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 amendment to this Form 10-K
o.
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company as defined by Rule 12b-2 of the
Exchange Act: smaller reporting company
þ.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act): Yes
o No
þ.
The
aggregate market value of the registrant's common stock, $0.01 par value, held by
non-affiliates (21,201,254 shares) was approximately $59,363,511 based on the average
closing bid and asked prices ($2.80) for the common stock on April 7, 2008.
At April 7,
2008, the number of shares outstanding of the registrant's common stock, $0.01 par value
(the only class of voting stock), was 28,831,254.
TABLE OF CONTENTS
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PART I.
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Item 1.
Business |
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Item 1A.
Risk Factors |
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Item 1B.
Unresolved Staff Comments |
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Item 2.
Properties |
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Item 3.
Legal Proceedings |
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Item 4.
Submission of Matters to a Vote of
Security Holders |
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PART II.
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Item 5.
Market for Registrant's Common
Equity, Related Stockholder Matters, and Issuer Purchases of Equity
Securities |
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Item 6.
Selected Financial Data |
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Item 7.
Management's Discussion and
Analysis of Financial Condition and Results of Operations
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Item 7A. Quantitative
and Qualitative Disclosures about Market Risk |
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Item 8.
Financial Statements and Supplementary Data |
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Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure |
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Item 9A. Controls
and Procedures (Item 9A (T)) |
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Item 9B. Other
Information |
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PART III.
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Item 10.
Directors, Executive Officers and Corporate
Governance |
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Item 11.
Executive Compensation |
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Item 12.
Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters |
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Item 13.
Certain Relationships and Related Transactions,
and Director Independence |
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Item 14.
Principal Accountant Fees and Services
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Item 15.
Exhibits and Financial Statement
Schedules |
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Signatures |
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2
PART
I
As
used herein the terms “Company,” “we,” “our,” and
“us” refer to SunVesta, Inc., its predecessors, and its subsidiaries, unless
context indicates otherwise.
Corporate History
The Company
was incorporated under the laws of the State of Florida on September 12, 1989, as
“Thor Ventures Corp.” On November 26, 2002, the Company’s name was
changed to “Jure Holdings, Inc.” as part of a process to restructure the
corporation. On April 25, 2003, we acquired OPENLiMiT Holding AG, a Swiss developer of
digital signature software and subsequently changed our name to “OPENLiMiT,
Inc.” We spun-off OPENLiMiT, Holding AG to our stockholders on September 1,
2005. On August 24, 2007 we changed the Company’s name to “SunVesta,
Inc.” and on August 27, 2007 acquired SunVesta Holding AG as a wholly owned
subsidiary.
SunVesta
HoldingAG was incorporated under the laws of Switzerland on December 18, 2001 and is
domiciled in Zug, Switzerland. SunVesta HoldingAG operates through its wholly-owned
subsidiaries, as follows:
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SunVesta Holding AG
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SunVesta Projects &
Management AG
Switzerland
100%
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SunVesta Tourism
Costa Rica Limitada
Costa Rica
100%
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Rich Land Investments
Limitada
Costa Rica
90%
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SunVesta Turistik
Yatirim ve Ticaret A.S.
Turkey
100%
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The
Company’s principal place of business is located at Seestrasse 97, Oberrieden,
Switzerland, CH-8942, and our telephone number is (011) 41-43-388-40-60.
The
Company’s registered agent is Corpdirect Agents, Inc., located at 515 E. Park Ave.,
Tallahassee, Florida, 32301.
The
Company
The Company
intends to develop high-end luxury hotels and resorts in emerging tourist destinations.
These complexes will be composed of a traditional hotel operation combined with villas to
be sold within the framework of a fractional private residence club program. Members will
have international membership privileges.
We will
concentrate initially on offering luxury hotel products located in attractive, top-class
coastal vacation destinations in countries such as Costa Rica, Vietnam and Turkey that are
fast emerging as popular tourist destinations. Building on the anticipated success of our
initial offerings, we intend to extend our innovative program of private residence clubs
and fractional ownership to traditional tourist destinations in order to attract business,
sports, and shopping travelers. Ultimately, we intend to develop at least one
exclusive
luxury hotel and resort in the top vacation destination on each continent in addition to at
least five world-class locations that will serve as city boutique and mountain resort
hotels.
Our initial
real estate development is to be constructed on 8.5 hectares of prime land located in
Guanacaste, Costa Rica, that includes a concession to build an exclusive resort & spa
hotel with a luxury private residence club. The construction of the $190 million SunVesta
Papagayo Princess Resort is expected to start in 2009 and to be completed in late 2010 or
early 2011.
Business Considerations
Country
specific conditions are taken into account when fractional ownership properties are
considered for development. The main variable factor is the definition of the right of use
that can range from temporary renting or leasing assignments to ownership-like
securitization, from built-in taking-back and buy-back options or refund terms including
capital reimbursement to indefinite ownership transfers.
We intend
to direct our investment priority towards emerging market countries with beneficial land
acquisition costs and the foreseeable development of tourism, in countries such as Costa
Rica, Vietnam and Turkey. More basic considerations as to where to develop properties
include the stability of local political conditions, geologically useful cultivability, and
types of destinations that attract a five-star clientele. Each potential investment is
first compared against a validation checklist and then, if warranted, subjected to a
substantial due diligence process. Since location is key to the success of any tourist
based luxury real estate project each development is carefully considered during the
eligibility process. We also intend to consider projects in fully developed tourist areas.
Promising development opportunities often arise from luxury real estate developments driven
into foreclosure or sold at auction.
Distribution Channels
The Company
intends to utilize traditional and existing third party distribution channels. We are in
the process of identifying experienced business-partners to achieve best sales results. The
selection of third party contractors will be made according to geographical and
demographical requirements. For example: we will focus on engaging contract sales
organizations to market the SunVesta Papagayo Princess Resort in Costa Rica from the United
States, Canada, Central America, and South America.
Other
prospective distribution channels are:
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Large and strong real estate brokers
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Asset managers and insurance brokers
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Specialized brokers for residence clubs, destination clubs
and high-end fractional interests
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Hotel management companies
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Direct Sales at the resort through SunVesta and/or the hotel
management company
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Fractional Interest Market - Key Findings
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Industry Size (from Fractional Interest Report by NorthCourse Leisure
Real Estate Solutions)
As of March
2005, some 170 fractional interest resorts that had begun sales prior to December 31, 2004
have been identified. The majority of fractional resorts are located in the U.S. (142),
followed by Canada (16), Mexico (5), the Caribbean (4) and three in other locations. These
counts include only significant offerings, and not properties with only a handful of units.
Also excluded in this count are “destination clubs”, as defined in a following
section.
Fractional
interest resorts may be arbitrarily classified by aggregate retail sales price per unit,
including 93 resorts in the “traditional fractional interest” tier at less than
$500 per square foot, 40 in the “high-end fractional” (HFI’s) tier at
$500 to $999 per square foot, and 37 “Private Residence Clubs” (PRC’s)
with $1,000 or higher per square foot. HFI’s and PRC’s have shown particularly
strong growth in recent years. Among the 72 identified fractional resorts in active sales
during 2004, 16 were traditional fractional interests, 27 were HFI’s, and 29 were
PRC’s.
Fractional
interest resorts in active sales during 2004 offered approximately 2,195 units. Half of
these units were offered in PRC’s resorts (52.2%).
Fractional
interest sales totaled approximately $1,075 million worldwide during 2004. Included in the
total are $625 million in developer sales volume of fractional interests and $450 million
in sales volume of destination clubs. This represents a substantial increase to 2003, when
fractional interest developers sold an estimated $373 million in new fractional interests
and destination clubs sold $140 million in memberships. A continuous market growth of over
30% per year (average) is expected for the next 10 years.
In addition
to the above $1,075 million, $31.5 million of resales and $436.7 million of presales were
generated in the 2004 for a grand total of over $1.5 billion.
Product (from Fractional Interest Report by NorthCourse Leisure Real
Estate Solutions)
Fractional
interest resorts exist in four primary types of destinations – ski (52%), golf (23%),
beach (20%) and urban (3%).
Fractional
interest share sizes range from 1/25 (two weeks of annual ownership) to 1/4 (13 weeks of
annual ownership). Among other resorts actively selling in 2004, the average size of
traditional fractionals was 1/5, which equates to 9 or 10 weeks of annual ownership. HFI
and PRC resorts tended towards smaller fractions, averaging 1/7 and 1/8 shares respectively
(6 to 8 weeks of annual ownership).
The average
price of a fractional interest was $221,600 in 2004, up from an average of $207,800 in
2003. Prices at PRC resorts averaged $247,000 per fraction, HFI’s $165,000 per
fraction and traditional fractional interests $99,200 per fraction. Prices are expected to
increase at the same rate for the coming years.
Maintenance
fees average $285 per week of annual use for traditional fractional interests, $830 for
HFI’s and $1,430 for PRC’s. Fees vary significantly by unit size, resort
features, and other characteristics.
The most
common reservation methods are rotating priority systems (owners select their choice of
weeks based on rotating priority) and rotating calendar systems (weeks assigned each owner
change on a pre-determined basis).
One bedroom
units are most common at traditional fractional resorts, while two-bedroom units are most
common at HFI and PRC resorts. Among other resorts selling in 2004, traditional fractional
units averaged 1,670 square feet, HFI’s 2,500 square feet, and PRC’s 1,740
square feet. PRC units tend to be smaller than HFI units due to locations featuring
exceptionally high land values and/or construction costs.
Seven out
of ten active fractional resorts reports affiliation with an external exchange company. In
addition, many resorts offer internal exchange through a club or private relationship
between independent developers. Rental and resale programs are offered by more than half of
all active resorts.
HFI
and PRC Owners (from Fractional Interest Report by NorthCourse Leisure Real Estate
Solutions)
HFI and PRC
owners tend to be married empty-nesters in their mid to earlier fifties. Owners are very
affluent, as 45.4% report a household income of $500,000 or more. Many hold membership in a
country club (55%), and own some other form of vacation property in addition to their
fractional interest.
The vast
majority of owners report being satisfied with their fractional interest (92.7%). This
includes 71.2% that are “very” satisfied and 21.5% that are
“somewhat” satisfied. In addition more than 9 out of 10 owners either already
have recommended fractional ownership to a friend or relative, or are willing to do
so.
The most
important purchase motivations, as reported by owners are: (1) location of the resort; (2)
quality of finishes and furnishings; and (3) extent of on-site amenities and activities.
The most important purchase hesitations are: (1) worry that they may not always receive
their preferred time or home; (2) concerns about ability to resell; and (3) annual dues and
maintenance fees.
Partners
Brues Y
Fernandez
The Company
entered into a contract in March of 2007 with the Spanish construction company Brues Y
Fernandez which contract contains a non-binding commitment to build the complete project
and to supply part of the financing for the construction.
The Brues Y
Fernandez Group is the general construction contractor for the project in Costa Rica. Its
international experience is combined by personal commitment reflected in the willingness to
share in the construction financing and contribute liability capital to obtain construction
loans. The Brues Y Fernandez Group has substantial international experience, particularly
in South America. As with all the cooperation partners, it has experience in similar
projects and a wide range of references guaranteeing services of the highest
quality.
Wimberly
Allison Tong & Goo
The Company
is currently in midst of the project development. We were able to contract the
world’s leading corporations for design, development and management for luxury Hotels
and Resorts
Wimberly
Allison Tong & Goo is an international architect firm based in England and the United
States and will be taking on general architectural responsibility for the Costa Rica
project. Over the last 50 years, Wimberly Allison Tong & Goo has established itself as
leading design consultant and developer in the hospitality, leisure and entertainment
industries with project experience in over 130 countries. Apart from various awards and
prizes for international architectural services, the firm can boast highly regarded
projects in the field of hospitality realization that amply demonstrate both its high
creative and technical competence.
Gettys
Gettys is a
global design firm specializing in interior design, interior architecture and procurement
services for the hospitality industry, headquartered in Chicago, Illinois with offices in
Miami, Irvine, and Hong Kong.
With nearly
twenty years of experience in hotel design, Gettys is committed to providing sustainable
design, an extensive portfolio of projects represents a diverse selection of hotel design
and resort design project– from the Americas to the Caribbean and Asia - with
complex architecture, notable surroundings, and subtle project nuances makes Gettys an
ideal, seasoned partner on any hospitality design project
The Hotel
of Tomorrow (H.O.T.) Project is a groundbreaking initiative of Gettys. An exclusive
think-tank, the H.O.T. Project seeks to conceptualize the future of the hospitality
industry and foster the spirit of innovation through collaboration.
Ossenbach Pendones & Bonilla S.A.
As the
operative architect firm in Costa Rica, Ossenbach Pendones & Bonilla S. A. is locally
responsible for implementing Wimberly Allison Tong & Goo's plans. The Company is
pleased to have signed up Ossenbach Pendones & Bonilla S. A., in particular Mr. C.
Ossenbach, because this architect firm with its 30-year track record has already completed
such projects as a cooperation partner for an internationally recognized agency and enjoys
an outstanding reputation in its own country.
Amstein
+ Walthert AG
The
engineering company Amstein + Walthert AG will be responsible for installing the
high-performance building plant and in addition act as the quality controller for the Costa
Rica resort and no doubt in future projects as well. Amstein + Walthert AG is one of the
largest engineering companies in Switzerland; internationally awarded and renowned for its
outstanding engineering services, which cover practically every aspect of construction
including solar energy, geothermal energy and building plant.
Isselbaecher Food Service Equipment GmbH
Isselbaecher Food Service Equipment GmbH will be responsible for kitchen
planning and construction in the Costa Rica project, but probably also for other projects
to follow. This is such a crucial issue that the Company is not prepared to put it in the
hands of architects or general contractors, but wants to avail itself of the expertise of a
specialist so that the demands of an international 5-star plus hotel operator can be
satisfied. Since 1970, Isselbaecher Food Service Equipment GmbH has been the outstanding
and competent contact worldwide for planning and implementing large-kitchen projects of all
kinds, such as in hotels, restaurants, bistros, schools and universities and also hospitals
etc.; a long reference list underscores the required experience.
Montejo
& Associates
The law
firm Montejo & Associates has been engaged by the Company to handle all the legal
aspects in conjunction with the acquisition of the site in Costa Rica and its development,
in particular with respect to the envisaged use of running a hotel and also the commercial
prominence of the project. Montejo & Associates is further contracted to support the
Company in obtaining building permission.
Montejo
& Associates was established in 1987, and is primarily devoted to real estate matters.
The owner, Andr?s Montejo, is an attorney-at-law and notary public and was a President of
the National Housing and Urban Development Institute. Apart from that, he taught property
and ownership law (for over ten years) as
a professor
at the University of Costa Rica. The law firm specializes and has proven expertise in the
areas of importance for the Company: Residential Condominiums, Urban Development, Tourist
Development, Tourist Concessions, Marine Costal Zone, Mortgages, Property Purchase, Houses
and Buildings, Negotiation, Due Diligence, Property Survey, Purchase-Sale Agreements,
Escrow Services, Title Transfers and Guaranties.
Tourist Demographics – Costa Rica
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Between 1998 and 2005 the number of tourists visiting Costa
Rica has almost doubled.
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Costa Rica is being considered as one of the most attractive
tourism destinations worldwide.
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The demand for new hotel rooms is increasing per year by a
minimum of 4%.
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The yearly growth of Costa Rica’s tourism industry is
6.6%.
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The “Plan Nacional de Turismo” (2002 –
2012) is expecting an average of 2.5 million tourists and an additional
demand for accommodation facilities of 49,000 rooms by 2012 (2005:
32,000).
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Over 60% of tourists’ come from the U.S. and Canada.
The balance comes from Europe (approx. 30%), South America and the
Caribbean (10%).
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Marketing and Advertising Methods
The Company
intends to recruit or mandate third party expertise to help marketing and selling our
hospitality related products. Our biggest effort will be focused on the marketing and sale
of fractional interests in the Papagayo Princess Resort & Spa Hotel. Professional
support for this endeavor is currently being evaluated and once a marketing partner is
appointed remuneration will primarily be based on success.
Competition
Efforts to
establish an affiliation of luxury tourist real estate developments that offer fractional
ownership are fragmented and very competitive. Although we do not believe that we will
compete directly with any other programs due to our novel approach, we do believe that we
will compete indirectly with a number of companies, both private and public, that are
active in developing and promoting fractional ownership in tourist destinations. Many of
these competitors, such as “Exclusive Resorts”, “Four Seasons” and
“St. Regis” are substantially larger and better funded than we are with
significantly longer histories of real estate development. Nonetheless, we believe that
competition in the development of luxury real estate properties that cater to the
hospitality industry is based principally on the following factors:
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the location of the development;
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the level of service offered;
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the terms of fractional ownership offered;
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the preferential treatment of clients; and
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the reputation of the business.
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We
anticipate that, as our business develops, we will respond successfully to these
considerations.
Further, we
believe that we have certain distinctive competitive advantages over all or many of our
competitors that will enable us to progress the development of our plan of operation. The
advantages include:
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the location of its initial Costa Rican project;
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environmental integrity; and
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the willingness of our project managers to consider joint
venture relationships with third parties to maximize resources in real
estate development.
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All of
these factors in combination with the dedication of our personnel will enable us to be
competitive in offering fractional ownership of luxury real estate dedicated to the
hospitality industry.
Marketability
The
products to be sold by the Company, fractional ownership interests in luxury real estate
and private club memberships within the hospitality industry, are purchased by a diverse
array or buyers within an established market place. The market for fractional ownership
opportunities can be sourced on a worldwide basis. Fractional interest sales totaled
approximately $1,075 million worldwide during 2004. Included in the total are $625 million
in developer sales volume of fractional interests and $450 million in sales volume of
destination clubs. This represents a substantial increase over 2003, when fractional
interest developers sold an estimated $373 million in new fractional interests and
destination clubs sold $140 million in memberships. A continuous market growth of over 30%
per year (average) is expected for the next 10 years.
Patents, Trademarks, Licenses, Franchises, Concessions, Royalty
Agreements and Labor Contracts
The Company
currently has registered its “SunVesta” trademark in various
countries.
Governmental and Environmental Regulation
The
Company’s operations are subject to a variety of national, federal, state and local
laws, rules and regulations relating to, among other things, worker safety and the use,
storage, discharge and disposal of environmentally sensitive materials.
We believe
that we are in compliance in all material respects with all laws, rules, regulations and
requirements that affect our business. Further, we believe that compliance with such laws,
rules, regulations and requirements do not impose a material impediment on our ability to
conduct business.
Employees
The Company
is a development stage company and currently has 5 employees. Our management uses
consultants, attorneys, and accountants to assist in the conduct of our business
Reports to Security Holders
The
Company’s annual report contains audited financial statements. We are not required to
deliver an annual report to security holders and will not automatically deliver a copy of
the annual report to our security holders unless a request is made for such delivery. We
file all of our required reports and other information with the Securities and Exchange
Commission (the “Commission”). The public may read and copy any materials that
are filed by the Company with the Commission at the Commission’s Public Reference
Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information
on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330.
The statements and forms filed by us with the Commission have also been filed
electronically and are available for viewing or copying on the Commission maintained
Internet site that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the Commission. The Internet
address for this site can be found at
http://www.sec.gov.
The
Company’s operations and securities are subject to a number of risks. Below we have
identified and discussed the material risks that we are likely to face. Should any of the
following risks occur, they will adversely affect our operations, business, financial
condition and/or operating results as well as the future trading price and/or the value of
our securities.
Risks
Related to the Company’s Business
The
Company’s limited operating history; anticipated losses; uncertainly of future
results.
The Company
has no operating history upon which an evaluation of our business prospects can be based.
Rather, the Company’s prospects must be evaluated with a view to the risks
encountered by a company in an early stage of development, particularly in light of the
uncertainties relating to the acceptance of its business model.
We will be
incurring costs to develop our luxury real estate and hospitality business. There can be no
assurance that we will be profitable on a quarterly or annual basis. In addition, as we
expand our business operations we will likely need to increase our operating expenses and
increase our administrative resources. To the extent that such expenses are not
subsequently followed by commensurate revenues, our business results of operations and
financial condition would be materially adversely affected.
The
Company has a historical record of losses which may continue.
The Company
reported cumulative operating losses from January 1, 2005 (date of inception of development
stage) until December 31, 2007 of $7,295,409. The historical record indicates that we have
not realized revenue from our efforts and cannot provide us with any certainty that revenue
is forthcoming or that revenue would be sufficient to support operations. The sum of these
indicators creates uncertainty as to whether we will ever transition from losses to
profits. Should we continue to incur losses we would be unable to meet our working capital
requirements which inability would stifle operations.
Need
for additional financing.
The Company
has no revenue from operations and therefore is not able to meet operating costs. As such,
we will need to raise capital within the next twelve months to implement our plan of
operation. However, there can be no assurance that we will be able to raise the required
capital or that any capital raised will be obtained on favorable terms. Failure to obtain
adequate capital would significantly curtail the Company’s business.
Unpredictability of future revenues; potential fluctuations in the
Company’s operating results.
Since we
have no history of generating revenues within the niche luxury real estate market in which
we intend to compete, we are unable to forecast revenues accurately. Our current and future
expense levels are based largely on our own investment/operating plans and estimates of
future revenue. The Company may be unable to adjust spending to compensate for any
unexpected revenue shortfall or delay. Accordingly, any significant shortfall or delay in
revenue in relation to our planned expenditures would have an immediate adverse affect on
the Company’s business, financial condition, and results of operations.
Dependence on key personnel.
Our
performance and operating results are substantially dependent on the continued service and
performance of our managers, officers, and directors. We intend to hire additional
management personnel as we move forward with our business model. Competition for such
personnel is intense, and there can be no assurance that we will be able to retain our key
management employees, or that we will be able to attract or retain highly qualified
technical personnel in the future. The loss of the services of any of our key employees or
the inability to attract and retain the necessary management personnel could have a
material adverse effect upon the Company’s business.
Unproven acceptance of the Company’s approach to offering
fractional ownership of luxury real estate.
Although
the concept of fractional ownership of luxury real estate is not new to the hospitality
industry, our plan of operation incorporates proven traditional elements of fractional
ownership with unproven concepts yet to be offered. As a result, we do not know with any
certainty whether our services and/or products will be accepted within the hospitality
marketplace. If our services and/or products prove to be unsuccessful within the
marketplace, such failure could materially adversely affect the Company’s financial
condition, operating results, and cash flows.
Risks
Related to the Company’s Stock
The
market for our stock is limited and our stock price may be volatile.
The market
for our common stock has been limited due to low trading volume and the small number of
brokerage firms acting as market makers. Because of the limitations of our market and
volatility of the market price of our stock, investors may face difficulties in selling
shares at attractive prices when they want to. The average daily trading volume for our
stock has varied significantly from week to week and from month to month, and the trading
volume often varies widely from day to day.
The
Company does not pay cash dividends.
The Company
does not pay cash dividends. We have not paid any cash dividends since inception and have
no intention of paying any cash dividends in the foreseeable future. Any future dividends
would be at the discretion of our board of directors and would depend on, among other
things, future earnings, our operating and financial condition, our capital requirements,
and general business conditions. Therefore, shareholders should not expect any type of
cash flow from their investment.
We
incur significant expenses as a result of being quoted on the Over the Counter Bulletin
Board, which may negatively impact our financial performance.
We incur
significant legal, accounting and other expenses as a result of being listed on the Over
the Counter Bulletin Board. The Sarbanes-Oxley Act of 2002, as well as related rules
implemented by the Commission, has required changes in corporate governance practices of
public companies. We expect that compliance with these laws, rules and regulations,
including compliance with Section 404 of the Sarbanes-Oxley Act of 2002 as discussed in the
following risk factor, may substantially increase our expenses, including our legal and
accounting costs, and make some activities more time-consuming and costly. As a result,
there may be a substantial increase in legal, accounting and certain other expenses in the
future, which would negatively impact our financial performance and could have a material
adverse effect on our results of operations and financial condition.
Our
internal controls over financial reporting may not be considered effective in the future,
which could result in a loss of investor confidence in our financial reports and in turn
have an adverse effect on our stock price.
Pursuant to
Section 404 of the Sarbanes-Oxley Act of 2002 we are required to furnish a report by our
management on our internal controls over financial reporting. Such report must contain,
among other matters, an assessment of the effectiveness of our internal controls over
financial reporting as of the end of the year, including a statement as to whether or not
our internal controls over financial reporting are effective. This assessment must include
disclosure of any material weaknesses in our internal controls over financial reporting
identified by management. If we are unable to continue to assert that our internal controls
are effective, our investors could lose confidence in the accuracy and completeness of our
financial reports, which in turn could cause our stock price to decline.
The
Company’s shareholders may face significant restrictions on their
stock.
The
Company’s stock differs from many stocks in that it is a “penny stock.”
The Commission has adopted a number of rules to regulate “penny stocks”
including, but not limited to, those rules from the Securities Act as follows:
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3a51-1
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which defines penny stock as, generally speaking, those
securities which are not listed on either NASDAQ or a national securities
exchange and are priced under $5, excluding securities of issuers that have
net tangible assets greater than $2 million if they have been in operation
at least three years, greater than $5 million if in operation less than
three years, or average revenue of at least $6 million for the last three
years;
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15g-1
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which outlines transactions by broker/dealers which are
exempt from 15g-2 through 15g-6 as those whose commissions from traders are
lower than 5% total commissions;
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15g-2
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which details that brokers must disclose risks of penny
stock on Schedule 15G;
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15g-3
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which details that broker/dealers must disclose quotes and
other information relating to the penny stock market;
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15g-4
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which explains that compensation of broker/dealers must be
disclosed;
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15g-5
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which explains that compensation of persons associated in
connection with penny stock sales must be disclosed;
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15g-6
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which outlines that broker/dealers must send out monthly
account statements; and
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15g-9
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which defines sales practice requirements.
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Since the
Company’s securities constitute a “penny stock” within the meaning of the
rules, the rules would apply to us and our securities. Because these rules provide
regulatory burdens upon broker-dealers, they may affect the ability of shareholders to sell
their securities in any market that may develop; the rules themselves may limit the market
for penny stocks. Additionally, the market among dealers may not be active. Investors in
penny stock often are unable to sell stock back to the dealer that sold them the stock. The
mark-ups or commissions charged by the broker-dealers may be greater than any profit a
seller may make. Because of large dealer spreads, investors may be unable to sell the stock
immediately back to the dealer at the same price the dealer sold the stock
to the investor. In some cases, the stock may fall quickly in value. Investors may be
unable to reap any profit from any sale of the stock, if they can sell it at
all.
Shareholders should be aware that, according to Commission
Release No. 34-29093 dated April 17, 1991, the market for penny stocks has suffered
from patterns of fraud and abuse. These patterns include:
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control of the market for the security by one or a few
broker-dealers that are often related to the promoter or issuer;
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manipulation of prices through prearranged matching of
purchases and sales and false and misleading press releases;
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