitled to receive a proportionate 0.3% of the LLC's interest in cash flow,
profits, and tax benefits. The note is secured by the pledge of the general
assets of the LLC. On November 16, 2002, the borrower defaulted and on February
28, 2003, the Company and the LLC executed a letter agreement to extend all due
dates and conversion date to May 1, 2003. Due to the default and uncertainty
about collecting the receivable and the value of the investment if converted,
the Company has established a 100% valuation allowance and charged $10,000 and
the related accrued interest receivable of $324 to bad debt expense in 2002.
During 2003, the Company continued to recognize interest income and a related
bad debt expense $1,000. The Company discontinued this accrual in 2004. The
convertible note receivable at December 31, 2004 was as follows:
F-15
Convertible note receivable $10,000
Accrued interest receivable 1,324
Allowance for loan loss (11,324)
--------
$ -
========
The Company advanced a potential acquiree $56,000 in 2002. Due to the
uncertainty of collecting the balance due and the uncertain value of the
collateral, the Company charged the $56,000 and related interest of $2,755 at
December 31, 2002 to bad debt expense in 2002. During 2003, the Company
continued to recognize interest income and a related bad debt expense $5,600.
The Company discontinued this accrual in 2004 and has reserved 100% of this note
and related accrued interest through December 31, 2005 and 2004 as follows:
Notes receivable $56,000
Accrued interest receivable 8,355
Allowance for loan loss (64,355)
--------
$ -
========
NOTE 6 REDEMPTION OF DEBENTURES
Prior to fiscal 2004, the Company had received $750,000 pursuant to a Securities
Purchase Agreement to issue and sell 12% convertible debentures.
During December 2003 to the date of redemption (March 8, 2004), $87,194 of
debentures were converted into 15,159,326 shares of common stock . Additionally,
from March 2004 to May 2004, the Company repaid debenture holders $750,000.
On March 8, 2004, the Company entered into a redemption agreement with its
debenture holders, whereby the Company agreed to pay $150,000 per week for five
weeks commencing on March 22, 2004 until such time as the Company has paid
$750,000. Upon final payment, the Company delivered 20,000,000 shares of common
stock to the debenture holders as full satisfaction of all accrued liabilities
under the debenture agreements. In May 2004, the Company paid funds due to the
debenture holders in full satisfaction of all liabilities. In connection with
the redemption agreement, the Company paid the debenture holders cash of
$750,000, 20,000,000 shares of common stock valued at $720,000 or $.036 per
share, and $87,194 of common shares upon conversion of the debentures. These
were in full satisfaction of accrued penalties and liquidating damages of
$546,478, accrued interest of $116,188, and debenture liabilities of $750,000
resulting in an aggregate settlement expense of $144,527.
NOTE 7 LOAN AGREEMENT AND LOSS ON FORCLOSURE
From March to April, 2004, the Company entered into 2-year loan agreements and
borrowed an aggregate of $824,000. The loans bear interest at a rate equal to
the prevailing 30-day LIBOR rate plus 100 basis points. Interest on the loans is
computed on the basis of 360-day year for the number of actual days elapsed and
is due and payable quarterly commencing June 2, 2004. The loans are due in March
2006. If the loans are not paid by the close of business on the due date in
March 2006, the Company shall pay the lender a late charge equal to five percent
of the outstanding principal balance. The Company paid a cash fee equal to 10%
of the amount borrowed which is deducted directly from the proceeds by the
lender. These fees are recorded debt discount and amortized over the loan term.
Due to the foreclosure (see below) the entire unamortized portion of these debt
discounts were expensed during the year ended December 31, 2004. The loans are
collateralized by 56,000,000 shares of the Company's common stock. The
collateral shares are not considered outstanding for accounting purposes and do
not have voting rights until and unless they are foreclosed upon due to any
future default as stipulated in the agreements. The Company defaulted on the
$824,000 loans payable in June 2004 due to non-payment of required interest
payments. In November 2004, the lender took possession of 56,000,000 collateral
common shares. As a result of this foreclosure by the lender, the Company
recorded the value of the 56,000,000 shares of $1,869,000 and removed the loan
payable and accrued interest balances of $824,000 and $36,115, respectively,
resulting in a loss on foreclosure of $1,008,885. The value of the 56,000,000
shares was determined using the market price of the shares on the date they were
granted as collateral.
F-16
NOTE 8 EMPLOYMENT AGREEMENT
The Company had an employment agreement with its former president where he
received $120,000 in annual salary, $30,000 annual guaranteed bonus, a 10%
incentive bonus based on Company financial criteria, and certain fringe benefits
and expense reimbursements. The agreement expired July 2005. In May 2004, the
president was issued 10,000,000 shares of the Company's common stock for all
accrued and remaining future compensation under this agreement.
The Company does not have an employment agreement with its current CEO and
President Craig A. Waltzer. Mr. Waltzer contributed services valued at $30,000
during 2005 which is recorded as compensation expense and additional paid-in
capital in 2005.
From June 7, 2005 through December 31, 2005 the Company used offices of its
portfolio investee Aventura Networks, LLC. The fair value of the office space
was nominal and not recorded.
..
NOTE 9 COMMITMENTS AND CONTINGENCIES
A - Anti-Dilutionand 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 will 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 10Y).
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 Stock Purchase Agreement under Regulation E. On March 24, 2006 we
filed a Form 2-E notifying the SEC of the activity pursuant to the 1-E and our
intent to discontinue the 1-E offering.
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 under the direction of prior management
granted and issued common stock for consulting services after its election as a
BDC in March 2005 and issued and granted additional shares without ascertainable
consideration which may have violated certain sections of the 1940 Act. Current
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.
F-17
On March 7, 2006 management completed its offering under Regulation 1-E and
recommended the Board file a Preliminary Information Statement to propose a
shareholder vote to withdraw its BDC election. Pending the Board's concurrence
and completion of the Preliminary Information Statement, the Company will file a
Definitive Information Statement setting the shareholder meeting to vote on the
BDC withdrawal. Assuming shareholder approval the Company will file Form 54C
notifying the Commission that pursuant to provisions of form 54(c), we will be
withdrawing our election to be subject to Sections 55 through 65 of the
Investment Company Act.
The outcome of the above matters could have a significant impact on our ability
to continue as a going concern. (see Note 2)
C - Violation Of Stock Purchase Agreement:
-----------------------------------------------
The Company was in violation of provisions of the Stock Purchase Agreement with
Dutchess Private Equities Fund II LP (Dutchess) 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. The Company satisfied the terms of the
Stock Purchase Agreement in 2006 and exchanged a mutual release with Dutchess.
D - Legal Matters:
---------------------
On December 30, 2005, the Company filed a complaint in US District Court for the
Southern District of Florida against its former management and directors
alleging inappropriate issuance of Company shares to themselves and their
affiliates. On March 22, 2006 the Company settled the lawsuit in exchange for
former management's agreement to relinquish all rights to approve, authorize or
consent to current managements decisions as contained in the LLC Purchase
Agreement between the Company and the owners of Aventura Networks LLC. The
Company believes the complaint had merit but did not wish to harm innocent third
parties in the event these shares were further distributed. Furthermore,
previous management refused to relinquish their aforementioned rights and
indicated their intention to block our acquisition of Ohio Funding Group, Inc.
as announced in our February 21, 2006 Memorandum of Understanding and Intent
with Horvath Holdings, LLC unless we settled by dismissing the lawsuit.
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.
F-18
NOTE 10 STOCKHOLDERS EQUITY AND LIABILITY PAYABLE WITH COMMON STOCK
Preferred Stock
----------------
On June 5, 2003, the Company's Board of Directors authorized 10,000,000 shares
of preferred stock, par value $0.001. Such preferred stock, or any series
thereof, shall have such designations, preferences, participating, optional or
other annual rights and qualifications, limitations or restrictions adopted by
the Company's Board of Directors. No preferred stock is presently issued or
outstanding and no certificate of designation has been filed by the Company to
permit issuance of any preferred stock.
Common Stock Transactions
---------------------------
A. In January 2003, 5,000,000 shares previously issuable were
issued.
B. On February 4, 2003, the Company settled a lawsuit by issuing
1,000,000 common shares and $6,500 in cash. The shares were valued at the
quoted trading price of $0.03 per share on the settlement date resulting in
a total settlement expense of $36,500.
C. On June 5, 2003, with the approval of the Company's Board of
Directors, the authorized number of common shares, $0.001 par value,
authorized by the Company was increased from 100,000,000 to 200,000,000. In
October 2003, the Company changed the number of authorized common shares to
500,000,000.
D. During the three months ended December 31, 2003, in connection with
the conversion of debentures payable, the Company issued 8,898,328 shares
of common stock upon the conversion of debentures payable amounting to
$25,006.
E. On November 15, 2003, the Company entered into an agreement with a
third party for investor relations services. The term of this agreement was
from the date of the contact to December 31, 2003. In connection with this
agreement, the Company issued such consultant 2,000,000 shares of its
common stock for these services. The Company valued these shares at the
fair market value on the date of the agreement or $0.0095 per share, and
recorded consulting expense of $19,000.
F. On December 4, 2003, the Company entered into an agreement with a
third party for management consulting, business advisory, shareholder
information and public relations services. The term of this agreement was
for two months. In connection with this agreement, the Company issued such
consultant 10,000,000 shares of its common stock for these services. The
Company valued these shares at the fair market value on the date of the
agreement or $0.004 per share, and recorded consulting expense of $20,000
and deferred consulting expense of $20,000 to be amortized over the
contract term.
G. On December 12, 2003, the Company entered into an agreement with a
third party for investor relations services. The term of this agreement was
for a six-month period. In connection with this agreement, the Company
issued such consultant 3,000,000 shares of its common stock for these
services. The Company valued these shares at the fair market value on the
date of the agreement or $0.014 per share, and recorded consulting expense
of $7,000 and deferred consulting expense of $35,000 to be amortized over
the contract term.
H. On December 15, 2003, the Company entered into an agreement with a
third party for investor relations services. The term of this agreement was
for a two-month period. In connection with this agreement, the Company
issued such consultant 3,000,000 shares of its common stock for these
services. The Company valued these shares at the fair market value on the
date of the agreement or $0.054 per share, and recorded consulting expense
of $81,000 and deferred consulting expense of $81,000 to be amortized over
the contract term.
I. During the three months ended March 31, 2004, in connection with the
conversion of debentures payable, the Company issued 6,260,998 shares of
common stock upon the conversion of debentures payable amounting to
$62,188.
F-19
J. During the three months ended March 31, 2004, the Company entered into
agreements with third parties for management consulting, business advisory,
shareholder information and public relations services. In connection with
these agreements, the Company issued such consultants 36,800,000 shares of
its common stock for these services. The Company valued these shares at the
quoted trading price on the date of the agreement at prices ranging from
$0.026 to $0.043 per common share resulting in a value of $1,378,400, which
will be amortized over the one-year contract term.
K. During the three months ended June 30, 2004, the Company entered into
agreements with third parties for management consulting, business advisory,
shareholder information and public relations services. In connection with
these agreements, the Company issued such consultants 13,500,000 shares of
its common stock for these services. The Company valued these shares at the
quoted trading price on the date of the agreement at prices ranging from
$0.027 to $0.036 per common share resulting in a value of $420,000, which
will be amortized over the contract terms.
L. In May 2004, the Company issued 10,000,000 shares of common stock to
an officer of the Company for all accrued compensation through June 30,
2004 and future compensation under the agreement. The Company valued these
shares at the quoted trading price on the date of grant of $0.03 per common
share, and reduced accrued compensation by $242,792 and recorded non-cash
compensation expense of $57,208.
M. During the three months ended September 30, 2004, the Company issued
shares to third parties and the Company's CEO for past management
consulting, business advisory, shareholder information and public relations
services. In connection with these agreements, the Company issued such
consultants and employee 72,250,000 shares of its common stock for these
services. The Company's CEO received 66,000,000 of these shares. The
Company valued these shares at the quoted trading price on the date of the
agreement at prices ranging from $0.007 to $0.025 per common share, and
recorded consulting expense of $1,434,950 with $1,410,500 charged to
compensation - officer and $24,450 charged to consulting.
N. In September 2004, the Company entered into a private stock placement
and consulting agreement whereby the Company agreed to sell 53,000,000
shares of its common stock for $0.0025 per share or $132,500. The services
have been valued at the difference between the quoted trading price on the
date prior to the agreement date and the price paid per shares or $0.0055
per share. The $291,500 allocated to services will be amortized over the
two year term of the contract. The Company received $30,000 of the $132,500
it was to receive from the sale of these shares. The Company is trying to
collect the remaining $102,500, but has been unsuccessful and as of
December 31, 2004 has provided a 100% reserve against this receivable. In
addition, since the consultant is not performing under this agreement, the
$291,500 allocated to services has been expensed during the year ended
December 31, 2004.
O. In November 2004, the Company issued 500,000 shares of common stock to
a consulting for services rendered. The Company valued these shares at the
quoted trading price on the date of grant of $0.007 per common share
resulting in a value of $3,500 which has been expensed as consulting fees.
P. On May 13, 2005 the Company granted 150,000,000 shares of its
previously un-issued unrestricted free-trading 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 believes 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.
Q. On May 26, 2005 the Company issued 20,000,000 shares of its previously
un-issued unrestricted free-trading 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 $48,000 was expensed. The term of the agreement was three months and
the agreement was cancelled after two months. 6,000,000 shares were
returned to the Company and retired. As a BDC, the Company is not permitted
to issue stock for services and believes 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-20
R. On May 26, 2005 the Company issued 30,000,000 shares of its previously
un-issued unrestricted free-trading 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 believes 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.
S. On May 26, 2005 the Company issued 32,000,000 shares of its previously
un-issued unrestricted free-trading 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 believes 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.
T. On May 26, 2005 the Company issued 10,000,000 shares of its previously
un-issued unrestricted free-trading 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 believes 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.
U. On May 26, 2005 the Company issued 15,000,000 shares of its previously
un-issued unrestricted free-trading 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 believes 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.
V. On May 26, 2005 the Company issued 20,000,000 shares of its previously
un-issued unrestricted free-trading 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 believes 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.
W. On May 26, 2005 the Company issued 35,000,000 shares of its previously
un-issued unrestricted free-trading 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 believes 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-21
X. On May 26, 2005 the Company issued 10,000,000 shares of its previously
un-issued unrestricted free-trading 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 believes 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.
Y. 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 previously un-issued
unrestricted free-trading 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
the sellers of Aventura Networks, LLC to additional shares in the event
additional shares are issued to Dutchess relating to the initial draw of
this Stock Purchase Agreement. By virtue of the LLC Purchase Agreement, the
former owners of Aventura Networks LLC are entitled to 5 times the
additional shares issued to Dutchess 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 waived 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) previously un-issued unrestricted
free-trading 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) previously un-issued unrestricted free-trading shares, an
additional fifty million (50,000,000) previously un-issued unrestricted
free-trading shares on November 3, 2005 and an additional sixty million
(60,000,000) previously un-issued unrestricted free-trading shares on
December 29, 2005 towards satisfaction of the obligations for the initial
draw amount and the Company's Board approved the issuances. 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 December 31, 2005 Dutchess sold
149,299,004 shares for $235,940 and $40,545 was amortized as a cost of
financing. For financial reporting purposes, all shares issued to Dutchess
are not considered issued or outstanding until a final settlement date is
achieved. At December 31, 2005 however the issued shares to Dutchess are
considered dilutive for purposes of the computation of diluted earnings per
share. In February 2006 an additional fifty million (50,000,000) previously
un-issued unrestricted free-trading shares were issued to Dutchess and in
March 2006 a final fifteen million (15,000,000) previously un-issued
unrestricted free-trading shares were issued to Dutchess. After Dutchess
sold the last of the shares issued in March 2006 our loan balance was
$978.11. Aventura Networks, LLC issued a check to Dutchess on behalf of the
Company to fully satisfy the debt. Immediately after satisfying our Debt
with Dutchess we exchanged a mutual release.
F-22
Z. On June 7, 2005 the Company issued 880,000,000 shares of its previously
un-issued restricted common stock in an exempt issuance to Aventura
Holdings, Inc. - old 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. Aventura Holdings, Inc. - old distributed its
shares and anti-dilution rights to its sole shareholder (Melissa Apple,
Trustee of the Maria Lopez Irrevocable Trust UTD March 29, 2004) then
merged with the Company on October 17, 2005. The Company adopted the name
Aventura Holdings, Inc. - new and Aventura Holdings, Inc. - old was
dissolved.
AA. On December 29, 2005 the Company issued 500,000,000 shares of its
previously un-issued restricted common stock in an exempt issuance to
Melissa Apple, Trustee of the Maria Lopez Irrevocable Trust UTD March 29,
2004 as additional shares due the owners of Aventura Networks, LLC under
the anti-dilution provision contained in the May 27, 2005 LLC Purchase
Agreement (See Item 10Y). On December 29, 2005 300,000,000 additional
shares of restricted section 144 common stock became issuable under the
anti-dilution provision of the Aventura Networks, LLC Purchase Agreement
(See Item 10Y).
BB. On December 29, 2005 300,000,000 additional shares of restricted common
stock became issuable under the anti-dilution provision of the Aventura
Networks, LLC Purchase Agreement (See Item 10Y).
NOTE 11 INCOME TAXES
There was no income tax expense or benefit for federal and state income taxes in
The consolidated statement of operations for years 2005, 2004 and 2003 due to
the Company's net loss and valuation allowance on the resulting deferred tax
asset.
The actual tax expense differs from the "expected" tax expense for the years
ended December 31, 2004 and 2003 (computed by applying the U.S. Federal
Corporate tax rate of 34% to income before taxes) as follows:
2005 2004 2003
--------------- --------------- ---------------
Computed "expected" tax benefit $(1,006,776.00) $ (1,794,447) $ (460,713)
State income taxes (22,494) (174,167) (64,625)
Change in tax rate benefits - - (91,266)
Stock for services and/or settlement 547,570 1,709,615 55,590
Other 313,894 - 13,910
Change in deferred tax asset valuation 167,806 258,999 547,104
--------------- --------------- ---------------
$ - $ - $ -
=============== =============== ===============
The tax effects of temporary differences that give rise to significant portions of deferred tax assets
and liabilities at December 31, 2005 are as follows:
2005 2004
--------------- ---------------
Deferred tax assets:
Net operating loss carryforward $ 1,352,214 $ 1,184,409
Loan loss allowance 75,146 75,146
--------------- ---------------
Total deferred tax assets 1,427,360 1,259,555
Less: valuation allowance (1,427,360) (1,259,555)
--------------- ---------------
Net deferred tax asset $ - $ -
=============== ===============
F-23
At December 31, 2005, the Company had useable net operating loss carryforwards
of approximately $4,198,000 for income tax purposes, available to offset future
taxable income expiring in 2019.
The valuation allowance at January 1, 2005 was $1,259,555. The net change in
the valuation allowance during the year ended December 31, 2005 was an increase
of $167,806.
NOTE 12 RELATED PARTY AND AFFILIATE TRANSACTIONS
The following disclosures comply with generally accepted accounting principles
and the disclosure requirements under the Regulation S-X, Article 6, with regard
to affiliate investments and transactions. See Schedule of Investments for
identification of Investments in Affiliates.
The Company has controlling interests in certain investments at December 31,
2005 (see Schedule of Investments for identification of Investments in
Affiliates and Note 4).
The Company advanced funds to its controlled portfolio companies during 2005
(see Note 4).
Due to stockholder at December 31, 2004 represents non-interest bearing advances
from the Company's then president and principal stockholder who resigned in
2005.
NOTE 13 - SUBSEQUENT EVENTS
In February and March 2006 the Company issued 50,000,000 and 15,000,000 shares
respectively of its previously un-issued unrestricted free-trading common stock
to Dutchess Private Equities Fund II LP (Dutchess) pursuant to a $5,000,000
Stock Purchase Agreement. After Dutchess sold the last of the shares issued in
March 2006 our loan balance was $978.11. Aventura Networks, LLC issued a check
to Dutchess on behalf of the Company to fully satisfy the debt. Immediately
after satisfying our Debt with Dutchess we exchanged a mutual release. The
Company was obligated to issue these shares and funds to Dutchess as additional
re-payment of the May 27, 2005 $315,000 advance (See Note 10Y).
On February 23, 2006, the Company announced that it entered into a Memorandum of
Understanding and Intent (MOU) with Horvath Holdings, LLC to acquire 30% of Ohio
Funding Group, Inc. in exchange for 200,000,000 shares of restricted Company
stock. Integrated into the MOU is a one year option for Horvath to purchase a
controlling interest in Aventura through the sale of other Horvath controlled
entities to Aventura either in a single transaction or a series of transactions.
F-24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. 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. Based on this evaluation,
management has 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.
ITEM 9B. OTHER INFORMATION
None
62
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The officers and directors of the Company are as follows:
NAME AGE POSITION
----------------------- --- ------------------------
Craig A. Waltzer 44 Chief Executive Officer
Chairman
James Reskin 47 Chief Compliance Officer
Jere J. Lane 52 Director
Sean Josiah 36 Director
Arlene Waltzer 65 Director
Anthony J. Roberts, Sr. 69 Director
Each director of the Company holds such position until the next annual meeting
of the Company's stockholders and until his successor is duly elected and
qualified. The officers hold office until the first meeting of the board of
directors following the annual meeting of stockholders and until their
successors are chosen and qualified, subject to early removal by the board of
directors.
The Audit Committee
The Audit Committee operates pursuant to a charter approved by the Board of
Directors. The charter sets forth the responsibilities of the Audit Committee.
The primary function of the Audit Committee is to serve as an independent and
objective party to assist the Board of Directors in fulfilling its
responsibilities for overseeing and monitoring the quality and integrity of the
Company's financial statements, the adequacy of the Company's system of internal
controls, the review of the independence, qualifications and performance of the
Company's independent registered public accounting firm, and the performance of
the Company's internal audit function. The Audit Committee is presently
composed of two persons - Messrs. Josiah and Lane (Chair), each of whom is
considered independent. The Company's Board of Directors has determined that
Jere J. Lane is the "audit committee financial expert" as defined under Item 401
of Regulation S-K of the 1934 Act. Messrs. Josiah and Lane each meet the
current independence and experience requirements of Rule 10A-3 of the 1934 Act
and, in addition, are not "interested persons" of the Company as defined in
Section 2(a)(19) of the Investment Company Act of 1940.
Section 16(a) Beneficial Ownership Reporting Compliance
Pursuant to Section 16(a) of the 1934 Act, the Company's directors and executive
officers, and any persons holding more than 10% of its common stock, are
required to report their beneficial ownership and any changes therein to the SEC
and the Company. Specific due dates for those reports have been established, and
the Company is required to report herein any failure to file such reports by
those due dates. Based on the Company's review of Forms 3, 4 and 5 filed by
such persons, the Company believes that during the fiscal year ended December
31, 2005, all Section 16(a) filing requirements applicable to such persons were
met in a timely manner.
63
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS AND OFFICERS
The following table sets forth the remuneration of each of the Company's
executive officers during each of its three most recent fiscal years:
NAME YEAR AMOUNT
----------------- ---- ----------
Craig A. Waltzer 2005 $ 30,000
2004 -
2003 -
T. Joseph Coleman 2005 1,478,000
2004
2003
Peter Klamka 2005 60,000
2004 -
2003 -
1 - Contributed services
2 - Payment in Company shares
The Company has no stock option, retirement, pension, or profit-sharing programs
for the benefit of directors, officers, or other employees.
The Company has no investment adviser as defined in section 2(a)(20) of the 1940
Act.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Management
The following table sets forth, as of March 28, 2006, each stockholder who owns
more than 5% of our outstanding shares of common stock, each director, the chief
executive officer, our executive officers and our directors and executive
officers as a group. As of such date, Melissa Apple, Trustee of the Maria Lopez
Irrevocable Trust UTD March 29, 2004 owned more than 50% of our outstanding
voting securities, and would be deemed to control us, as such term is defined in
the 1940 Act. The Trustee is a former spouse of Craig A. Waltzer, our Chief
Executive Officer, and for that reason, while the Trustee must act in the manner
she alone deems appropriate in her sole and exclusive discretion, this prior
affiliation is disclosed. Unless otherwise indicated, we believe that each
beneficial owner set forth in the table has sole voting and investment power.
Current management inquired whether the Company's former President / Director
(T. Joseph Coleman) was a person who beneficially owns or owned at December 31,
2005 in excess of five percent of the Company's common stock. Mr. Coleman
indicated that he was "unaware of any individual or entity that currently owns
or controls more than 5% of AVNT." At December 31, 2004 T. Joseph Coleman and
fellow former Director and brother William H. Coleman reported beneficial
ownership of approximately twenty-one percent of outstanding Company stock.
During 2005 the Company issued T. Joseph Coleman and William H. Coleman (or
their affiliated entities) a substantial number of shares (see item 5). If
Messrs. Coleman were controlling person(s) and distributed their shares, the
Company is unaware whether their shares were disposed of in a manner consistent
with distribution and disclosure obligations (including any exemptions relied
upon by Messrs. Coleman).
NUMBER OF SHARES PERCENTAGE
OWNED OF CLASS
---------------- ----------
Melissa Apple, Trustee of the Maria Lopez Irrevocable Trust UTD March 29, 2004 2,005,000,000 68.09%
(1) Includes 625,000,000 issuable shares pursuant to the anti-dilution provision
in the LLC Purchase Agreement.
(2) Based on 2,319,657,813 shares outstanding as of March 28, 2006 plus
625,000,000 issuable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
The aggregate fees billed by the Company's auditors for professional services
rendered in connection with the audit of the Company's annual consolidated
financial statements for fiscal 2005 and 2004 and reviews of the consolidated
financial statements included in the Company's Forms 10-KSB for fiscal 2005 and
2004 were approximately $28,000 and $17,000, respectively.
AUDIT-RELATED FEES
For fiscal 2005 the auditors billed $14,000 relating to assistance with SEC
comment responses. For fiscal 2004 and 2003, the Company's auditors billed for
service related to an SB-2 registration filing with the SEC in the amount of $0
and $2,000, respectively. The Company's auditors did not bill any additional
fees for assurance and related services that are reasonably related to the
performance of the audit or review of the Company's financial statements and are
not reported under "Audit Fees" above.
TAX FEES
The aggregate fees billed by the Company's auditors for professional services
for tax compliance, tax advice, and tax planning were $0, $0 and $0 for fiscal
2005, 2004 and 2003, respectively.
ALL OTHER FEES
The aggregate fees billed by the Company's auditors for all other non-audit
services rendered to the Company, such as attending meetings and other
miscellaneous financial consulting, in fiscal 2005 and 2004 were $0 and $0,
respectively.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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
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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.
March 28, 2006 By: /s/ Craig A. Waltzer
-----------------------
Craig A. Waltzer
Chief Executive Officer,
President, and Director
67