Global Beverage Solutions, Inc. - Recent Material Event
<![CDATA[SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007
000-28027
(Commission File Number)
GLOBAL BEVERAGE SOLUTIONS, INC.
(Exact Name of Registrant as Specified in Charter)
90-0093439
(IRS Employer Identification No.)
NEVADA
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(State or Other Jurisdiction of Incorporation)
2 S. UNIVERSITY DR, SUITE 220, PLANTATION, FL 33324
---------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
954-473-0850
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(Registrant's Telephone Number, Including Area Code)
Securities Registered under Section 12 (b) of the Exchange Act:
NONE
Securities Registered under Section 12 (g) of the Exchange Act:
Common Stock, $0.001 Par Value
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) filed all reports to be filed
by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes [X]
No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
<TABLE>
<S> <C>
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller
reporting company)
</TABLE>
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate market value of the voting stock (which consists solely of shares
of common stock) held by non-affiliates of the issuer as of June 30, 2007,
computed by reference to the market value (closing price) of the registrant's
common stock, as reported by the over-the-counter bulletin board was
approximately $4,126,050.
As of April 8, 2008, there were 98,760,094 shares of the issuer's common stock
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference into this Report except those
Exhibits so incorporated as set forth in the Exhibit Index.
GLOBAL BEVERAGE SOLUTIONS, INC.
FORM 10-K
TABLE OF CONTENTS
PAGE
PART I
ITEM 1 Business 3
ITEM 1A Risk Factors 11
ITEM 2 Properties 20
ITEM 3 Legal Proceedings 20
ITEM 4 Submission of Matters to a Vote of Security Holders 20
PART II
ITEM 5 Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 21
ITEM 6 Selected Financial Data 23
ITEM 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations 24
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk 30
ITEM 8 Financial Statements and Supplementary Data 31
ITEM 9 Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 69
ITEM 9A(T) Controls and Procedures 69
ITEM 9B Other Information 70
PART III
ITEM 10 Directors, Executive Officers and Corporate Governance 71
ITEM 11 Executive Compensation 74
ITEM 12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 77
ITEM 13 Certain Relationships and Related Transactions, and
Director Independence 79
ITEM 14 Principal Accountant Fees and Services 79
PART IV
ITEM 15 Exhibits and Financial Statement Schedules 81
SIGNATURES 84
2
PART I
FORWARD LOOKING STATEMENTS
This Annual Report contains forward-looking statements within the meaning of the
federal securities laws that involve a number of risks and uncertainties. Our
future results may differ materially from our historical results and actual
results could differ materially from those projected in the forward-looking
statements as a result of certain risk factors. These factors are described in
the "Risk Factors" section below. Among the factors that could cause actual
results to differ materially from those expected are the following: business
conditions and general economic conditions; competitive factors, such as pricing
and marketing efforts; and the pace and success of product research and
development. These and other factors may cause expectations to differ.
ITEM 1: BUSINESS
Global Beverage Solutions, Inc., a Nevada corporation (the "Company", "us" or
"we"), distributes imported bottled water and alternative or "New Age" beverages
through two wholly-owned subsidiaries, Aqua Maestro, Inc. and Beverage Network
of Maryland, Inc. The Company's strategy is to develop and acquire bottled water
and "New Age" beverage brands. "New Age" beverages include non-carbonated
ready-to-drink iced teas, lemonades, juice cocktails, single serve juices,
ready-to-drink iced coffees, energy drinks, sports drinks, soy drinks, natural
bottled water and sodas as well as sparkling juices. The Company believes that
the combined distribution and customer base of its two subsidiaries provides an
established platform from which to acquire and develop brands. Additionally,
strategic opportunities may exist to acquire and further develop existing
distribution platforms.
Aqua Maestro, Inc. is based in Boca Raton, Florida and imports and
sells bottled water through company-owned distribution centers to retailers and
consumes in south Florida, direct to retailers outside of south Florida, direct
to consumers through its website at www.aquamaestro.com and to third party
distributors.
Beverage Network of Maryland, Inc. is a New Age beverage distributor
based in Jessup, Maryland which distributes brands such as Welch's and Fiji to
retailers in Washington, DC, northern Virginia, and the entire state of
Maryland.
Our business strategy involves growing the third party branded revenue
base in each of these entities while developing and/or acquiring bottled water
or New Age beverage brands. Thus, through these entities we plan to sell our own
proprietary brands as well as third party brands.
Our common stock is traded in the over-the-counter market and is quoted on the
NASD Over-The-Counter Bulletin Board ("OTCBB") under the symbol GBVS.
3
GENERAL DEVELOPMENT OF BUSINESS
We were incorporated on November 6, 1992, with the name MedEx, Inc.
On January 2, 2008 we filed Form N-54C with the Securities and Exchange
Commission ("SEC") to notify the SEC of the withdrawal of our previous election
to be regulated as a BDC under applicable provisions of the 1940 Act. After
careful consideration of the 1940 Act requirements applicable to BDCs,
evaluation of the Company's ability to operate as a going concern in an
investment company regulatory environment, the costs associated with complying
with the 1940 Act, the Company's past difficulty in complying with the 1940 Act
and a thorough assessment of potential alternative business models, our Board of
Directors determined that continuation as a BDC was not in the best interests of
the Company or our stockholders. With the approval of more than a majority of
the voting power of our common stock, we proceeded to file Form N-54C and
thereby de-elect our BDC status.
We intend to pursue a business model whereby we acquire majority ownership
stakes in beverage-related companies. In this regard, we plan to remain active
in the imported bottled water and alternative or "New Age" beverage (such as
mildly flavored waters, fruit drinks, sports and energy drinks, soy-based
beverages and other non-conventional beverages) industries through our two
wholly owned subsidiaries: Aqua Maestro, Inc., a Florida corporation, and
Beverage Network of Maryland, Inc., a Florida corporation.
Under our new business model, we will at all times conduct our activities in
such a way that we will not be deemed an "investment company" subject to
regulation under the 1940 Act. Thus, we will not hold ourselves out as being
engaged primarily in the business of investing, reinvesting or trading in
securities. In addition, we will conduct our business in such a manner as to
ensure that we will at no time own or propose to acquire investment securities
having a value exceeding 40% of our total assets at any one time.
Pursuant to Regulation S-X, Rule 6, the Company will operate on a
non-consolidated basis until January 2, 2008. Operations of the portfolio
companies will be reported at the subsidiary level and only the appreciation or
impairment of these investments in portfolio companies will be included in the
Company's financial statements. Subsequent to January 2, 2008, as noted above,
we will cease operating as a BDC and we will prepare consolidated financial
statements with our wholly owned subsidiaries.
Effective as of February 23, 2007, we completed our acquisition of Beverage
Network of Maryland, Inc. pursuant to a merger agreement. On March 29, 2007, we
completed our acquisition of Aqua Maestro, Inc. pursuant to a merger agreement.
On January 2, 2008, we adopted the Global Beverage Solutions, Inc. 2008 Stock
Plan which authorizes the issuance of up to forty million (40,000,000) shares of
our common stock in connection with awards of restricted stock, unrestricted
stock and stock options to our officers, directors, employees and to contractors
and other persons that provide services to the Company. The 2008 Stock Plan's
purpose is to support our ongoing efforts to attract and retain persons of
exceptional talent to serve the Company and to enable us to provide equity
incentives to such persons to that end. On the date the 2008 Stock Plan was
approved by our Board of Directors, the Board also approved the award, pursuant
to the 2008 Stock Plan, of (i) 4,000,000 shares of our common stock, (ii)
immediately vesting stock options to purchase 10,710,000 shares of our common
stock and (iii) performance vesting stock options to purchase 17,700,000 shares
of our common stock.
4
On January 23, 2008, we entered into a stock repurchase agreement with XStream
Beverage Network, Inc. ("XStream") to repurchase the sixty million five hundred
thousand (60,500,000) shares of our common stock that we issued to XStream in
connection with our acquisition of Beverage Network of Maryland, Inc. As
consideration for the stock repurchase, we issued to XStream a $700,000
convertible note convertible into shares of our Common Stock if we default in
payments under the note or fail to pay down $500,000 in principal of an earlier
note issued to XStream on or before May 1, 2008.
NAME CHANGES
The Company was incorporated in 1992 under the name of MedEx, Inc. Pursuant to
the merger of STG Corp., a Delaware corporation, with and into the Company, we
amended our Articles of Incorporation to change our name to MedEx Corp. On
October 21, 2002, Aussie Apparel Group, Ltd., a Nevada corporation, was merged
with and into us, and pursuant to the merger, we changed our name to Aussie
Apparel Group Ltd. Because the shareholders of Aussie Apparel became the
controlling shareholders of the Company after the exchange, Aussie Apparel was
treated as the acquirer for accounting purposes. Accordingly, the financial
statements, as presented herein, are the historical financial statements of
Aussie Apparel and include the transactions of MedEx Corp. only from the date of
acquisition, using reverse merger accounting.
We changed our name to Bluetorch Inc. ("Bluetorch") on October 24, 2003. On
April 19, 2005 in accordance with a Mutual Settlement and Release Agreement, the
Company amended its articles of incorporation to implement a name change of the
Company. Effective April 20, 2005 the Company's new name became Pacific Crest
Investments. Following the public announcement of our new name, we received
notice that another corporation had a name similar to Pacific Crest Investments.
In order to avoid potentially prolonged and expensive litigation, we agreed to
change our name again, and effective May 5, 2005, our new name became Pacific
Peak Investments.
On October 10, 2005, we changed our name to Global Beverage Solutions, Inc. to
emphasize our concentration in the beverage industry.
NARRATIVE DESCRIPTION OF BUSINESS
BUSINESS SUMMARY
BEVERAGE OPERATIONS
We intend to pursue a business model whereby we acquire majority ownership
stakes in beverage-related companies. In this regard, we plan to remain active
in the imported bottled water category and alternative or "New Age" beverage
category (such as mildly flavored water, fruit drinks, sports and energy drinks,
soy-based beverages and other non-conventional beverages) through our two wholly
owned subsidiaries, Aqua Maestro, Inc. and Beverage Network of Maryland, Inc.
5
Through these subsidiaries, we engage in the distribution of New Age beverages
and imported bottled water through direct store delivery distribution, sales to
third party distributes and the Internet. Our customers include retail grocery
stores, special stores, convenience stores, health food stores, hotels,
restaurants and delis and food service distributors.
Under our new business model, we will at all times conduct our activities in
such a way that we will not be deemed an "investment company" subject to
regulation under the 1940 Act. Thus, we will not hold ourselves out as being
engaged primarily in the business of investing, reinvesting or trading in
securities. In addition, we will conduct our business in such a manner as to
ensure that we will at no time own or propose to acquire investment securities
having a value exceeding 40% of our total assets at any one time.
Global and our subsidiaries employ a total of forty-four persons, with three
employed by Global, thirty-two employees working at Beverage Network of
Maryland, Inc. and nine employees working at Aqua Maestro, Inc.
OPERATION AS A BDC
Under our election to be governed as a BDC under the 1940 Act, we engaged in the
business of providing investors with the opportunity to participate, with a
modest amount in venture capital, in investments that are generally not
available to the public and that typically require substantially larger
financial commitments. In addition, we provided professional management and
administration that might otherwise be unavailable to investors if they were to
engage directly in venture capital investing. When regulated as a BDC under the
1940 Act, we operated as a non-diversified company as that term is defined in
Section 5(b)(2) of the 1940 Act. We could not cease to be, or withdraw our
election as, a BDC without the approval of the holders of a majority of our
outstanding voting stock as defined under the 1940 Act.
As a BDC, we were required to invest at least 70% of our total assets in
qualifying assets, which, generally, are securities of companies that are not
investment companies and that:
o do not have a class of securities registered on an exchange or
included in the Federal Reserve Board's over-the-counter margin
list;
o are actively controlled by a BDC and have an affiliate of a BDC on
their board of directors; or
o meet such other criteria as may be established by the SEC.
Qualifying assets also include cash, cash equivalents, U.S. Government
securities and high-quality debt investments maturing within one year or less
from the date of investment. We also were required to offer to provide
significant managerial assistance to our qualifying portfolio companies. We
could invest the remaining 30% of our total assets in non-qualifying assets,
including debt and/or equity securities of companies that may be larger or more
stabilized than target portfolio companies.
6
COMPETITION
We face competition on a nationwide basis. Competition for our products will
come primarily from companies with widespread distribution and established
brands. We believe that our ability to compete successfully depends upon a
number of factors, including: market presence; customer service and
satisfaction; the capacity, reliability and security of our delivery network;
convenience; the pricing policies of our competitors; and the introduction of
new products and services by our competitors and by us. There are risks
associated with the beverage industry relating to competition due to the fact
that many of the competitive products are controlled by and marketed by the
largest competitors in the industry.
CURRENT OPERATIONS AND INVESTMENTS
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BEVERAGE NETWORK OF MARYLAND, INC. ("BNM")
------------------------------------------
On February 23, 2007, we completed the purchase of BNM from XStream Beverage
Network, Inc. ("XStream"). The transaction was structured as a merger of BNM
into our wholly owned subsidiary Global Merger Corp. pursuant to an Agreement
and Plan of Merger between the parties dated January 31, 2007, and as amended
February 23, 2007. Based in Jessup, Maryland, BNM engages in the distribution of
beverages in the Mid-Atlantic States, focusing on New Age beverage brands.
Through BNM and its ten sales representatives and twelve delivery vehicles, we
offer brands such as Fiji, Arizona and Welch's and service approximately 2,000
retail accounts in the Mid Atlantic region, including several large brand name
retailers.
As a part of the transaction we issued 60,500,000 shares of our common stock and
a $2,000,000 note payable to XStream (the "XStream Secured Note"). At closing,
we paid $229,000 on the XStream Secured Note and pursuant to the agreements were
to pay 40% of any subsequent cash proceeds received from the February 5, 2007
Form 1-E Offering. The remaining note balance was to be paid in monthly
installments of $25,000 commencing September 1, 2007. Additionally, we were to
apply 35% of the net proceeds of any equity capital raised by us while the
XStream Secured Note remained outstanding to reduce the XStream Secured Note.
On January 23, 2008, we entered into a Stock Repurchase Agreement with XStream
by which we repurchased the 60,500,000 shares of our common stock originally
issued to XStream. As consideration for the purchase, we issued a convertible
note in the principal amount of $700,000 (the "XStream Convertible Note"). The
XStream Convertible Note bears interest at the prime rate plus 2% and matures on
October 31, 2008. The XStream Convertible Note is convertible into shares of our
common stock as the conversion price specified in the Stock Repurchase Agreement
with XStream if we default in the repayment of amounts due under the XStream
Convertible Note or if we fail to pay $500,000 to Laurus Master Fund, Ltd.
("Laurus") on or before May 1, 2008 pursuant to the letter agreement described
in the following paragraph.
On January 23, 2008, and in conjunction with the stock repurchase described in
the previous paragraph, we entered into a letter agreement with Laurus and
XStream (the "Letter Agreement"). In connection with the Letter Agreement,
XStream collaterally assigned both the XStream Secured Note and the XStream
Convertible Note to Laurus. Under the Letter Agreement, we agreed to pay to
Laurus $500,000 in repayment of a portion of the outstanding balance of the
XStream Secured Note by May 1, 2008. Upon making the $500,000 payment, Laurus
agreed to release certain liens it has on the inventory of BNM and XStream, and
Laurus and XStream agreed to terminate a stock pledge agreement with respect to
the stock of BNM and a master security agreement securing collateral on our
obligations under the Secured Note.
7
Simultaneously, and in conjunction with, the stock repurchase and the Letter
Agreement discussed above, we entered into a second amendment ("Amendment No.
2") of the XStream Secured Note. Amendment No. 2 accelerated the maturity date
of the note from March 31, 2011 to October 31, 2008 and removed the requirement
for monthly payments of $25,000. The XStream Secured Note had a principal
balance of $1,072,453 and accrued interest of $29,079 at December 31, 2007.
BNM had unaudited net revenue of $7,225,279 and a net loss of $12,391,848,
including an asset impairment of $11,831,318 in the ten months ended December
31, 2007, the period it was owned by Global.
AQUA MAESTRO, INC. ("AM")
-------------------------
On March 29, 2007, we completed the purchase of AM from its shareholders. The
transaction was structured as a merger of AM into our wholly owned subsidiary,
Global Beverage Acquisition Corp. pursuant to an Agreement and Plan of Merger
and Reorganization between the parties dated March 29, 2007.
Consideration paid to the prior shareholders of AM for the acquisition of AM
included $500,000 in cash, $300,000 of which was paid at closing and the balance
payable in equal monthly installments of $22,222 beginning April 15, 2007,
10,000,000 shares of our common stock and the right to certain earn-out
payments. At December 31, 2007, the note had a principal balance of $15,749 and
accrued interest balance of $1,850. The earn-out is a percentage of defined
gross profit equal to 10% of calendar 2008 gross profit, 5% of calendar 2009
gross profit and 3% of calendar 2010 gross profit.
With its business offices in Boca Raton, Florida and its logistics in Fort
Lauderdale, Florida, AM is engaged in the wholesale and retail distribution of
domestic and imported bottled water, comprising over forty brands and over one
hundred-seventy different items, to retailers through Company-owned distribution
centers, third-party distributors. AM's wholesale client base spans across North
America and the Caribbean, and includes well-known hotels and resorts. In
addition, AM provides retail home delivery distribution of its bottled water
products to end-consumers through its Internet site at aquamaestro.com.
AM had unaudited net revenue of $1,585,381 and a net loss of $1,602,116
including an asset impairment of $1,321,606 in the nine months ended December
31, 2007, the period it was owned by Global.
8
SOS RESOURCE SERVICES, INC. ("SOS")
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On October 9, 2007, we sold the Partners Secured Note (described below) to SOS
for an aggregate purchase price of $700,000. The purchase price included an
initial cash payment of $100,000 and a promissory note for $600,000, which was
due in weekly installments of $75,000 commencing October 22, 2007 and with the
final balance due December 10, 2007. As of December 31, 2007, we have received
only $12,000 of the $600,000 note, leaving a balance due of $588,000. Due to
uncertainty of collection, we recorded an unrealized loss of $588,000.
RUDY PARTNERS, LTD. ("PARTNERS")
--------------------------------
On January 18, 2007, we executed an agreement with Partners wherein we agreed to
sell our 80% interest in Rudy for an 8% secured promissory note in the amount of
$6,000,000 (the "Partners Secured Note") plus assumption of the advances and
receivables owed to us by Rudy. The agreement closed on May 11, 2007. The
Partners Secured Note was collateralized by 11,000,000 shares of our common
stock held by the owners of Partners and was payable in six annual installments
of $1,000,000 commencing January 31, 2008. The Partners Secured Note was sold to
SOS.
RUDY BEVERAGE, INC. ("RUDY")
----------------------------
On November 17, 2005, we executed a Stock Purchase Agreement with the
shareholders (the "Rudy Sellers") of Rudy, a Nevada corporation, whereby we
exchanged 6,000,000 shares of our common stock for 80% of the issued and
outstanding common stock of Rudy. The Rudy Sellers were eligible to receive up
to 10,000,000 additional shares of our common stock if Rudy achieved certain
sales and net revenue goals by the twelve month periods ending June 30, 2007 and
2008. Rudy was founded by Rudy Ruettiger and Drew Carver to create a unique line
of beverages higher in nutritional value but lower in sugar than existing
brands. Rudy currently has developed two distinct products: Rudy Flying Colors,
catering to elementary school aged children; and Rudy Revolution, a sport drink
aimed at athletes of all ages. The goal of the Rudy line of beverages is to
create flavorful juice blends which are low in sugar.
We originally valued our investment in Rudy at December 31, 2006, based on the
estimated value of the collateral on the Partners note of $3,375,000, resulting
in an original adjustment of $3,294,760 as unrealized depreciation of our
investment and recorded a bad debt expense of $88,218 for our receivable from
Rudy for interest accrued on loans. Subsequent to December 31, 2006, based on
the decline in the collateral on the Partners note, that is, the shares of our
common stock, we recorded an additional adjustment of $1,800,000 under guidance
in FAS 5 for the additional decline in our common stock as of April 24, 2007.
At December 31, 2007, we had receivables from Rudy in the total amount of
$1,818,043 on which we have recorded unrealized depreciation for the full amount
of the receivable. Partners agreed to convert any notes payable by Rudy to us,
once Partners becomes publicly-traded or a subsidiary of a publicly-traded
company, into no more than 20% of the common stock of the publicly traded
entity, based upon the market value of the public entity's common stock.
9
EON BEVERAGE GROUP, INC. ("EON")
--------------------------------
On July 8, 2005, we consummated the transactions contemplated by the Share
Purchase Agreement (dated June 28, 2005) with EON, a manufacturer of structured
water, and, as a result, we invested $400,000 in exchange for 9% of the issued
and outstanding common stock of EON. The Company also made loans in the amount
of $611,500 to EON. During the first quarter of 2006, shareholders of the
Company contributed their stock in EON to us, which increased our ownership to
44%. While EON expected to sell a substantial volume of its structured water to
Rudy for use in certain of its drinks, our Board of Directors has determined
that EON will not achieve profitability without substantial additional
investment, which we are unwilling to provide. Accordingly, we fully reserved
our investment of $400,000 and fully reserved our advances of $611,500 for a
total unrealized depreciation expense of $1,011,500 at September 30, 2006.
Accounts receivable in the amount of $50,369 for interest charges and management
fees were also fully reserved at September 30, 2006.
TITANIUM DESIGN STUDIO, INC. ("TDS")
------------------------------------
On June 6, 2005, we signed a Share Purchase Agreement with TDS, a Nevada
corporation, whereby we invested $200,000 in cash in exchange for 8% of the
issued and outstanding common stock of TDS. TDS has a proprietary manufacturing
process which allows it to cast precision titanium jewelry resulting in a level
of detail not obtainable by milling titanium. Early in 2006, TDS relocated its
operations to Thailand in order to access cheaper labor. As a result of our
reduced influence on operations, our Board of Directors fully reserved our
investment of $200,000 on December 31, 2005.
FORMER PORTFOLIO COMPANIES
--------------------------
As of December 31, 2006 (and prior to the acquisition of BNM and AM), Global had
two wholly owned subsidiary companies, Unboxed Distribution, Inc. ("Unboxed")
and Total Sports Distribution, Inc. ("Total Sports"), active in the apparel
industry. The operations of Unboxed and Total Sports were discontinued early in
2005 when it became evident that they would not be able to attain profitability
within a reasonable period of time. During 2005, we also exchanged our 51%
investment in Island Tribe, Inc. ("Island Tribe") for the 12,000 shares of our
common stock which we had initially issued to acquire Island Tribe.
We signed an acquisition agreement in December 2002 with Australian-based
Federation Group for the Hot Tuna, Xisle and Piranha Boy brands. We then spent
most of 2003 and the early part of 2004 restructuring our portfolio of apparel
brands.
We rescinded our acquisition agreement for Hot Tuna, Xisle and Piranha Boy in
November 2003 and assigned the rights for the three brands to Frontier
International Holdings Pty Ltd. In addition, we changed our name from Aussie
Apparel Group Ltd. to Bluetorch Inc. in recognition of this brand restructuring
and our move away from the original portfolio of Australian apparel brands. We
replaced the intended Australian portfolio of brands with other brands including
Bluetorch, True Skate Apparel (TSABrand), Airwalk and Island Tribe.
10
UNBOXED
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In September 2003, Unboxed signed a licensing agreement (with option to acquire)
with Gotcha Brands, Inc. for the Bluetorch label.
On March 12, 2005, Global and Unboxed signed a Mutual Settlement and Release
Agreement with Gotcha Brands Inc., the Bluetorch licensor. This agreement
required Unboxed to cease the selling and marketing of Bluetorch apparel, and we
also agreed to change our corporate name by April 20, 2005.
This wholly owned subsidiary has been inactive since March 12, 2005.
TOTAL SPORTS
------------
On January 10, 2004, Total Sports entered into a license agreement (with an
option to purchase) with Krash Distribution Inc. to license the True Skate
Apparel (TSABrand) name for apparel and accessories.
On February 19, 2004, Total Sports signed a definitive agreement with Collective
Licensing International, LLC to license the Airwalk brand for apparel in the
United States market. On March 22, 2005, Global and Total Sports signed a Mutual
Settlement and Release Agreement with Collective Licensing International, LLC,
the licensor of the Airwalk apparel brand. This agreement required Total Sports
to cease selling and marketing Airwalk apparel. On July 1, 2005, Global and
Total Sports signed a Mutual Settlement and Release Agreement with Krash
Distribution Inc., the licensor of TSABrand apparel. This agreement required
Total Sports to cease selling and marketing of TSABrand apparel.
This wholly owned subsidiary has been inactive since July 1, 2005.
ISLAND TRIBE
------------
In accordance with a Stock Purchase Agreement dated August 20, 2004, we
purchased for 12,000 restricted shares of our common stock, a 51% interest in
Island Tribe, a surf apparel company. This transaction was effective August 1,
2004 and the investment was valued at $372,000, based upon the trading price of
our common stock at the time of the transaction. Over the next 4 years, the
purchase agreement provided for us to receive an additional 24% ownership of
Island Tribe. On November 20, 2005, we returned our 51% interest in Island Tribe
in exchange for the 12,000 shares we had originally issued for the acquisition
and cancelled the shares.
ITEM 1A: RISK FACTORS
The risks set out below are not the only risks we face. If any of the following
risks occur, our business, financial condition and results of operations could
be materially adversely affected. In such case, our net asset value and the
trading price of our common stock could decline, and you may lose all or part of
your investment. The following risks affect us and our business:
11
GENERAL RISK FACTORS
--------------------
INVESTMENTS IN OUR STOCK BY NEW SHAREHOLDERS MAY BE AT A HIGHER COST PER SHARE
THAN THAT PAID BY PRIOR INVESTORS.
Due, in part, to increases in our share price, some of our present shareholders
have acquired an interest in us at a total cost substantially less than the
total cost that newer investors will likely pay for their shares. Therefore, the
newer investors will bear a greater proportion of the risk of loss (measured by
the cost of shares). As of February 29, 2008, there were 950,000,000 shares of
common stock authorized and 98,760,094 common shares outstanding. All shares
were considered issued at their par value.
WE MAY SELL ADDITIONAL EQUITY IN THE FUTURE THAT MAY DILUTE THE VALUE OF YOUR
INVESTMENT.
Reductions in the price of our stock resulting from the performance of our
subsidiaries or other market conditions might result in stock being sold to new
investors, including management, at prices below the price paid by you. Senior
management may be granted the right, and others may have the right, under
certain circumstances, to acquire additional shares of our stock at a price
equal to the market price as it exists at a point in the future. If such a grant
of a right occurred at a time where the price of the stock has fallen relative
to the current market value and falls below the price paid by you, management
might be given the right to purchase stock at a price below your cost. In either
of these cases, the value of your investment would be further diluted.
NEED FOR ADDITIONAL CAPITAL.
Unforeseen events, problems or delays may occur that would require the Company
to seek additional debt and/or equity financing, which may not be available on
favorable terms, if at all, sooner than expected to meet its requirements, and
the Company may need additional capital to fund its growth, acquisition and
development objectives that are part of its business strategy. In the event that
the Company cannot obtain additional funds if and when needed, the Company may
be forced to curtail or cease some or all of its activities.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF MANAGEMENT.
We have instituted provisions in our articles of incorporation and our bylaws
indemnifying, to the extent permitted under applicable law, our current and
former directors, officers, employees and agents against any loss, liability or
expenses incurred as a result of such persons action or omission in connection
with our affairs, other than that which involves intentional misconduct, fraud
or knowing violation of the law. Therefore, to the extent that these provisions
provide any protection to management, that protection may limit the right of a
shareholder to collect damages from members of management. Management is
accountable to the shareholder as a fiduciary and, consequently, members of
management are required to exercise good faith and integrity in handling our
affairs.
12
OUR BUSINESS MAY BECOME SUBJECT TO EXTENSIVE ADDITIONAL REGULATION AT THE
FEDERAL AND STATE LEVELS. THE VALUE OF SECURITIES OWNED BY US MAY BE ADVERSELY
IMPACTED BY SUBSEQUENT REGULATORY CHANGES.
Our operations are and will be affected by current and future legislation and by
the policies established from time to time by various federal and state
regulatory authorities. It is not possible to predict what changes, if any, will
be made to existing federal and state legislation and regulations or the effect
that such changes may have on our future business and earnings prospects. Our
investment strategy as a BDC included the purchase of unregistered securities in
both private companies as well as private placements offered by public
companies, and we may continue to acquire unregistered securities in private
companies as part of our strategy to grow our beverage business. We are able to
purchase securities pursuant to exemptions to the registration requirements of
United States Federal securities laws. Changes in such laws or their
interpretation could adversely impact our ability to resell such securities
which would have a negative effect on the value of such securities as well as
impact our overall business strategy and the liquidity of our investments. In
such an event, we may need to reformulate our business strategy.
WE CANNOT GUARANTEE DIVIDENDS PAYMENTS TO OUR STOCKHOLDERS.
We are allowed by our articles of incorporation and/or by-laws to pay dividends
to our stockholders. However, there can be no guarantee we will have sufficient
revenues to pay dividends during any period. Investors in need of liquidity
through the payment of dividends should refrain from common stock which does not
have a dividend requirement.
INVESTING IN OUR SHARES MAY INVOLVE A HIGH DEGREE OF RISK.
The investments and acquisitions we make in accordance with our business
strategy may result in a higher amount of risk than alternative acquisition and
investment options. Our acquisitions and investments in beverage related
operating entities may be speculative and aggressive, and therefore, an
investment in our shares may not be suitable for someone with low risk
tolerance.
THE MARKET PRICE OF OUR COMMON STOCK MAY FLUCTUATE SIGNIFICANTLY.
The market price and liquidity of the market for shares of our common stock may
be significantly affected by numerous factors, some of which are beyond our
control and may not be directly related to our operating performance. These
factors, may adversely affect our ability to raise capital through future equity
financings. These factors include (without limitation):
o significant volatility in the market price and trading volume of
securities of companies in the beverage industry, which are not
necessarily related to the operating performance of these
companies;
o changes in regulatory policies or tax guidelines applicable to the
Company;
13
o our common stock is unlikely to be followed by any market
analysts, and there may be few institutions acting as market
makers for our common stock which can adversely affect its price;
o changes in earnings or variations in operating results;
o any shortfall in revenue or net income or any increase in losses
from levels expected by investors or securities analysts;
o departure of one or more of our key personnel;
o operating performance of companies comparable to us;
o potential legal and regulatory matters;
o changes in prevailing interest rates;
o general economic trends and other external factors; and
o loss of a major funding source.
WE MAY EXPERIENCE FLUCTUATIONS IN OUR FINANCIAL AND OPERATIONAL RESULTS.
We could experience fluctuations in our financial and operational results due to
a number of factors, including (without limitation) the level of our expenses,
the degree to which we encounter competition in our markets, changes in the
beverage industry, and general economic conditions. As a result of these
factors, results for any period should not be relied upon as being indicative of
performance in future periods.
ECONOMIC RECESSIONS OR DOWNTURNS COULD IMPAIR OUR SUBSIDIARIES AND HARM OUR
OPERATING RESULTS.
Our subsidiaries will generally be affected by the conditions and overall
strength of the national, regional and local economies. These factors also
impact the amount of growth in the beverage industry. Additionally, these
factors could adversely impact the customer base of Global and our subsidiaries.
As a result, we and our subsidiaries may be susceptible to economic slowdowns or
recessions. Economic slowdowns or recessions could lead to financial losses in
our subsidiaries and a decrease in revenues, net income and assets. Unfavorable
economic conditions also could increase our funding costs, limit our access to
the capital markets or result in a decision by lenders not to extend credit to
us. These events could harm our operating results and financial conditions, and
therefore, adversely affect our ability to meet our obligations under the
Convertible Debentures.
WE MAY NOT REALIZE GAINS OR INCOME FROM OUR INVESTMENTS.
14
While our business strategy, after de-election of BDC status, now involves
acquiring and growing brands within the beverage industry, we have also made
investments in portfolio companies when we were a BDC. While we have sought to
generate both current income and capital appreciation, the companies that we
acquire and the securities in which we have invested may not appreciate and, in
fact, may decline in value, and the issuers of debt securities, in which we have
invested, may default on interest and/or principal payments. Accordingly, we may
not be able to realize gains from our business acquisitions and investments, and
any gains that we do realize may not be sufficient to offset any losses we
experience.
YOUR INFLUENCE IN MATTERS REQUIRING SHAREHOLDER ACTION WILL BE SUBJECT TO THE
PROBABILITY THAT MOST SHAREHOLDERS WILL FOLLOW MANAGEMENT'S DIRECTION.
While no officer or director holds a large percentage of the issued and
outstanding shares of our voting securities, there are no major stockholders
with a controlling interest and no consortium of stockholders has been
identified with a block of control or who would likely exercise voting control
over matters that may be submitted to our stockholders for approval. Without
such a controlling block, management positions will be the most likely to be
presented to stockholders and more likely to influence stockholder decisions
(assuming that stockholders will likely "vote with" management). Therefore,
while the number of shares controlled by the officers and directors is less than
a majority, their position as managers of the Company is material and
significant.
THERE MAY BE IMPEDIMENTS TO HOSTILE TAKEOVERS OF THE COMPANY.
Our Board of Directors has the authority to issue shares of our stock, up to the
maximum amount of shares authorized in our Articles of Incorporation, without
further action by our stockholders, and the issuance of stock under certain
circumstances could have the effect of delaying or preventing a change in
control of the Company or may deter takeover attempts. Furthermore, we are
subject to provisions of the Nevada Revised Statutes that may make it difficult
for a potential acquirer to exert control over our Board of Directors and may
discourage attempts to gain control without the consent of the Board of
Directors.
OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE MARKET
FOR TRADING IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR STOCK
CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK.
The Securities and Exchange Commission has adopted Rule 15g-9 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
option to acquire any equity security with an exercise price of less than $5.00
per share, subject to certain exceptions. For any transaction involving a penny
stock, unless exempt, the rules require:
o that a broker or dealer approve a person's account for
transactions in penny stocks; and
15
o the broker or dealer has received from the investor a written
agreement to the transaction, setting forth the identity and
quantity of the penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
o obtain financial information and investment experience objectives
of the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Commission relating to the penny
stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement
from the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities
subject to the "penny stock" rules. This may make it more difficult for
investors to dispose of our common stock and cause a decline in the market value
of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in
both public offerings and in secondary trading and about the commissions payable
to both the broker-dealer and the registered representative, current quotations
for the securities and the rights and remedies available to an investor in cases
of fraud in penny stock transactions. Finally, monthly statements have to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.
RISKS RELATED TO OUR BUSINESS
-----------------------------
DOWNTURNS IN THE BEVERAGE INDUSTRY.
We operate in the beverage industry, and specifically in the bottled water and
"New Age" beverage sectors. Our financial condition could be significantly
adversely affected by industry factors which may cause our subsidiaries to
perform poorly and, consequently, affect our financial condition. The beverage
industry is subject to many risks. Our definition of beverage, as used in the
context of the beverage industry, is broad and includes both alcoholic and
non-alcoholic beverages and waters and flavored water and different sectors in
the beverage industry may be subject to variable risks and economic pressures.
As a result, it will be difficult to anticipate the impact of changing economic
and political conditions on our operations and on our subsidiaries, and, as a
result, our financial results. The revenues, income (or losses) and valuations
of beverage companies can fluctuate suddenly and dramatically due to any one or
more of the following factors:
16
o DEMAND RISK. Beverages have sustained growth as more people opt
for higher-priced alternatives to "tap-water" but this is an
industry phenomenon and may be reversed. A decline in consumer
demand for such higher-priced alternatives to tap water, including
bottled water, flavored water, sports drinks and other drinks
would affect many of the companies in the beverage industry
including us and our subsidiaries.
o REGULATORY RISK. The profitability of beverage companies could be
adversely affected by changes in the regulatory environment. The
businesses of beverage companies are heavily regulated by federal,
state and local governments in diverse manners, both as to quality
and health factors and claims for benefits. Such regulation can
change over time in scope and intensity.
o COSTS OF PRODUCTION RISK. The profitability of beverage companies
may be materially impacted by costs associated with production
including raw materials and political factors where some raw
materials originate across national or even state boundaries.
Where raw materials may include fruits and vegetables,
unseasonable extreme weather patterns could affect production and
hence, costs.
o OPERATIONAL RISK. Like most industries, beverage companies are
subject to various operational costs, and risks arise in the
unforeseen increases in cost within the industry.
DEMAND FOR OUR PRODUCTS MAY BE ADVERSELY AFFECTED BY CHANGES IN CONSUMER
PREFERENCES AND TASTES OR IF WE ARE UNABLE TO INNOVATE OR MARKET OUR PRODUCTS
EFFECTIVELY.
We are a consumer products company operating in highly competitive markets and
rely on continued demand for our products. To generate revenues and profits, we
must sell products that appeal to our customers and to consumers. Any
significant changes in consumer preferences and any inability on our part to
anticipate and react to such changes could result in reduced demand for our
products and erosion of our competitive and financial position. Our success
depends on our ability to respond to consumer trends, such as consumer health
concerns about obesity, product attributes and ingredients. In addition, changes
in product category consumption or consumer demographics could result in reduced
demand for our products. Consumer preferences may shift due to a variety of
factors, including the aging of the general population, changes in social
trends, changes in travel, vacation or leisure activity patterns, weather,
negative publicity resulting from regulatory action or litigation against
companies in the industry, or a downturn in economic conditions. Any of these
changes may reduce consumers' willingness to purchase our products.
Our continued success is also dependent on our product innovation, including
maintaining a robust pipeline of new products, and the effectiveness of our
advertising campaigns and marketing programs. There can be no assurance as to
our continued ability either to develop and launch successful new products or
variants of existing products, or to effectively execute advertising campaigns
and marketing programs. In addition, both the launch and ongoing success of new
products and advertising campaigns are inherently uncertain, especially as to
their appeal to consumers. Our failure to successfully launch new products could
decrease demand for our existing products by negatively affecting consumer
perception of existing brands, as well as result in inventory write-offs and
other costs.
17
IF WE ARE NOT ABLE TO BUILD AND SUSTAIN PROPER INFORMATION TECHNOLOGY
INFRASTRUCTURE, OUR BUSINESS COULD SUFFER.
We depend on information technology as an enabler to improve the effectiveness
of our operations and to interface with our customers, as well as to maintain
financial accuracy and efficiency. If we do not allocate and effectively manage
the resources necessary to build and sustain the proper technology
infrastructure, we could be subject to transaction errors, processing
inefficiencies, the loss of customers, business disruptions, or the loss of or
damage to intellectual property through security breach.
OUR OPERATING RESULTS MAY BE ADVERSELY AFFECTED BY INCREASED COSTS, DISRUPTION
OF SUPPLY OR SHORTAGES OF RAW MATERIALS AND OTHER SUPPLIES.
We and our suppliers use various raw materials and other supplies in our
businesses. Our key packaging materials include PET resin used for plastic
bottles, aluminum used for cans, glass bottles and cardboard. Fuel and natural
gas are also important commodities due to their use in our supplier's plants and
in the trucks delivering our products. Some of these raw materials and supplies
are available from a limited number of suppliers. We are exposed to the market
risks arising from adverse changes in commodity prices affecting the cost of our
raw materials and energy. The raw materials and energy which our suppliers use
for the production of our products are largely commodities that are subject to
price volatility and fluctuations in availability caused by changes in global
supply and demand, weather conditions, agricultural uncertainty or governmental
controls. Our suppliers purchase these materials and energy mainly in the open
market. If commodity price changes result in unexpected increases in costs of
raw materials and/or energy, we may not be able to increase our prices to offset
these increased costs without suffering reduced volume, revenue and operating
income.
Our profitability may also be adversely impacted due to water scarcity and
regulation. Water is a limited resource in many parts of the world. As demand
for water continues to increase, we and our business partners may face
disruption of supply or increased costs to obtain the water needed to produce
our products.
OUR BUSINESS COULD SUFFER IF WE ARE UNABLE TO COMPETE EFFECTIVELY.
Our businesses operate in highly competitive markets. We compete against global,
regional and private label manufacturers on the basis of price, quality, product
variety and effective distribution. Increased competition and actions by our
competitors could lead to downward pressure on prices and/or a decline in our
market share, either of which could adversely affect our results.
DISRUPTION OF OUR SUPPLY CHAIN COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Our ability and that of our suppliers, including bottlers, contract
manufacturers, and retailers, to make, move and sell products is critical to our
success. Damage or disruption to our or their manufacturing or distribution
capabilities due to weather, natural disaster, fire or explosion, terrorism,
pandemics such as avian flu, strikes or other reasons, could impair our ability
to manufacture or sell our products. Failure to take adequate steps to mitigate
the likelihood or potential impact of such events, or to effectively manage such
events if they occur, could adversely affect our business, financial condition
and results of operations, as well as require additional resources to restore
our supply chain.
18
TRADE CONSOLIDATION OR THE LOSS OF ANY KEY CUSTOMER COULD ADVERSELY AFFECT OUR
FINANCIAL PERFORMANCE.
We must maintain mutually beneficial relationships with our key customers,
including our retailers and bottling partners, to effectively compete. There is
a greater concentration of our customer base generally due to the continued
consolidation of retail trade. As retail ownership becomes more concentrated,
retailers demand lower pricing and increased promotional programs. Further, as
larger retailers increase utilization of their own distribution networks and
private label brands, the competitive advantages we derive from our distribution
systems and brand equity may be eroded. Failure to appropriately respond to
these trends or to offer effective sales incentives and marketing programs to
our customers could reduce our ability to secure adequate shelf space at our
retailers and adversely affect our financial performance.
CHANGES IN THE LEGAL AND REGULATORY ENVIRONMENT COULD LIMIT OUR BUSINESS
ACTIVITIES, INCREASE OUR OPERATING COSTS, REDUCE DEMAND FOR OUR PRODUCTS OR
RESULT IN LITIGATION.
The conduct of our businesses, and the production, distribution, sale,
advertising, labeling, safety, transportation and use of many of our products,
are subject to various laws and regulations administered by federal, state and
local governmental agencies in the United States, as well as to foreign laws and
regulations administered by government entities and agencies in markets in which
we operate.
These laws and regulations may change, sometimes dramatically, as a result of
political, economic or social events. Such regulatory environment changes
include changes in food and drug laws, laws related to advertising and deceptive
marketing practices, accounting standards, taxation requirements, competition
laws and environmental laws, including laws relating to the regulation of water
rights and treatment. Changes in laws, regulations or governmental policy and
the related interpretations may alter the environment in which we do business
and, therefore, may impact our results or increase our costs or liabilities. In
particular, governmental bodies in jurisdictions where we operate may impose new
labeling, product or production requirements, or other restrictions.
DEPENDENCE ON MANAGEMENT.
The Company will be substantially dependent upon the efforts and abilities of
Jerry Pearring, Brett Spitalny, and other members of the Company's senior
management team. The loss or unavailability to the Company of any of these
individuals could have a material adverse effect upon the Company's business,
financial condition and operating results.
19
IF WE ARE UNABLE TO HIRE OR RETAIN KEY EMPLOYEES, IT COULD HAVE A NEGATIVE
IMPACT ON OUR BUSINESS.
Our continued growth requires us to develop our leadership bench and to
implement programs designed to retain talent. However, there is no assurance
that we will continue to be able to hire or retain key employees. We compete to
hire new employees, and then must train them and develop their skills and
competencies. Our operating results could be adversely affected by increased
costs due to increased competition for employees, higher employee turnover or
increased employee benefit costs. Any unplanned turnover could deplete our
institutional knowledge base and erode our competitive advantage.
ITEM 2: PROPERTIES
We maintain our corporate offices at 2 S. University Drive, Suite 220,
Plantation, Florida 33324. We occupy the property pursuant to a lease agreement,
which calls for monthly payments of $4,455 through May 31, 2008; $5,198 through
May 31, 2009; and $5,940 through May 31, 2011. AM has a warehouse lease, which
requires monthly rental of $4,938 through October 2008 and $5,089 through
December 2008 and an office lease which requires monthly rental of $2,100
through May 31, 2008 and $2,205 through May 31, 2009. Beverage Network of
Maryland has an office and warehouse lease which is currently on a
month-to-month basis at a rental of approximately $27,000.
ITEM 3: LEGAL PROCEEDINGS
We are in the process of finalizing a settlement with the SEC regarding our past
difficulty in complying with the 1940 Act. At this time, it does not appear that
we will incur any fines or penalties under this settlement. Otherwise, we are
not currently subject to any legal proceedings, nor, to our knowledge, is any
legal proceeding threatened against us. From time to time, we may be a party to
certain legal proceedings in the ordinary course of business, including
proceedings relating to the enforcement of our rights under contracts. While the
outcome of these legal proceedings, if any, cannot be predicted with certainty,
we do not expect that these proceedings will have a material effect upon our
financial condition or results of operations.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 13, 2007, stockholders representing more than a majority of the voting
power of the Company, acting by written consent, approved and authorized our
Board of Directors to withdraw the Company's election to be treated as a BDC
under the 1940 Act by filing a Form N-54C with the SEC. The Company filed its
preliminary information statement on Schedule 14C on July 13, 2007 and the
definitive information statement on Schedule 14C on October 2, 2007 with the
SEC. The information statement was provided on behalf of our Board of Directors
to record holders of shares of our common stock as of the close of business on
the record date of July 13, 2007 to provide them notice that our Board of
Directors had recommended the de-election of BDC status and that stockholders
representing more than a majority of our voting power had approved the
de-election by written consent.
20
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the over-the-counter bulletin board
stock market (the "OTC Bulletin Board") under the symbol "GBVS.OB".
For the periods indicated, the following table sets forth the high and low bid
prices per share of our common stock. These price quotations listed below
represent inter-dealer quotations without retail markup, markdown, or commission
and may not necessarily represent actual transactions. The high and low prices
during each quarter for the years ended December 31, 2007 and 2006 are as
follows:
QUARTER ENDED HIGH LOW
March 31, 2007 $ 0.45 $ 0.215
June 30, 2007 0.27 0.059
September 30, 2007 0.069 0.033
December 31, 2007 0.04 0.007
March 31, 2006 2.04 0.92
June 30, 2006 1.59 0.83
September 30, 2006 1.13 0.46
December 31, 2006 0.61 0.28
HOLDERS
As of April 8, 2008, there were 98,760,094 shares of common stock issued and
outstanding, held by approximately 368 shareholders of record, including
65,400,363 shares in the public float.
DIVIDENDS ON COMMON STOCK
We have not declared a cash dividend on our common stock in the last two fiscal
years and we do not anticipate the payment of dividends in the near future.
While generally we may not pay dividends on our common stock without first
paying dividends on our preferred stock, there are no shares of our preferred
stock currently outstanding. There are no other legal restrictions that
currently limit our ability to pay dividends on our common stock other than
those generally imposed by applicable state law.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
We granted options to the three owners of an advertising vendor used by Rudy to
acquire 150,000 shares, each, of our common stock at an exercise price of $1.05
per share, the average price on the date of the grant, June 14, 2006. The stock
option agreements expire on June 14, 2011, are fully vested and allow for
payment of the exercise price in either cash or as an offset to their monthly
billing of a minimum of 20%. During the years ended December 31, 2007 and 2006,
these individuals exercised options and acquired 7,101 shares and 25,962 shares,
respectively, of our common stock, through offset to their monthly billing,
leaving a balance of options to acquire 416,937 shares. The following table
provides information as of December 31, 2007 with respect to compensation plans
(including individual compensation arrangements) under which our equity
securities are authorized for issuance:*
21
<TABLE>
<S> <C>
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE EXERCISE FUTURE ISSUANCES UNDER
ISSUED UPON EXERCISE OF PRICE OF OUTSTANDING EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, OPTIONS, WARRANTS AND (EXCLUDING SECURITIES
WARRANTS AND RIGHTS RIGHTS REFLECTED IN COLUMN (a))
PLAN CATEGORY (a) (b) (c)
----------------------------- -------------------------- ------------------------- -------------------------
Equity compensation plans -0- -0- -0-
approved by security holders
Equity compensation plans not 416,937 $1.05 -0-
approved by security holders
</TABLE>
* The above table reflects only the equity compensation plans,
including individual compensation arrangements, as of December 31,
2007. The Global Beverage Solutions, Inc. 2008 Stock Plan discussed
below is not reflected in the table.
On January 2, 2008, we adopted the Global Beverage Solutions, Inc. 2008 Stock
Plan (the "Plan"). The Plan provides for equity compensation in the form of
awards of vested stock, restricted stock and stock options to our key employees,
officers and directors and to contractors and other persons or entities that
provide services to us. Our board of directors (or a committee designated by the
board of directors) administers the Plan and determines the awards to be issued
under the Plan. We have reserved 40,000,000 shares of our common stock to be
available for award under the Plan. There are no options outstanding under the
Plan at December 31, 2007.
On January 2, 2008, the Board of Directors approved the award under the Plan of
(i) 4,000,000 shares of the Company's common stock, (ii) immediately vesting
stock options to purchase 10,710,000 shares of the Company's common stock and
(iii) performance vesting stock options to purchase 17,700,000 shares of the
Company's common stock. Such Plan awards were made to the Company's employees,
officers and directors.
There are two types of performance vesting stock options that were awarded under
the Plan. The first type becomes conditionally vested based upon the amount of
gross proceeds raised by the Company through certain financings during 2008. The
second type of performance vesting stock option becomes conditionally vested
upon the closing of a specified acquisition. Under both types of performance
vesting stock options, the conditionally vested options become fully vested and
exercisable in three equal annual installments, with the first installment
occurring on the date that the options become conditionally vested. The exercise
price of all stock options awarded under the Plan on January 2, 2008 was $0.012
per share.
22
RECENT SALES OF UNREGISTERED SECURITIES
Sales during the first three quarters of the fiscal year were reported in Item 2
of Part II of the Form 10-Q filed for each such quarter. During the fourth
quarter of 2007, 100,000 restricted shares of our common stock were issued on
October 18, 2007 to a note-holder of Aqua Maestro to extend the maturity date of
the note-holders' note for $75,000 from October 1, 2007 to March 31, 2008. These
shares issued were sold pursuant to an exemption from registration under Section
4(2) promulgated under the Securities Act of 1933, as amended.
REPURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
There were no repurchase transactions to report for our fiscal year ended
December 31, 2007.
On January 23, 2008, we entered into a Stock Repurchase Agreement with XStream
by which we repurchased the 60,500,000 shares of our common stock originally
issued to XStream as consideration for our purchase of BNM. As consideration for
the repurchase, we issued a convertible note in the principal amount of $700,000
to XStream. The convertible note bears interest at the prime rate plus 2% and
matures on October 31, 2008.
ITEM 6: SELECTED FINANCIAL DATA
N/A
23
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS. Certain statements contained in this
report that are not historical fact are "forward-looking statements" as that
term is defined in the Private Securities Litigation Reform Act of 1995. The
words or phrases "will likely result," "are expected to," "will continue," "is
anticipated," "believes," "estimates," "projects" or similar expressions are
intended to identify these forward-looking statements. These statements are
subject to risks and uncertainties beyond our reasonable control that could
cause our actual business and results of operations to differ materially from
those reflected in our forward-looking statements. The safe harbor provisions
provided in the Securities Litigation Reform Act do not apply to forward-looking
statements we make in this report. Forward-looking statements are not guarantees
of future performance. Our forward-looking statements are based on trends which
we anticipate in our industry and our good faith estimate of the effect on these
trends of such factors as industry capacity, product demand and product pricing.
The inclusion of projections and other forward-looking statements should not be
regarded as a representation by us or any other person that we will realize our
projections or that any of the forward-looking statements contained in this
prospectus will prove to be accurate.
OVERVIEW
On January 2, 2008, we filed Form N-54C with the Securities and Exchange
Commission ("SEC") to notify the SEC of the withdrawal of our previous election
to be regulated as a BDC under sections 55 through 65 of the Investment Company
Act of 1940 (the "1940 Act"). A majority of the voting power of our common stock
voted to approve the recommendation of the Board of Directors to withdraw our
election to be regulated as a BDC.
We intend to pursue a business model whereby we acquire majority ownership
stakes in beverage-related companies. In this regard, we plan to remain active
in the imported bottled water category and alternative or "New Age" beverage
category (such as mildly flavored water, fruit drinks, sports and energy drinks,
soy-based beverages and other non-conventional beverages) through our two wholly
owned subsidiaries, Aqua Maestro, Inc. and Beverage Network of Maryland, Inc.
Under our new business model, we will at all times conduct our activities in
such a way that we will not be deemed an "investment company" subject to
regulation under the 1940 Act. Thus, we will not hold ourselves out as being
engaged primarily in the business of investing, reinvesting or trading in
securities. In addition, we will conduct our business in such a manner as to
ensure that we will at no time own or propose to acquire investment securities
having a value exceeding 40% of our total assets at any one time.
While operating as a BDC, Global provided equity and debt investment capital to
fund growth, acquisitions and recapitalizations of small market companies
primarily located in the United States.
24
LIQUIDITY AND CAPITAL RESOURCES - GOING CONCERN
At December 31, 2007, we had current assets of $2,882 and current liabilities of
$6,076,990 resulting in a working capital deficit of $6,074,108. At December 31,
2007, we had an accumulated deficit of $33,766,869 of which $16,770,467 was
unrealized.
In connection with our filing of N-54C on January 2, 2008, to notify the SEC of
the withdrawal of our election to be regulated as a BDC, we will in the future
prepare consolidated financial statements with our subsidiaries.
Our subsidiaries are projected to be profitable in 2008; however, they will
require $400,000 in additional funding for inventory and working capital to
achieve profitability. In addition, we will require $4,051,885 to meet our debt
service requirements and $750,000 to meet our corporate overhead.
We intend to engage in private placement offerings from time to time to provide
us with working capital to pay down certain of our debt obligations, for other
general corporate and operations uses, and to enable us to pursue our strategy
to develop and acquire bottled water and New Age beverage brands and
distribution platforms. In the event that we cannot obtain additional funds when
needed, however, we may be forced to renegotiate some or all of our debt and
curtail or cease some or all of our activities.
Whereas the Company believes it will be successful with its plans, due to market
factors and economic conditions, no assurance can be given that the required
financing will be available on favorable terms or at all. The financial
statements do not include any adjustments related to recoverability and
classification of assets carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
RESULTS OF OPERATIONS
REVENUES -
In 2007, we had no revenues. We accrued revenues from Rudy for interest income
on loans in the amounts of $86,721 in 2006 and $1,497 in 2005. This entire
amount was written off to bad debt expense when the valuation adjustment to our
investment in Rudy was recorded, since it was unlikely to be collected. We
accrued interest income of $19,977 and $2,392 and management fee income of
$18,000 and $10,000, in 2006 and 2005, respectively, from EON. These amounts
were written off as a bad debt in the amount of $50,369 at September 30, 2006,
when it was determined that EON would require more funding than we wished to
risk.
25
EXPENSES - Total expenses as detailed in the Statements of Operations for the
three years ended December 31, 2007, 2006 and 2005 increased 16% in 2007 from
2006 and increased 26% in 2006 from 2005.
Expenses in 2007 increased to $1,553,934 from $1,324,876 in 2006. Compensation
and benefits increased $247,283 (154%) primarily as a result of a staff increase
and oversight of the two wholly owned subsidiaries acquired in the first quarter
of 2007. Non-cash option compensation increased $40,450 as a result of 12 months
amortization in 2007 as compared to 6 months in 2006. Accounting services
increased $33,365 and legal services increased $90,154 in 2007. Accounting
services increased primarily due to the investment increases in 2007 while legal
services increased due to both the investment increases and for services related
to withdrawal as a BDC. Other general and administrative expenses increased
$122,472. This includes increases in rent of $34,497, increases in travel
expenses of $22,241 and increases in consulting fees of $42,293 plus increases
of $38,029 in other office related expenses. These increases were offset by
decreases in bad debt expense of $138,587; legal settlement decreases of
$78,000; decreases in public relations, transfer agent and other professional
fees of $37,748; and decreases in interest expense of $51,831. The cost
increases are primarily related to increased compensation and benefits and costs
associated with attempting to raise additional capital.
Expenses in 2006 include $538,000 of interest expense which is the calculated
value of the beneficial conversion feature of the secured convertible promissory
notes payable issued during 2006. Other 2006 expenses which were reduced from
the prior year include the following: (i) compensation and benefits decreased
$104,000; (ii) investment advisory services decreased $134,000; and (iii) other
selling, general and administrative expenses decreased $63,000. These decreases
were partially offset by increases in bad debts of $138,000; legal services of
$100,000; and public relations, transfer agent and other professional services
of $40,000.
Expenses in 2005 include increases from the 2004 amounts of $60,000 for a legal
settlement and increases of $164,000 in total interest cost. Expenses in 2005
include declines from the 2004 amounts of $40,000 for legal services, $74,000
for investment advisory services, $58,000 for public relations, transfer agent
and other professional services and a decline of $173,000 in other selling,
general and administrative expenses.
NET REALIZED AND UNREALIZED LOSSES - As an investment company under the
Investment Company Act of 1940, all of our investments were required to be
carried at market value or fair value as determined by management for
investments which do not have readily determinable market values. Prior to our
conversion to BDC status, only marketable debt and equity securities and certain
derivative securities were required to be carried at market value.
Beginning June 19, 2003 and until January 2, 2008, portfolio assets for which
market prices are available are valued at those prices. Securities that are
traded in the over-the-counter market or on a stock exchange generally will be
valued at the prevailing bid price on the valuation date. However, our current
investments were acquired in privately negotiated transactions and may have no
readily specific facts and circumstances of each portfolio investment. We must
determine the fair value of each individual investment on a quarterly basis. We
will record unrealized depreciation on investments when we believe that an
investment has become impaired, including where realization of an equity
security is doubtful. Conversely, we will record unrealized appreciation if we
believe that the underlying portfolio company has appreciated in value and,
therefore, its investment has also appreciated in value, where appropriate.
26
As an investment company prior to January 2, 2008, we invested primarily in
illiquid securities including equity securities of private companies. The
structure of each equity security was specifically negotiated to enable us to
protect our investment and maximize our returns. We generally included many
terms governing ownership parameters, dilution parameters, liquidation
preferences, voting rights, and put or call rights. Our investments were
generally subject to some restrictions on resale and generally have no
established trading market. Because of the type of investments that we made and
the nature of our business, our valuation process required an analysis of
various factors. Our fair value methodology included the examination of, among
other things, the underlying investment performance, financial condition and
market changing events that impact valuation.
The net realized and unrealized losses may be summarized as follows:
2007 2006 2005
---------- ---------- ----------
Realized losses:
Unboxed and Total Sports $ -- $ -- $ 69,826
Rudy 4,785,000 -- --
Island Tribe -- -- 396,777
---------- ---------- ----------
$4,785,000 $ -- $ 466,603
========== ========== ==========
Unrealized losses:
EON $ -- $ 1,011,500 $ --
BNM 11,831,318
AM 1,321,606
SOS 588,000
Rudy (3,276,717) 5,094,760 --
TDS -- -- 200,000
------------ ------------ ------------
$ 10,464,207 $ 6,106,260 $ 200,000
============ ============ ============
NET ASSET (LIABILITY) VALUE
As a Business Development Company prior to January 2, 2008, certain of our
activities and disclosures were made in reference to Net Asset (Liability) Value
which is the value of our portfolio assets less debt and preferred stock. This
may be viewed, simply and generalized, as the value of our assets to our common
stockholders. As of the date of the financial information in this report, the
value of our portfolio of assets including investments in equity securities,
accounts receivable from portfolio companies and cash was $2,904,201 and from
this, are subtracted liabilities and debts of $6,076,990. There are no shares of
preferred stock outstanding but the rights of preferred stockholders would be
included if there were. The Net Asset (Liability) Value is therefore
($3,172,789). The Net Asset (Liability) Value per Share is ($0.0215).
27
RECENT ACCOUNTING PRONOUNCEMENTS
There are several new accounting pronouncements issued by the Financial
Accounting Standards Board ("FASB") which are not yet effective. Each of these
pronouncements, as applicable, has been or will be adopted by the Company.
Management does not believe any of these accounting pronouncements has had or
will have a material impact on our financial position or operating results.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". This
Statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles, expands disclosures about fair
value measurements, and applies under other accounting pronouncements that
require or permit fair value measurements. SFAS No. 157 does not require any new
fair value measurements. However, the FASB anticipates that for some entities,
the application of SFAS No. 157 will change current practice. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007, which for us would
be our fiscal year beginning January 1, 2008. We are currently evaluating the
impact of SFAS No. 157 but do not expect that it will have a material impact on
our financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities." This statement permits entities to
choose to measure many financial instruments and certain other items at fair
value that are not currently required to be measured at fair value. SFAS No. 159
is effective for fiscal years beginning after November 15, 2007, which for the
Company would be its fiscal year beginning January 1, 2008. The Company is
currently evaluating the impact of SFAS No. 159, but does not expect that it
will have a material impact on its financial statements.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51" ("SFAS 160").
SFAS 160 establishes accounting and reporting standards for the noncontrolling
interests in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160
is effective on January 1, 2009 for the Company. We are currently evaluating the
impact of adopting SFAS 160.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements.
Critical accounting policies are those that are both important to the
presentation of our financial condition and results of operations and require
management's most difficult, complex, or subjective judgments. Our most critical
accounting policy relates to the valuation of our investments.
28
Pursuant to the requirements of the 1940 Act, when we were a BDC, our Board of
Directors was responsible for determining in good faith the fair value of our
investments for which market quotations are not readily available. At the
current time, none of our investments has a market quotation.
We determine fair value to be the amount for which an investment could be
exchanged in an orderly disposition over a reasonable period of time between
willing parties other than in a forced or liquidation sale. Our valuation
process is intended to provide a consistent basis for determining the fair value
of the portfolio. We record unrealized depreciation on investments when we
believe that an investment has become impaired, including where realization of
an equity security is doubtful. We record unrealized appreciation if we believe
that the underlying portfolio company has appreciated in value and, therefore,
our equity security has also appreciated in value.
Our equity interest in portfolio companies for which there is no liquid public
market are valued using industry valuation benchmarks, and then the value is
assigned a discount reflecting the illiquid nature of the investment as well as
our minority, non-control position. When an external event such as a purchase
transaction, public offering, or subsequent equity sale occurs, the pricing
indicated by the external event is used to corroborate our valuation. The
determined values are generally discounted to account for restrictions on resale
and minority ownership positions, if applicable.
OFF BALANCE SHEET ARRANGEMENTS
We have operating leases for our corporate office and for the office and
warehouse spaces used by BNM and AM, as detailed in the tabular disclosure of
contractual obligations detailed below.
29
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
Payments due by period (000's)
------------------------------
Total Year 1 Year 2-3 Year 4-5 Over 5
------ ------ -------- -------- ------
Operating leases:
Global office lease $ 227 $ 59 $ 139 $ 29 $ --
Aqua Maestro office lease 41 26 15 -- --
Aqua Maestro warehouse 60 60 -- -- --
Beverage Network of Maryland
Office and warehouse leases (1) -- -- -- -- --
------ ------ -------- -------- ------
Total $ 328 $ 145 $ 154 $ 29 $ --
====== ====== ======== ======== ======
Long-term debt:
Convertible promissory notes $1,326 $1,326 $ -- $ -- $ --
XStream note 1,072 1,072 -- -- --
Master Distributor note 1,740 1,740 -- -- --
Aqua Maestro note 16 16 -- -- --
Convertible note 239 239 -- -- --
------ ------ -------- -------- ------
Total $4,393 $4,393 $ -- $ -- $ --
====== ====== ======== ======== ======
(1) Currently month-to-month with monthly rent expense of approximately
$27,000.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
N/A
30
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
GLOBAL BEVERAGE SOLUTIONS, INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page
----
Report of Independent Registered Public Accounting Firm 32
Statements of Net Assets at December 31, 2007 and 2006 33
Statements of Operations for the years ended December 31, 2007,
2006 and 2005 34
Statements of Cash Flows for the years ended December 31, 2007,
2006 and 2005 35
Statements of Changes in Net Assets for the years ended December
31, 2007, 2006 and 2005 37
Schedules of Investments at December 31, 2007 and 2006 38
Notes to Financial Statements 40
Schedules of Financial Ratios for the years ended December 31, 2007,
2006 and 2005 68
31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Global Beverage Solutions, Inc.
We have audited the accompanying statements of net assets (liabilities),
including the schedule of investments, of Global Beverage Solutions, Inc. (the
"Company") as of December 31, 2007 and 2006, and the related statements of
operations, changes in net assets (liabilities) and cash flows for the years
ended December 31, 2007, 2006 and 2005. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Global Beverage Solutions, Inc.
as of December 31, 2007 and 2006, and the results of its operations and cash
flows for the years ended December 31, 2007, 2006 and 2005 in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 9 to the
financial statements, the Company has generated limited revenues and has
incurred losses totaling $33,766,869 for the period from August 26, 2002
(inception) through December 31, 2007. These factors, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans regarding these matters are also described in Note 9. The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/Turner, Stone & Company, LLP
April 10, 2008
Dallas, Texas
32
<TABLE>
<S> <C>
GLOBAL BEVERAGE SOLUTIONS, INC.
STATEMENTS OF NET ASSETS (LIABILITIES)
DECEMBER 31, 2007 AND 2006
2007 2006
------------ ------------
ASSETS
Investments in portfolio companies:
Unaffiliated issuers (Cost $788,000 at December
31, 2007 and $200,000 at December 31, 2006) $ -- $ --
Controlled affiliates (Cost $16,051,695 at December
31, 2007 and $6,669,760 at December 31, 2006) 2,898,771 1,575,000
Non-controlled affiliates (Cost $2,829,543 at December
31, 2007 and $1,011,500 at December 31, 2006 -- --
------------ ------------
Total investments in portfolio companies 2,898,771 1,575,000
Cash and cash equivalents 888 472
Deposits and prepaid expenses 1,994 474
Property and equipment, net 2,548 --
------------ ------------
TOTAL ASSETS 2,904,201 1,575,946
------------ ------------
LIABILITIES
Accounts payable 85,283 103,486
Accrued expenses 1,528,764 48,064
Non-interest bearing advances from an officer 50,079 --
Notes payable 4,412,864 1,335,000
------------ ------------
TOTAL LIABILITIES 6,076,990 1,486,550
------------ ------------
NET ASSETS (LIABILITIES) $ (3,172,789) $ 89,396
============ ============
Commitments and contingencies (Note 8)
COMPOSITION OF NET ASSETS (LIABILITIES):
Convertible preferred stock, $.001 par value;
50,000,000 shares authorized; no shares issued and outstanding $ -- $ --
Common stock, $.001 par value, authorized 950,000,000 shares;
147,567,501 and 43,665,067 shares issued and outstanding at
December 31, 2007 and 2006, respectively 147,567 43,665
Additional paid in capital 30,486,962 17,130,808
Deferred option compensation (40,449) (121,349)
Accumulated deficit:
Accumulated net operating loss (10,332,987) (8,779,053)
Net realized loss on investments (6,663,415) (1,878,415)
Net unrealized depreciation of investments (16,770,467) (6,306,260)
------------ ------------
NET ASSETS (LIABILITIES) $ (3,172,789) $ 89,396
============ ============
NET ASSET (LIABILITY) VALUE PER SHARE $ (0.0215) $ 0.0020
============ ============
See accompanying notes to financial statements.
33
GLOBAL BEVERAGE SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
THREE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
2007 2006 2005
------------- ------------- -------------
INCOME FROM OPERATIONS:
Interest income
Controlled affiliated portfolio company $ -- $ 86,721 $ 1,497
Non-controlled affiliated portfolio company -- 19,977 2,392
Management income - non-controlled affiliated
portfolio company -- 18,000 10,000
------------- ------------- -------------
-- 124,698 13,889
EXPENSES:
Compensation and benefits 407,720 160,437 264,533
Non-cash option compensation 80,900 40,450 --
Bad debt expense -- 138,587 --
Legal settlements -- 78,000 60,000
Accounting services 88,184 54,819 43,727
Legal services 259,244 169,090 69,652
Investment advisory services -- -- 134,964
Board of director fees 3,000 1,500 13,800
Public relations, transfer agent and other
professional services 36,755 74,503 34,651
Other general and administrative expenses 143,898 21,426 84,831
Interest expense 534,233 586,064 334,000
Loss on sale of furniture and fixtures -- -- 12,874
------------- ------------- -------------
1,553,934 1,324,876 1,053,032
------------- ------------- -------------
LOSS BEFORE INCOME TAXES (1,553,934) (1,200,178) (1,039,143)
INCOME TAXES -- -- --
------------- ------------- -------------
NET LOSS FROM OPERATIONS (1,553,934) (1,200,178) (1,039,143)
------------- ------------- -------------
NET REALIZED AND UNREALIZED LOSSES:
Net realized loss on investments in portfolio
companies net of income tax benefit of $0 (4,785,000) -- (466,603)
Change in unrealized depreciation of investments
in portfolio companies, net of deferred tax
benefit of $0. (10,464,207) (6,106,260) (200,000)
------------- ------------- -------------
NET DECREASE IN NET ASSETS FROM OPERATIONS $ (16,803,141) $ (7,306,438) $ (1,705,746)
============= ============= =============
NET DECREASE IN NET ASSETS FROM OPERATIONS PER
COMMON SHARE, BASIC AND DILUTED $ (0.1276) $ (0.1697) $ (0.0926)
============= ============= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 131,718,621 43,052,471 18,418,649
============= ============= =============
See accompanying notes to financial statements.
34
GLOBAL BEVERAGE SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
2007 2006 2005
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net decrease in net assets from operations $(16,803,141) $ (7,306,438) $ (1,705,746)
Adjustments to reconcile net decrease in net assets from
operations to net cash used in operating activities:
Change in unrealized depreciation of investments
in portfolio companies 10,464,207 6,106,260 200,000
Realized loss on investments in portfolio investment companies 4,785,000 -- 466,603
Non-cash option compensation 80,900 40,450 --
Bad debts -- 138,587 --
Depreciation 625 -- 12,546
Amortization of deferred financing costs -- -- 28,125
Common shares issued for compensation 1,500 -- --
Amortization of debt discount 173,038
Amortization of beneficial conversion feature:
Secured convertible promissory notes payable -- 538,000 --
Convertible debentures -- -- 234,926
Loss on sale of furniture and fixtures -- -- 12,874
Proceeds from sale of furniture and fixtures -- -- 300
Accrued investment income -- (124,698) (13,889)
Changes in operating assets and liabilities:
Deposits and prepaid expenses (1,520) 12,597 27,535
Accounts payable and accrued expenses 498,676 156,604 41,235
Loan from officer 36,900 -- --
------------ ------------ ------------
Net cash used in operating activities (763,815) (438,638) (695,491)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (3,173) -- --
Proceeds from sale of investments 112,000 -- --
Investments in and advances to portfolio investment companies (785,596) (1,966,260) (1,144,124)
------------ ------------ ------------
Net cash used in investing activities (676,769) (1,966,260) (1,144,124)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common and preferred stock 2,484,348 825,000 1,991,519
Proceeds from:
Secured convertible promissory notes payable 223,450 1,335,000 --
Convertible debentures -- -- 50,000
Loan payable to stockholder 20,000 -- --
Repayment of notes payable (1,286,798) -- --
------------ ------------ ------------
Net cash provided by financing activities 1,441,000 2,160,000 2,041,519
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 416 (244,898) 201,904
Cash and cash equivalents, beginning of year 472 245,370 43,466
------------ ------------ ------------
Cash and cash equivalents, end of year $ 888 $ 472 $ 245,370
============ ============ ============
Continued
See accompanying notes to financial statements.
35
GLOBAL BEVERAGE SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
2007 2006 2005
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
CASH PAID FOR INTEREST AND INCOME TAXES:
Interest (1) $ 98,933 $ 538,000 $ 306,500
Income taxes -- -- --
(1) The 2006 amount is the beneficial conversion feature of
convertible notes payable. The 2005 interest was prepaid in 2004
as part of a convertible debenture financing.
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for:
Amounts due Rudy Ruettiger by Rudy Beverage, Inc. $ 625,000 $ -- $ --
Legal settlements -- 138,000 --
Acquisition of 80% of Rudy Beverage, Inc. -- -- 4,860,000
Acquisition of Beverage Networks of Maryland, Inc. ("BNM") 8,864,500 -- --
Acquisition of Aqua Maestro, Inc. 1,431,250 -- --
Liability of Rudy Beverage, Inc. 7,458 27,260 --
Liability of Aqua Maestro, Inc. 14,000 -- --
Guarantee to note holder of stock issued in acquisition of BNM 1,000,000 -- --
Accrual of estimated liability in excess of value of common stock
issued to note holder in acquisition of BNM 968,000 -- --
Notes payable issued as partial consideration for:
Acquisition of Beverage Networks of Maryland, Inc. 3,766,818 -- --
Acquisition of Aqua Maestro, Inc. 190,356 -- --
Deferred financing costs and prepaid interest for issuance of
convertible debentures -- -- 306,500
Stock subscription written off -- -- (9,600)
See accompanying notes to financial statements.
36
GLOBAL BEVERAGE SOLUTIONS, INC.
STATEMENTS OF CHANGES IN NET ASSETS (LIABILITIES)
THREE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
2007 2006 2005
------------ ------------ ------------
CHANGES IN NET ASSETS FROM OPERATIONS:
Net loss from operations $ (1,553,934) $ (1,200,178) $ (1,039,143)
Net realized loss on sale of investments (4,785,000) -- (466,603)
Change in net unrealized depreciation of investments (10,464,207) (6,106,260) (200,000)
------------ ------------ ------------
Net decrease in net assets from operations (16,803,141) (7,306,438) (1,705,746)
------------ ------------ ------------
CAPITAL STOCK TRANSACTIONS:
Common stock issued for cash 2,484,348 825,000 1,991,519
Common stock issued for conversion of convertible debentures -- -- 293,750
Common stock issued in acquisition of investments:
Beverage Network of Maryland, Inc. ("BNM") 8,864,500 -- --
Aqua Maestro, Inc. 1,431,250 -- --
Rudy Beverage, Inc. -- -- 4,860,000
Guarantee to note holder of stock issued in acquisition of BNM 1,000,000 -- --
Accrual of estimated liability in excess of value of common stock
issued to note holder in acquisition of BNM (968,000) -- --
Common shares cancelled in connection with recission of
acquisition -- -- (8,400)
Debt discount related to beneficial conversion feature -- 538,000 --
Common stock issued for legal settlements -- 138,000 --
Common stock issued for liability of portfolio company 21,458 27,260 --
Common stock issued for amounts due Rudy Ruettiger by
Rudy Beverage, Inc. 625,000 -- --
Common stock issued for services 1,500 -- --
Amortization of deferred option compensation 80,900 40,450 --
------------ ------------ ------------
Net increase in net assets from stock transactions 13,540,956 1,568,710 7,136,869
------------ ------------ ------------
Net increase (decrease) in net assets (3,262,185) (5,737,728) 5,431,123
Net assets, beginning of year 89,396 5,827,124 396,001
------------ ------------ ------------
Net assets (liabilities), end of year $ (3,172,789) $ 89,396 $ 5,827,124
============ ============ ============
See accompanying notes to financial statements.
37
GLOBAL BEVERAGE SOLUTIONS, INC.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2007
SHARES/ DATE OF HISTORICAL FAIR % NET
PERCENT ACQUISITION COST VALUE ASSETS
INVESTMENT IN UNAFFILIATED ISSUERS
----------------------------------
8% Jun-05 Titanium Design Studio, Inc.; privately held;
a titanium jewelry manufacturer $ 200,000 $ - 0.0%
N/A Oct-07 Note receivable from SOS Resource Services; past
due 588,000 - 0.0%
------------ ------------ --------
788,000 - 0.0%
------------ ------------ --------
INVESTMENTS IN AND ADVANCES TO NON-CONTROLLED AFFILIATED PORTFOLIO COMPANIES
----------------------------------------------------------------------------
44% Jul-05 EON Beverage Group, Inc.; privately held;
manufactures structured water pursuant to
proprietary process 1,011,500 - 0.0%
N/A Jan-07 Receivables from Rudy Beverage, Inc., which
may be converted under certain circumstances into
shares of common stock of Rudy Beverage, Inc.; Rudy
sells and manufactures beverages higher in nutritional
value and lower in sugar than most existing brands 1,818,043 - 0.0%
------------ ------------ --------
2,829,543 - 0.0%
------------ ------------ --------
INVESTMENTS IN AND ADVANCES TO CONTROLLED AFFILIATED PORTFOLIO COMPANIES
------------------------------------------------------------------------
100% Feb-07 Beverage Network of Maryland, Inc.; wholly owned;
distributor of beverages in Mid-Atlantic States
(Includes cash advances of $386,704) 14,018,022 2,186,704 -68.9%
100% Mar-07 Aqua Maestro, Inc., wholly-owned; engaged in
wholesale and retail distribution of domestic and
imported bottled water (Includes cash advances of
$112,067) 2,033,673 712,067 -22.4%
------------ ------------ --------
16,051,695 2,898,771 -91.4%
------------ ------------ --------
------------
Total investments at December 31, 2007 $19,669,238 2,898,771 -91.4%
============
Cash and other assets, less liabilities (6,071,560) 191.4%
------------ --------
Net liabilities at December 31, 2007 $(3,172,789) 100.0%
------------ --------
See accompanying notes to financial statements.
38
GLOBAL BEVERAGE SOLUTIONS, INC.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2006
SHARES/ DATE OF HISTORICAL FAIR
PERCENT ACQUISITION COST VALUE
COMMON STOCK IN UNAFFILIATED ISSUERS
------------------------------------
8% Jun-05 Titanium Design Studio, Inc.; privately held;
a titanium jewelry manufacturer $ 200,000 $ -
COMMON STOCK IN CONTROLLED AFFILIATED PORTFOLIO COMPANIES
---------------------------------------------------------
80% Nov-05 Rudy Beverage, Inc.; privately held; manufactures
and sells beverages higher in nutritional value
and lower in sugar than existing brands
(1,762% of net assets) 6,669,760 1,575,000
COMMON STOCK IN NON-CONTROLLED AFFILIATED PORTFOLIO COMPANIES
-------------------------------------------------------------
44% Jul-05 EON Beverage Group, Inc.; privately held;
manufactures structured water pursuant to
proprietary process 1,011,500 -
------------ ------------
Total investments at December 31, 2006 $ 7,881,260 1,575,000
============
Cash and other assets, less liabilities (1,485,604)
------------
Net assets at December 31, 2006 $ 89,396
============
See accompanying notes to financial statements.
39
</TABLE>
GLOBAL BEVERAGE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
The Company was incorporated in 1992 under the name of MedEx, Inc. Pursuant to
the merger of STG Corp., a Delaware corporation, with and into the Company, we
amended our Articles of Incorporation to change our name to MedEx Corp. On
October 21, 2002, Aussie Apparel Group, Ltd., a Nevada corporation, was merged
with and into us, and pursuant to the merger, we changed our name to Aussie
Apparel Group Ltd. Because the shareholders of Aussie Apparel became the
controlling shareholders of the Company after the exchange, Aussie Apparel was
treated as the acquirer for accounting purposes. Accordingly, the financial
statements, as presented herein, are the historical financial statements of
Aussie Apparel and include the transactions of MedEx Corp. only from the date of
acquisition, using reverse merger accounting.
We changed our name to Bluetorch Inc. ("Bluetorch") on October 24, 2003.
Effective April 20, 2005 the Company changed its name to Pacific Crest
Investments, and as a result of a conflict in name with an existing company, we
again changed our name to Pacific Peak Investments, effective May 5, 2005. On
October 10, 2005, the Company changed its name to Global Beverage Solutions,
Inc. and began trading on the OTC Bulletin Board under the symbol GBVS.OB.
On June 19, 2003, the Company became a business development company ("BDC")
pursuant to applicable provisions of the Investment Company Act of 1940 (the
"1940 Act").
On January 2, 2008, the Company filed Form N-54C with the Securities and
Exchange Commission ("SEC") to notify the SEC of the withdrawal of our previous
election to be regulated as a BDC and subject to sections 55 through 65 of the
1940 Act. A majority of the voting power of our common stock voted to approve
the recommendation of the Board of Directors to withdraw our election to be
regulated as a BDC.
Pursuant to Regulation S-X Rule 6, the Company will operate on a
non-consolidated basis until January 2, 2008. Operations of the portfolio
companies will be reported at the subsidiary level and only the appreciation or
impairment of these investments in portfolio companies will be included in the
Company's financial statements. Subsequent to January 2, 2008, as noted above,
the Company will cease operating as a BDC and will prepare consolidated
financial statements with its wholly owned subsidiaries.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting periods. Significant estimates include the valuation of the
investments in portfolio companies and deferred tax asset valuation allowances.
Actual results could differ from those estimates.
40
CASH & CASH EQUIVALENTS
Cash equivalents include all highly liquid unencumbered debt instruments with
original maturities of three months or less when purchased.
CONCENTRATIONS OF CREDIT RISK
Cash is maintained at a financial institution. The Federal Deposit Insurance
Corporation ("FDIC") insures accounts at each institution for up to $100,000. At
times, cash may be in excess of the FDIC insurance limit of $100,000.
REVENUE RECOGNITION
The Company has accrued interest income from its follow-on investments in
portfolio companies and has accrued management fees from one of its portfolio
companies in 2006 and 2005. The Company did not recognize any revenues for the
year ended December 31, 2007, and after January 2, 2008 will consolidate with
its wholly owned subsidiaries since the Company filed a withdrawal of its
election to be subject as a BDC to the 1940 Act.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107, "Disclosures About Fair Value of Financial Instruments," requires
disclosure of fair value information about financial instruments when it is
practicable to estimate that value. The carrying amounts of the Company's cash,
interest and fees receivable from portfolio companies, accounts payable and
accrued expenses, and convertible debentures approximate their estimated fair
values due to the short-term maturities of these financial instruments and
because related interest rates offered to the Company approximate current
offered rates.
VALUATION OF INVESTMENTS (AS AN INVESTMENT COMPANY)
As an investment company under the Investment Company Act of 1940 prior to
January 2, 2008, all of the Company's investments were required to be carried at
market value or fair value as determined by management for investments which do
not have readily determinable market values. Prior to our conversion to BDC
status in 2003, only marketable debt and equity securities and certain
derivative securities were required to be carried at market value.
Portfolio assets for which market prices are available are valued at those
prices. Securities that are traded in the over-the-counter market or on a stock
exchange generally will be valued at the prevailing bid price on the valuation
date. However, the Company's current investments were acquired in privately
negotiated transactions and have no readily determinable market values. These
securities are carried at fair value as determined by management and outside
professionals as necessary under the Company's valuation policy. Currently, the
valuation policy provides for management's review of the management team,
financial conditions, and products and services of the portfolio company. In
situations that warrant such an evaluation, an independent business valuation
may be obtained. No independent valuation was obtained in 2007.
41
Value, as defined in Section 2(a)(41) of 1940 Act, is (i) the market price for
those securities for which a market quotation is readily available and (ii) for
all other securities and assets, fair value is as determined in good faith by
management. There is no single standard for determining fair value in good
faith. As a result, determining fair value requires that judgment be applied to
the specific facts and circumstances of each portfolio investment. The Company
must determine the fair value of each individual investment on a quarterly
basis. The Company records unrealized depreciation on investments when it
believes that an investment has become impaired, including where realization of
an equity security is doubtful. Conversely, the Company records unrealized
appreciation if the Company believes that the underlying portfolio company has
appreciated in value and, therefore, its investment has also appreciated in
value, where appropriate.
As an investment company, the Company invested primarily in illiquid securities
including equity securities of private companies. The structure of each equity
security was specifically negotiated to enable the Company to protect its
investment and maximize its returns. The Company generally included many terms
governing ownership parameters, dilution parameters, liquidation preferences,
voting rights, and put or call rights. The Company's investments are generally
subject to some restrictions on resale and generally have no established trading
market. Because of the type of investments that the Company made and the nature
of its business, the Company's valuation process requires an analysis of various
factors. The Company's fair value methodology includes the examination of, among
other things, the u]]> |