UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2006.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
COMMISSION FILE NUMBER 33-42498
AVENTURA HOLDINGS, INC.
(Exact name of small business issuer as specified in its charter)
Florida 65-0254624
(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)
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 May 10, 2006 was
2,643,443,527.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
1
AVENTURA HOLDINGS, INC. F/K/A SUN NETWORK GROUP, INC.
Index
Page
Number
PART I. FINANCIAL INFORMATION 3
Item 1. Financial statements 3
Balance Sheet as of March 31, 2006 (unaudited) 3
Statements of Operations for the three months ended
March 31, 2006, from January 1, 2005 through March 15, 2005
and from March 16, 2005 through March 31, 2005 (unaudited) 4
Statements of Cash Flows for the
three months ended March 31, 2006 and 2005 (unaudited) 5
Statement of Changes in Net Assets as of
March 31, 2006 (unaudited) 6
Schedule of Investments as of March 31, 2006 (unaudited) 7
Schedule of Financial Highlights for the three months ended
March 31, 2006 (unaudited) 8
Notes to Financial Statements (unaudited) 9
Item 2. Management's Discussion and Analysis or Plan of Operations 14
Item 3. Controls and Procedures 21
PART II. OTHER INFORMATION 23
Item 1. Legal Proceedings 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits 25
SIGNATURES 25
CERTIFICATIONS 25
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AVENTURA HOLDINGS, INC. F/K/A SUN NETWORK GROUP, INC.
BALANCE SHEET
MARCH 31, 2006
(unaudited)
ASSETS:
Investments in and Advances to Affiliates:
Majority owned affiliates 10,887
Minority owned other non-controlled affiliates
-
Total Investments in Affiliates
10,887
------------
TOTAL ASSETS $ 10,887
============
LIABILITIES & SHAREHOLDERS' EQUITY:
Current Liabilities:
Accounts payable $ 13,639
------------
Total Current Liabilities 13,639
------------
Total Liabilities 13,639
------------
Shareholder Equity:
Common Stock; $0.001 par value; 5,000,000,000 shares
authorized; 2,319,657,813 shares issued and outstanding 2,319,658
Common stock issuable (625,000,000 shares)
625,000
Additional Paid in Capital 8,503,498
Accumulated Deficit (11,450,908)
------------
Total Shareholders' Equity
(2,752)
------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 10,887
============
Net Asset Value Per Share (NAV) $ (0.00)
============
The accompanying notes are an integral part of these financial statements.
3
AVENTURA HOLDINGS, INC. F/K/A SUN NETWORK GROUP, INC.
STATEMENTS OF OPERATIONS
POST BDC ELECTION
FOR THE THREE ELECTION PRE BDC
MONTHS ENDED FROM MARCH 16 FROM JANUARY 1
MARCH 31 THRU MARCH 31 THRU MARCH 15
2006 2005 2005
------------ ------------ ------------
(unaudited) (unaudited) (unaudited)
OPERATING INCOME:
------------------
REVENUES:
Operating Revenues $ - $ - $ 5,000
EXPENSES:
Operating Expenses:
Consulting - - 149,000
Professional Fees 18,010 18,422 2,729
General & Administrative Expenses 3,941 3,767 34,960
------------ ------------ ------------
Total Operating Expenses 21,951 22,189 186,689
------------ ------------ ------------
Net Operating Loss (21,951) (22,189) (181,689)
OTHER INCOME AND (EXPENSES):
Finance Costs (21,705) - -
Recovery of bad debt - 2,849
------------ ------------ ------------
Total Other Revenues and (Expenses) (21,705) - 2,849
NET LOSS $ (43,656) $ (22,189) $ (178,840)
============ ============ ============
LOSS PER SHARE:
Net Loss Per Common Share -
Basic and Diluted $ (nil) $ (nil) $ (nil)
============ ============ ============
Weighted Common Shares Outstanding -
Basic and Diluted 2,534,657,813 323,657,813 323,657,813
============ ============ ============
The accompanying notes are an integral part of these financial statements.
4
AVENTURA HOLDINGS, INC. F/K/A SUN NETWORK GROUP, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
MARCH 31
--------------------------
2006 2005
------------ ------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net loss $ (43,656) $ (201,029)
Adjustments to reconcile net loss to net
cash used in operating activities:
Amortization of deferred finance costs 21,705
Stock based consulting expense - 147,025
Increase (decrease) in:
Accounts payable (6,715) (8,238)
------------ ------------
Net cash used in operating activities (28,666) (62,242)
------------ ------------
Cash flows from investing activities:
Payment of Company expenses by portfolio company 29,645 -
------------ ------------
Cash flows from financing activities:
Proceeds from (payments on) loans from officer - 46,500
Payment on Stock Purchase Agreement (979) -
------------ ------------
Net cash provided (used) by financing activities (979) 46,500
------------ ------------
Net decrease in cash - (15,742)
Cash at beginning of period - 19,852
------------ ------------
Cash at end of period $ - $ 4,110
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ - $ -
============ ============
Income Taxes $ - $ -
============ ============
The accompanying notes are an integral part of these financial statements.
5
AVENTURA HOLDINGS, INC. F/K/A SUN NETWORK GROUP, INC.
STATEMENT OF CHANGES IN NET ASSETS
MARCH 31, 2006
(unaudited)
Decrease in net assets from operations:
Net operating loss $ (43,656)
------------
Net decrease in net assets from operations (43,656)
Common stock transactions 361,272
------------
Total increase in net assets 317,616
Net Assets:
Beginning of Period (320,368)
------------
End of Period $ (2,752)
============
The accompanying notes are an integral part of these financial statements
6
.AVENTURA HOLDINGS, INC. F/K/A SUN NETWORK GROUP, INC.
SCHEDULE OF INVESTMENTS
MARCH 31, 2006
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% 882,387 10,887
----------- -----------
TOTAL MAJORITY OWNED AFFILIATE INVESTMENTS $ 882,387 $ 10,887
=========== ===========
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 $1,092,387 $ 10,887
=========== ===========
(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
7
AVENTURA HOLDINGS, INC. F/K/A SUN NETWORK GROUP, INC.
SCHEDULE OF FINANCIAL HIGHLIGHTS
FOR THE THREE MONTHS ENDED MARCH 31, 2006
(unaudited)
Per Share Data:
Net asset value at beginning of period (a) $ (0.00)
Net operating income (losses) before investment gains and losses (b) (0.00)
Net realized gains (losses) on investments (b) -
Net unrealized gains (losses) on investments (b) -
Net increase (decrease) in shareholders' equity from net income (loss) (0.00)
------------
Dividends declared -
------------
Net increase (decrease) in stockholders equity resulting from dividends -
------------
Issuance of shares 0.00
------------
Net increase (decrease) in stockholders equity relating to share issuances 0.00
------------
Net asset value at end of period (a) $ (0.00)
============
Per share market value at end of period $ 0.0025
Total return (c) -99.14%
Shares outstanding at end of period 2,944,657,813
Ratio/Supplemental Data:
Net assets at end of period $ (2,752)
Ratio of operating expenses to average net assets (annualized) -797.64%
Ratio of net operating income to average net assets (annualized) 797.64%
(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
8
AVENTURA HOLDINGS, INC. F/K/A SUN NETWORK GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - NATURE OF ORGANIZATION
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, the Company operates as an investment holding
company and has acquired investments designed to build an investment portfolio
to enhance the Company's shareholder value. (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 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.
On April 24, 2006 the Company filed an information statement (Form 14C) with the
Securities and Exchange Commission and our controlling shareholder voted to
withdraw our BDC election. The Company will file a Form 14C Definitive
Information Statement on or about May 15, 2006 then file a Form N-54C notifying
the Securities and Exchange Commission that, pursuant to the provisions of
Section 54(c), we are withdrawing our 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.
The Company financial statements are presented as Aventura Holdings, Inc., our
CUSIP number and trading symbol is 053563 10 2 and AVNT respectively.
NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A - Basis of Presentation
-----------------------------
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). The accompanying financial statements for the interim
periods are unaudited and reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the financial position and operating results for the
periods presented. These financial statements should be read in conjunction
with the financial statements of Aventura Holdings, Inc. f/k/a Sun Network
Group, Inc. for the years ended December 31, 2005 and 2004 and notes thereto
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 2005 as filed with the SEC. The results of operations for the
three months ended March 31, 2006 are not necessarily indicative of the results
for the full fiscal year ending December 31, 2006.
9
The accompanying unaudited financial statements are prepared in accordance with
the guidance in the AICPA's Audit and Accounting Guide, "Audits of Investment
Companies" since the Company elected to be regulated as a Business Development
Company effective March 15, 2005.
In accordance with Article 6 of Regulation S-X under the Securities Act of 1933
and Securities Exchange Act of 1934, the Company does not consolidate portfolio
company investments, including those in which it has a controlling interest.
Therefore, effective March 16, 2005, the Company no longer consolidates Radio X
Network and Radio TV Network.
The results of operations for 2005 are divided into 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 March 31, 2005 representing 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.
B - Summary of Significant Accounting Policies
----------------------------------------------------
Investments
Investments in securities of unaffiliated issuers represent holdings of less
than 5% of the issuer's voting common stock. Investments in and advances to
affiliates are presented as (i) majority-owned, if holdings, directly or
indirectly, represent over 50% of the issuer's voting common stock, (ii)
minority-owned other controlled affiliates if the holdings, directly or
indirectly, represent over 25% and up to 50% of the issuer's voting common stock
and (iii) minority-owned other non-controlled affiliates if the holdings,
directly or indirectly, represent 5% to 25% of the issuer's voting common stock.
Investments - other than securities represent all investments other than in
securities of the issuer.
Investments in securities or other than securities of privately held entities
are initially recorded at their original cost as of the date the Company
obtained an enforceable right to demand the securities or other investment
purchased and incurred an enforceable obligation to pay the investment price.
For financial statement purposes, investments are recorded at their fair value.
Currently, readily determinable fair values do not exist for our investments and
the fair value of these investments is determined in good faith by the Company's
Board of Directors pursuant to a valuation policy and consistent valuation
process. Due to the inherent uncertainty of these valuations, the estimates may
differ significantly from the values that would have been used had a ready
market for the investments existed and the differences may be material. Our
valuation methodology includes the examination of among other things, the
underlying portfolio company performance, financial condition and market
changing events that impact valuation.
Realized gains (losses) from the sale of investments and unrealized gains
(losses) from the valuation of investments are reflected in operations during
the period incurred.
Revenue Recognition
Prior to its BDC election in March, 2005 the Company recognized revenues in
accordance with the guidance in the Securities and Exchange Commission Staff
Accounting Bulletin 104. Revenue was recognized when persuasive evidence of an
arrangement exists, as services are provided and when collection of the fixed or
determinable selling price is reasonable assured.
Revenues from the current and future activities as a business development
company which may include investment income such as interest income and
dividends, and realized or unrealized gains and losses on investments will be
recognized in accordance with the AICPA's Audit and Accounting Guide, "Audits of
Investment Companies."
10
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 2006, diluted loss per share is
the same as basic loss per share since the effect of all common stock
equivalents was antidilutive due to the net loss.
NOTE 3 - INVESTMENTS
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 March 31, 2006.
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 March 31, 2006.
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 the current quarter 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 and the Board ratified the
same value at March 31, 2006.
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 was 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, LLC paid obligations of $29,645 for
the Company during the three months ended March 31, 2006. 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 $10,887
representing Company expenses paid and expectations of payments by Aventura
Networks at March 31, 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.
11
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. On April 24, 2006
the Company filed an information statement (Form 14C) and the controlling
shareholder voted to withdraw our BDC election. The Company will file a Form
14C Definitive Information Statement on or about May 15, 2006 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.
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 4 - COMMITMENTS AND CONTINGENCIES
A - Anti-Dilution and Additional Share Issuance Provisions:
--------------------------------------------------------------
The stock purchase agreement of May 27, 2005 and the Aventura Networks, LLC
Interest Purchase Agreement closed on June 7, 2005 were both subject to
anti-dilution or additional share issuance provisions which required the
issuance of a significant quantity of additional common shares for no additional
consideration. The issuance of additional shares significantly diluted
shareholders (see note 5).
B - Compliance with the BDC Rules and Regulations under the Investment Company
--------------------------------------------------------------------------------
Act of 1940:
--------------
In March 2005, we filed an election to become subject to Sections 55 through 65
of the Investment Company Act of 1940, such that we could commence conducting
our business activities as a BDC. In April 2005, we determined to commence an
offering of shares of our common stock as a BDC in accordance with the exemption
from the registration requirements of the Securities Act of 1933 as provided by
Regulation E. In connection with that prospective offer, we filed a Form 1-E
with the U.S. Securities and Exchange Commission (SEC). In June 2005 we closed
on a $315,000 common stock sale under Regulation E.
12
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 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. On March 27, 2006 we filed a report of sales pursuant to Rule 609
of Regulation E (Form 2-E) informing the Securities and Exchange Commission of
our exempt share issuance activity and discontinuance of our offering. On April
24, 2006 the Company filed an information statement (Form 14C) and the
controlling shareholder voted to withdraw our BDC election. The Company will
file a Form 14C Definitive Information Statement on or about May 15, 2006 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. 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 granted and issued common stock for services and
further issued common stock without ascertainable consideration after its
election as a BDC in March 2005 which may have violated certain sections of the
1940 Act. On May 8, 2006 as a curative action, the Company's controlling
shareholder transferred 301,214,286 of its own Company shares back to the
Company.
The outcome of the above matters could have a significant impact on our ability
to continue as a going concern.
C - Other 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.
NOTE 5 - STOCKHOLDERS EQUITY AND LIABILITY PAYABLE WITH COMMON STOCK
Common Stock Transactions
---------------------------
A. 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) was 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. During the first quarter of 2006 the remaining $5,230 was
amortized as a direct finance cost. 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, an additional
sixty million (60,000,000) previously un-issued unrestricted free-trading shares
on December 29, 2005, an additional fifty million (50,000,000) previously
un-issued unrestricted free-trading shares on February 27 , 2006 and a final
fifteen million (15,000,000) previously un-issued unrestricted free-trading
shares on March 1, 2006 towards the satisfaction of the obligation for the
initial draw amount and the Company's Board approved the issuances. The $47,250
difference between the $362,250 and the $315,000 investment was treated as a
deferred financing cost of which $16,475 was amortized as a cost of financing
during the three months ended March 31, 2006. 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.
B. On June 7, 2005 the Company issued 880,000,000 shares of its previously
un-issued common stock to Aventura Holdings, Inc. in exchange for 100% interest
in Aventura Networks, LLC. The shares were valued at $0.00091 per share based
on a discounted quoted trading price. The investment is reflected on the
financial statements at $800,724. On December 29, 2005 500,000,000 shares were
issued and 300,000,000 shares were issuable 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.In February and March, 2006 an additional
325,000,000 shares became issuable under this anti-dilution provision. On April
4, 2006 625,000,000 shares representing all issuable shares under this
anti-dilution provision were issued to Melissa Apple, Trustee of the Maria Lopez
Irrevocable Trust UTD March 29, 2004. There are no additional shares due under
the anti-dilution provision contained in the May 27, 2005 LLC Purchase
Agreement.
13
NOTE 6 - GOING CONCERN
As reflected in the accompanying financial statements, the Company had an
accumulated deficit of $11,450,908 at March 31, 2006, net losses of $43,656
for the three months ended March 31, 2006 and working capital deficit of
$13,639 at March 31, 2006,and cash used in operations in for the three
months ended March 31, 2006 of $28,667.
The financial statements do not include any adjustments that might be necessary
if the Company is unable to continue as a going concern. Management believes
that the actions presently being taken to further implement its business plan,
including seeking portfolio investments provide opportunity for the Company to
continue as a going concern.
NOTE 7 - SUBSEQUENT EVENTS
On April 4, 2006 625,000,000 shares of the Company's previously un-issued common
stock was issued to Melissa Apple, Trustee of the Maria Lopez Irrevocable Trust
UTD March 29, 2004. These shares represent all previously issuable shares under
the anti-dilution provision contained in the May 27, 2005 LLC Purchase
Agreement. There are no additional shares issuable or due under this
anti-dilution provision.
On May 8, 2006 Melissa Apple, Trustee of the Maria Lopez Irrevocable Trust UTD
March 29, 2004 transferred 135,214,286 of its own Company shares to the Company
as a curative action for prior management's May 13, 2005 issuance to itself or a
related entity. These shares relate to an excess share issuance for
extinguishment of a debt.
On May 8, 2006 Melissa Apple, Trustee of the Maria Lopez Irrevocable Trust UTD
March 29, 2004 transferred 166,000,000 of its own Company shares to the Company
as a curative action for prior management's May 26, 2005 issuances that could
not be traced to ascertainable consideration or were issued as shares for
services in conflict with 1940 Act rules.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
This following information specifies certain forward-looking statements of
management of the company. Forward-looking statements are statements that
estimate the happening of future events are not based on historical fact.
Forward-looking statements may be identified by the use of forward-looking
terminology, such as "may", "shall", "could", "expect", "estimate",
"anticipate", "predict", "probable", "possible", "should", "continue", or
similar terms, variations of those terms or the negative of those terms. The
forward-looking statements specified in the following information have been
compiled by our management on the basis of assumptions made by management and
considered by management to be reasonable. Our future operating results,
however, are impossible to predict and no representation, guaranty, or warranty
is to be inferred from those forward-looking statements.
The assumptions used for purposes of the forward-looking statements specified in
the following information represent estimates of future events and are subject
to uncertainty as to possible changes in economic, legislative, industry, and
other circumstances. As a result, the identification and interpretation of data
and other information and their use in developing and selecting assumptions from
and among reasonable alternatives require the exercise of judgment. To the
extent that the assumed events do not occur, the outcome may vary substantially
from anticipated or projected results, and, accordingly, no opinion is expressed
on the achievability of those forward-looking statements. No assurance can be
given that any of the assumptions relating to the forward-looking statements
specified in the following information are accurate, and we assume no obligation
to update any such forward-looking statements.
OVERVIEW
RISK FACTORS
An investment in our common stock is highly speculative, involves a high degree
of risk, and should be considered only by those persons who are able to bear the
economic risk of their investment for an indefinite period. In addition to other
information in this Quarterly Report on Form 10-Q, 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.
14
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.
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
"Recent Developments").
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.
15
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.
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
mezzathree 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.
16
Our ability to invest in private companies may be limited in certain
circumstances.
If we are to maintain our status as a business development company, we must not
acquire any assets other than "qualifying assets" unless, at the time of and
after giving effect to such acquisition, at least 70% of our total assets are
qualifying assets. If we acquire debt or equity securities from an issuer that
has outstanding marginable securities at the time we make an investment, these
acquired assets 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.
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.
17
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.
18
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 March 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.
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.
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.
RECENT DEVELOPMENTS
On March 6, 2006 the Company terminated its Stock Purchase Agreement with
Dutchess Private Equities Fund II, L.P. (Dutchess) having delivered three
hundred million (300,000,000) shares and a payment of $978.11 to extinguish the
debt.
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.
19
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. 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. On April 24, 2006 the Company filed an information statement (Form
14C) to withdraw our BDC election. The Company will file a Form 14C Definitive
Information Statement on or about May 15, 2006 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.
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.
RESULTS OF OPERATIONS
As a BDC, the Company does not operate a business or consolidate its earnings
with its portfolio investees. Effective March 15, 2005 the Company elected BDC
status meaning that the Company is in the business of investing in other
businesses. BDC's measure most income by investment gains and losses and the
fluctuation in the value of its portfolio investees. It is difficult to
meaningfully compare the three months ended March 31, 2006 to the three months
ended March 31, 2005. All comparative references are for presentation purposes
only and should be viewed accordingly.
REVENUES
Revenues for the three months ended March 31, 2006 were $0 as compared to
revenues for the three months ended three months ended March 31, 2005 of $5,000
and were derived from our subsidiary, Radio X Network prior to our BDC election.
OPERATING EXPENSES
Consulting expense for the three months ended March 31, 2006 was $0 compared to
$149,000 for the three months ended March 31, 2005. Consulting expense related
to the issuance of common stock for services to outside consultants.
Professional fees for the three months ended March 31, 2006 were $18,010
compared to $21,151 for the three months ended March 31, 2005. The decrease is
primarily related to in-house accounting.
Other selling, general and administrative expenses were $3,941 for the three
months ended March 31, 2006 as compared to $38,727 for the three months ended
March 31, 2005. The decrease in expenses is primarily due to the Company's
change in focus to that of a BDC.
Financing costs were $21,705 for the three months ended March 31, 2006 compared
to $0 for the comparable three months ended March 31, 2005. The 2006 amount
relates to amortization of the Dutchess investment cash and non-cash financing
costs.
As a result of these factors, we reported a net loss of $43,656 or $(nil) per
share for the three months ended March 31, 2006 as compared to a net loss of
$201,029 or ($.nil) per share for the three months ended March 31, 2005.
20
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2006, we had an accumulated deficit of $11,450,908 and working
capital deficit of $13,639. Our president advanced $46,500 during the first
three months of 2005.
We have no material commitments for capital expenditures.
Net cash used in operations during the three months ended March 31, 2006 was
$28,667 and was substantially attributable to net loss of $43,657 offset
primarily by non-cash amortization of deferred financing costs of $21,705 and a
net decrease in operating assets and liabilities of $6,715. In the comparable
period of 2005, we had net cash used in operations of $62,242 primarily relating
to the net loss of $201,029 primarily offset by stock-based consulting expense
of $147,025 and a net decrease in operating assets and liabilities of $8,238.
Net cash generated by investing activities for the three months ended March 31,
2006 was $29,645 and consisted of Company expenses paid by one of its portfolio
investees. There were no investing activities for the three months ended March
31, 2005.
Net cash used by financing activities for the three months ended March 31, 2006
was $979 as compared to net cash provided by financing activities of $46,500 for
the three months ended March 31, 2005. During the three months ended March 31,
2006 we paid $979 in cash to extinguish our debt to Dutchess Private Equities
Fund II, LP. In the comparable period of 2005, we received advances from our
former CEO of $46,500.
For the fiscal year ended December 31, 2005, our independent registered public
accounting firm issued a going concern opinion in connection with their audit of
our financial statements. These conditions raise substantial doubt about our
ability to continue as a going concern if sufficient additional funding is not
acquired or alternative sources of capital developed to meet our working capital
needs.
Management expects to finalize our investment in Ohio Funding Group, Inc. and
make other investments in Horvath Holdings, LLC companies. 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.
CRITICAL ACCOUNTING POLICIES
A summary of significant accounting policies is included in Note 2 to the
unaudited financial statements included elsewhere in this Report. We believe
that the application of these policies on a consistent basis enables us to
provide useful and reliable financial information about our operating results
and financial condition.
OFF BALANCE SHEET ARRANGEMENTS
There are no off balance sheet arrangements that have or are reasonably likely
to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to investors.
ITEM 3. CONTROLS AND PROCEDURES
As required by SEC rules, we have evaluated the effectiveness of the design and
operation of our disclosure controls and procedures at the end of the period
covered by this report. This evaluation was carried out under the supervision
and with the participation of our management, including our principal executive
officer and principal financial officer. Based on this evaluation, these
officers have concluded that the design and operation of our disclosure controls
and procedures are effective. There were no changes in our internal control over
financial reporting or in other factors that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
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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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
A. 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, an additional sixty million
(60,000,000) previously un-issued unrestricted free-trading shares on December
29, 2005, an additional fifty million (50,000,000) previously un-issued
unrestricted free-trading shares on February 27 , 2006 and a final fifteen
million (15,000,000) previously un-issued unrestricted free-trading shares on
March 1, 2006 towards the satisfaction of the obligation for the initial draw
amount and the Company's Board approved the issuances. The $47,250 difference
between the $362,250 and the $315,000 investment was treated as a deferred
financing cost of which $6,705 was amortized as a cost of financing during the
three months ended March 31, 2006. 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.
B. On June 7, 2005 the Company issued 880,000,000 shares of its previously
un-issued common stock to Aventura Holdings, Inc. in exchange for 100% interest
in Aventura Networks, LLC. The shares were valued at $0.00091 per share based
on a discounted quoted trading price. The investment is reflected on the
financial statements at $800,724. On December 29, 2005 and April 4, 2006 the
Company issued 500,000,000 and 625,000,000 shares respectively 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. There are no
additional shares due under the anti-dilution provision contained in the May 27,
2005 LLC Purchase Agreement.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Section 607.0704 of the Florida Revised Statutes (the "Florida Law") provides
that the written consent of the holders of the outstanding shares of common
stock, having not less than the minimum number of votes which would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted, may be substituted for such a meeting. In
order to eliminate the costs and management time involved in obtaining proxies
and in order to effect the Proposals as early as possible in order to accomplish
the purposes of the Company as hereafter described, the Board of Directors of
the Company voted to utilize, and did in fact obtain, the written consent of the
holder of a majority interest of the common stock of the Company, approving to
un-elect Business Development Company status.
ITEM 5. OTHER INFORMATION
None
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ITEM 6. EXHIBITS
REGULATION
S-B NUMBER EXHIBIT
31 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer and
Chief Financial Officer of the Company
32 Section 906 Certification by Chief Executive Officer and Chief Financial
Officer
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AVENTURA HOLDINGS, INC.
May 12, 2006 By: /s/ Craig A. Waltzer
-----------------------
Craig A. Waltzer
Chief Executive Officer, President, and
Director
25