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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, 2004
000-1084133
(Commission File Number)
BLUETORCH 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)
12607 HIDDEN CREEK WAY, SUITE S, CERRITOS, CA 90703
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(Address of Principal Executive Offices) (Zip Code)
562-623-4040
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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
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Check whether the issuer (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. [X]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S 8 is not contained in this form, and no disclosure will 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. [X]
The issuer's revenues for the Fiscal Year ended December 31, 2004 were $-0-. 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 December 31, 2004,
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 $2,054,506.
As of March 31, 2005, there were 542,961,709 shares of the issuer's common stock
issued and outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
TABLE OF CONTENTS
Page
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PART I
ITEM 1: DESCRIPTION OF BUSINESS 2
ITEM 2: DESCRIPTION OF PROPERTY 9
ITEM 3: LEGAL PROCEEDINGS 9
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 9
PART II
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 9
ITEM 6: SELECTED FINANCIAL DATA 10
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10
ITEM 7A: QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK 13
ITEM 8: FINANCIAL STATEMENTS 14
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES 33
ITEM 9A: CONTROLS AND PROCEDURES 33
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS 34
ITEM 11: EXECUTIVE COMPENSATION 35
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 36
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 37
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES 40
ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 41
SIGNATURES
All shares and per share numbers for the Company's common stock set forth in
this Annual Report give effect to a forward three-for-one (3-for-1) stock split
which took effect on April 7, 2003 and a forward five for one (5-for-1) stock
split which took effect on May 27, 2003.
Statements contained in this Annual Report that are not historical facts are
forward looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are subject to
risks and uncertainties, which could cause actual results to differ materially
from estimated results. Such risks and uncertainties are detailed in filings
with the Securities and Exchange Commission, including without limitation in
Item 1: "Description of Business" and Item 7: Management's Discussion and
Analysis and Financial Condition and Results of Operations below.
PART I
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ITEM 1: DESCRIPTION OF BUSINESS
A. GENERAL
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Bluetorch Inc. (the "Company" or "Bluetorch"), a Nevada corporation, was
incorporated on January 29, 1997. The Company's original name was Mercury
Software and its name was changed to MedEx Corp. on June 24, 2002; then the
Company's name was changed to Aussie Apparel Group, Ltd. on October 21, 2002 and
then to Bluetorch Inc. on November 3, 2003.
The Company has elected to be regulated as a business development company
("BDC") under the Investment Company Act of 1940. See "Certain Government
Regulations" (see section F below).
The Company's principal office is located at 12607 Hidden Creek Way, Suite S,
Cerritos, CA 90703. The telephone number is (562) 623-4040.
Forward Looking Statements
This Annual Report contains forward-looking statements. The Company's
expectation of results and other forward-looking statements contained in this
Annual Report involve a number of risks and uncertainties. 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.
B. OVERVIEW
Bluetorch Inc. is a public investment company that currently owns two wholly
owned subsidiary companies, Unboxed Distribution, Inc. ("Unboxed") and Total
Sports Distribution, Inc. ("Total Sports") and a 51% interest in Island Tribe,
Inc. ("Island Tribe").
The Company signed an acquisition agreement in December 2002 with
Australian-based Federation Group for the Hot Tuna, Xisle and Piranha Boy
brands. (Refer to Item 13: "Certain Relationships and Related Transactions").
Bluetorch then spent most of 2003 and the early part of 2004 restructuring its
portfolio of apparel brands.
The Company rescinded its 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, the Company changed its name from
Aussie Apparel Group Ltd. to Bluetorch Inc. in recognition of this brand
restructuring and its move away from its original portfolio of Australian
brands. The Company had replaced the intended portfolio of brands of Hot Tuna,
Xisle and Piranha Boy with other brands including Bluetorch, True Skate Apparel
(TSABrand), Airwalk and Island Tribe.
Bluetorch became a business development company ("BDC") on June 19, 2003 in
order to better align its structure in terms of raising capital and its ability
to make investments
In September 2003, Unboxed signed a licensing agreement (with option to acquire)
with Gotcha Brands, Inc. for the Bluetorch label. (Refer to Item 13: "Certain
Relationships and Related Transactions").
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. (Refer to Item 13: "Certain
Relationships and Related Transactions").
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. (Refer to Item 13: "Certain Relationships and Related
Transactions").
In accordance with a Stock Purchase Agreement dated August 20, 2004, the Company
purchased, via the issuance of its restricted common stock, a 51% interest in
Island Tribe Inc. ("Island Tribe"), a surf apparel company. The value of this
investment is $372,000, with 30,000,000 restricted common shares in Bluetorch
Inc. being issued at a per-share price of $0.0124. The effective date of this
transaction is August 1, 2004. Over the next 4 years, this purchase agreement
provides for the Company to receive an additional 24% ownership of Island Tribe,
Inc. The Company is obligated to pay certain royalties/commissions on future
sales of Island Tribe product.
C. FUTURE MARKET
The Company's management team and board of directors have spent the past few
months reviewing all aspects of the business, specifically the business model
and the best opportunities for corporate success. The underlying objective of
this review was to ensure that the Company pursued a business strategy that was
in the best interests of the shareholders. As a result, it has been determined
that, as an investment company, the Company will only invest in/acquire cash
flow positive and profitable businesses. It is anticipated that these entities
will have good growth potential as a result of access to additional capital
and/or additional management acumen.
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As part of this strategic process, the Company will look beyond action sports
apparel for acquisition opportunities so as to include all apparel and footwear
businesses as well as entities in other consumer product categories that have
the potential for a positive return on investment. It is believed that this new
direction will provide the best opportunity for long-term shareholder value.
Regarding two of the Company's subsidiaries, Total Sports Distribution, Inc. and
Unboxed Distribution, Inc., it is clear that profitability in both entities is
not possible in the near future. Subsequent to December 31, 2004, the Company
has signed Mutual Settlement and Release Agreements to cease the licensing
agreements with the licensors for the Airwalk and Bluetorch labels. There were
significant future guaranteed royalty amounts payable by the Company in
accordance with the existing licensing agreements of these two subsidiaries and
so it was in the best interests of the Company to mitigate our potential losses.
Accordingly, it has been determined that it is not in the best interests of the
Company's shareholders to continue the flow of capital to these two subsidiaries
and that these investments be written-off as of December 31, 2004.
We will, however, continue to fund and invest in Island Tribe, Inc., a
subsidiary in which we own 51% of the issued common stock.
As a result of the above strategy, we will also rename the investment company,
presently Bluetorch Inc., to accurately reflect the new direction we are taking
and the reality that we will no longer be selling Bluetorch branded apparel
through Unboxed Distribution, Inc. (Refer to Item 8: "Financial Statements").
D. MANAGEMENT & STAFFING
Mark Connors, President of Total Sports Distribution, Inc., joined the
management team in 2004. Having managed the Southeast region for Reebok and
producing $180 million in sales, Mark was also a regional sales Director for
Avia and was the former CEO of Spenco.
Bernard Gurr, the Company's Chief Financial Officer since August 2004
(replacing Scott Battenburg), was a finance executive for the 1994 soccer World
Cup in Los Angeles and a former Chief Executive Officer of one of Australia's
top professional rugby clubs.
Domingo Clemente is the founder and President of Island Tribe, Inc.
E. SALES
For the year-ended December 31, 2004, total sales of the three (3) subsidiary
portfolio companies is $182,778 (unaudited). The sales for Island Tribe, Inc.
only include sales for the period from August 1, 2004 (date of investment by
Bluetorch) to December 31, 2004.
F. CERTAIN GOVERNMENT REGULATIONS
We operate in a highly regulated environment. The following discussion generally
summarizes certain government regulations.
BUSINESS DEVELOPMENT COMPANY. A business development company ("BDC") is defined
and regulated by the Investment Company Act of 1940 (the "1940 Act"). A business
development company must be organized in the United States for the purpose of
investing in or lending to primarily private companies and making managerial
assistance available to them. A business development company may use capital
provided by public shareholders and from other sources to invest in long-term,
private investments in businesses. A business development company provides
shareholders the ability to retain the liquidity of a publicly traded stock,
while sharing in the possible benefits, if any, of investing in primarily
privately owned companies.
As a business development company, we may not acquire any asset other than
"qualifying assets" unless, at the time we make the acquisition, the value of
our qualifying assets represent at least 70% of the value of our total assets.
The principal categories of qualifying assets relevant to our business are:
- - Securities purchased in transactions not involving any public offering, the
issuer of which is an eligible portfolio company;
- - Securities received in exchange for or distributed with respect to securities
described in the bullet above or pursuant to the exercise of options, warrants
or rights relating to such securities; and
- - Cash, cash items, government securities or high quality debt securities
(within the meaning of the 1940 Act), maturing in one year or less from the time
of investment.
An eligible portfolio company is generally a domestic company that is not an
investment company (other than a small business investment company wholly owned
by a business development company); and
- - Does not have a class of securities registered on an exchange or a class of
securities with respect to which a broker may extend margin credit;
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- - Is actively controlled by the business development company and has an
affiliate of a business development company on its board of directors.
To include certain securities described above as qualifying assets for the
purpose of the 70% test, a business development company must make available to
the issuer of those securities significant managerial assistance such as
providing significant guidance and counsel concerning the management,
operations, or business objectives and policies of a portfolio company or making
loans to a portfolio company. We offer to provide managerial assistance to each
of our portfolio companies.
As a business development company, we are entitled to issue senior securities in
the form of stock or senior securities representing indebtedness, including debt
securities and preferred stock, as long as each class of senior security has
asset coverage of at least 200% immediately after each such issuance. (Refer to
section H: "Risk Factors").
We may also be prohibited under the 1940 Act from knowingly participating in
certain transactions with our affiliates without the prior approval of our board
of directors who are not interested persons and, in some cases, prior approval
by the SEC.
We are periodically examined by the SEC for compliance with the 1940 Act. As
with other companies regulated by the 1940 Act, a business development company
must adhere to certain substantive regulatory requirements. A majority of our
directors must be persons who are not interested persons, as that term is
defined in the 1940 Act. Additionally, we are required to provide and maintain a
bond issued by a reputable fidelity insurance company to protect us against
larceny and embezzlement. Furthermore, as a business development company, we are
prohibited from protecting any director or officer against any liability to the
Company or our shareholders arising from willful malfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of such
person's office.
We maintain a code of ethics that establishes procedures for personal investment
and restricts certain transactions by our personnel. Our code of ethics
generally does not permit investment by our employees in securities that may be
purchased or held by us. The code of ethics is filed as an exhibit to our
registration statement, which is on file at the SEC. You may read and copy the
code of ethics at the SEC's Public Reference Room in Washington, D.C. You may
obtain information on operations of the Public Reference Room by calling the SEC
at (202) 942-8090. In addition, the code of ethics is available on the EDGAR
Database on the SEC Internet site at http://www.sec.gov. You may obtain copies
of the code of ethics, after paying a duplicating fee, by electronic request at
the following email address: publicinfo@sec.gov, or by writing to the SEC's
Public Reference Section, 450 5th Street, NW, Washington, D.C. 20549. As a
business development company under the 1940 Act, we are entitled to provide
loans to our employees in connection with the exercise of options. However, as a
result of provisions of the Sarbanes-Oxley Act of 2002, we are prohibited from
making new loans to, or materially modifying existing loans with, our executive
officers in the future.
We may not change the nature of our business so as to cease to be, or withdraw
our election as, a business development company unless authorized by vote of a
"majority of the outstanding voting securities," as defined in the 1940 Act, of
our shares. A majority of the outstanding voting securities of a company is
defined under the 1940 Act as the lesser of: (i) 67% or more of such company's
shares present at a meeting if more than 50% of the outstanding shares of such
company are present and represented by proxy or (ii) more than 50% of the
outstanding shares of such company. Since we made our business development
company election, we have not made any substantial change in the nature of our
business.
We fund new investments using cash, through the issuance of our common equity,
the reinvestment of previously accrued interest and dividends in debt or equity
securities, or the current reinvestment of interest and dividend income through
the receipt of a debt or equity security (payment-in-kind income). From time to
time, we may also opt to reinvest accrued interest receivable in a new debt or
equity.
VALUATION METHODOLOGY. We determine the value of each investment in our
portfolio on a quarterly basis, and changes in value result in unrealized gains
or losses being recognized. At December 31, 2004, approximately 72% of our total
assets represented portfolio investments recorded at fair value. Value, as
defined in Section 2(a)(41) of the Investment Company Act of 1940, 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 the board of directors. Since there is typically no
readily ascertainable market value for the investments in our portfolio, we
value substantially all of our portfolio investments at fair value as determined
in good faith by the board of directors pursuant to a valuation policy and a
consistently applied valuation process. Because of the inherent uncertainty of
determining the fair value of investments that do not have a readily
ascertainable market value, the fair value of our investments determined in good
faith by the board of directors may differ significantly from the values that
would have been used had a ready market existed for the investments, and the
differences could be material.
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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 while employing a
consistently applied valuation process for the types of investments we make.
Unlike banks, we are not permitted to provide a general reserve for anticipated
loan losses. Instead, we are required to specifically value 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 collection of a loan or realization of an equity security is doubtful, or
when the enterprise value of the company does not currently support the cost of
our debt or equity investment. Conversely, we will 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.
Changes in fair value are recorded in the statements of operations as "Gain /
Loss on investments in portfolio companies."
As a business development company, we plan to invest in liquid securities
including debt and equity securities of primarily private companies. The
structure of each private finance debt and equity security will be specifically
negotiated to enable us to protect our investment and maximize our returns. We
include many terms governing interest rate, repayment terms, prepayment
penalties, financial covenants, operating covenants, ownership parameters,
dilution parameters, liquidation preferences, voting rights, and put or call
rights. Our investments are generally subject to restrictions on resale and
generally have no established trading market. Because of the type of investments
that we make and the nature of our business, our valuation process requires an
analysis of various factors. Our fair value methodology includes the examination
of, among other things, the underlying investment performance, financial
condition and market changing events that impact valuation.
Valuation Methodology - Private Finance. Our process for determining the fair
value of a private finance investment begins with determining the enterprise
value of the portfolio company. The fair value of our investment is based on the
enterprise value at which the portfolio company could be sold in an orderly
disposition over a reasonable period of time between willing parties other than
in a forced or liquidation sale. The liquidity event whereby we exit a private
finance investment is generally the sale, the recapitalization or, in some
cases, the initial public offering of the portfolio company.
There is no one methodology to determine enterprise value and, in fact, for any
one-portfolio company, enterprise value is best expressed as a range of fair
values, from which we derive a single estimate of enterprise value. To determine
the enterprise value of a portfolio company, we analyze its historical and
projected financial results. We generally require portfolio companies to provide
annual audited and monthly unaudited financial statements, as well as annual
projections for the upcoming fiscal year. Typically in the private equity
business, companies are bought and sold based upon multiples of EBITDA, cash
flows, net income, revenues or, in limited instances, book value. The private
equity industry uses financial measures such as EBITDA or EBITAM (Earnings
Before Interest, Taxes, Depreciation, Amortization and, in some instances,
Management fees) in order to assess a portfolio company's financial performance
and to value a portfolio company. EBITDA and EBITAM are not intended to
represent cash flow from operations as defined by accounting principles
generally accepted in the United States of America and such information should
not be considered as an alternative to net income, cash flow from operations, or
any other measure of performance prescribed by accounting principles generally
accepted in the United States of America. When using EBITDA to determine
enterprise value, we may adjust EBITDA for non-recurring items. Such adjustments
are intended to normalize EBITDA to reflect the portfolio company's earnings
power. Adjustments to EBITDA may include compensation to previous owners,
acquisition, recapitalization, or restructuring related items or one-time
non-recurring income or expense items.
In determining a multiple to use for valuation purposes, we look to private
merger and acquisition statistics, discounted publicly trading multiples or
industry practices. In estimating a reasonable multiple, we consider not only
the fact that our portfolio company may be a private company relative to a peer
group of public comparables, but we also consider the size and scope of our
portfolio company and its specific strengths and weaknesses. In some cases, the
best valuation methodology may be a discounted cash flow analysis based on
future projections. If a portfolio company is distressed, a liquidation analysis
may provide the best indication of enterprise value.
COMPLIANCE WITH THE SARBANES-OXLEY ACT OF 2002 AND NYSE CORPORATE GOVERNANCE
REGULATIONS. On July 30, 2002, President Bush signed into law the Sarbanes-Oxley
Act of 2002 (the "Sarbanes-Oxley Act"). The Sarbanes-Oxley Act imposes a wide
variety of new regulatory requirements on publicly-held companies and their
insiders. Many of these requirements will affect us. For example:
- - Our chief executive officer and chief financial officer must now certify the
accuracy of the financial statements contained in our periodic reports;
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- - Our periodic reports must disclose our conclusions about the effectiveness of
our disclosure controls and procedures;
- - Our periodic reports must disclose whether there were significant changes in
our internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses; and
- - We may not make any loan to any director or executive officer and we may not
materially modify any existing loans.
The Sarbanes-Oxley Act has required us to review our current policies and
procedures to determine whether we comply with the Sarbanes-Oxley Act and the
new regulations promulgated thereunder. We will continue to monitor our
compliance with all future regulations that are adopted under the Sarbanes-Oxley
Act and will take actions necessary to ensure that we are in compliance
therewith.
G. CODE OF ETHICS, AUDIT COMMITTEE CHARTER AND INVESTMENT COMMITTEE CHARTER
The board of directors of the Company adopted a Code of Ethics, and Audit
Committee Charter and an Investment Committee Charter, all effective as of
August 27, 2003.
The Code of Ethics in general prohibits any officer, director or advisory person
(collectively, "Access Person") of the Company from acquiring any interest in
any security which the Company (i) is considering a purchase or sale thereof,
(ii) is being purchased or sold by the Company, or (iii) is being sold short by
the Company. The Access Person is required to advise the Company in writing of
his or her acquisition or sale of any such security.
The primary responsibility of the Audit Committee is to oversee the Company's
financial reporting process on behalf of the Company's Board of Directors and
report the result of their activities to the Board. Such responsibilities shall
include, but shall not be limited to, the selection and, if necessary, the
replacement of the Company's independent auditors and review and discussion with
such independent auditors of (i) the overall scope and plans for the audit, (ii)
the adequacy and effectiveness of the accounting and financial controls,
including the Company's system to monitor and manage business risks, and legal
and ethical programs, and (iii) the results of the annual audit, including the
financial statements to be included in the Company's annual report on Form 10-K.
Shane Traveller, an independent director, had been designated the Audit
Committee's "financial expert"; Mr. Traveller resigned as a director on March
11, 2005 and Kenneth Wiedrich was appointed as an independent director. Mr.
Wiedrich will now be designated the Audit Committee's "financial expert".
The Investment Committee shall have oversight responsibility with respect to
reviewing and overseeing the Company's contemplated investments and portfolio
companies and investments on behalf of the Board and shall report the results of
their activities to the Board. Such Investment Committee shall (i) have the
ultimate authority for and responsibility to evaluate and recommend investments,
and (ii) review and discuss with management (a) the performance of portfolio
companies, (b) the diversity and risk of the Company's investment portfolio,
and, where appropriate, make recommendations respecting the role or addition of
portfolio investments and (c) all solicited and unsolicited offers to purchase
portfolio companies.
The members of the Audit Committee and the Investment Committee are Read Worth
and Kenneth Wiedrich, both independent directors of the Company.
H. RISK FACTORS
Investing in the Company involves a number of significant risks relating to our
business and investment objective. As a result, there can be no assurance that
we will achieve our investment objective. In addition to the risk factors
described below, other factors that could cause actual results to differ
materially include:
- - The ongoing global economic downturn, coupled with war or the threat of war;
- - Risk associated with possible disruption in our operations due to terrorism;
- - Future regulatory actions and conditions in our operating areas; and
- - Other risks and uncertainties as may be detailed from time to time in our
public announcements and SEC filings.
INVESTING IN PRIVATE COMPANIES INVOLVES A HIGH DEGREE OF RISK. Our portfolio
consists of primarily long-term loans to and investments in private companies.
Investments in private businesses involve a high degree of business and
financial risk, which can result in substantial losses and accordingly should be
considered speculative. There is generally no publicly available information
about the companies in which we invest, and we rely significantly on the
diligence of our employees and agents to obtain information in connection with
our investment decisions. In addition, some smaller businesses have narrower
product lines and market shares than their competition, and may be more
vulnerable to customer preferences, market conditions or economic downturns,
which may adversely affect the return on, or the recovery of, our investment in
such businesses.
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OUR PORTFOLIO OF INVESTMENTS IS ILLIQUID. We generally acquire our investments
directly from the issuer in privately negotiated transactions. The majority of
the investments in our portfolio companies are typically subject to restrictions
on resale or otherwise have no established trading market. We typically exit our
investments when the portfolio company has a liquidity event such as a sale,
recapitalization, or initial public offering of the company. The illiquidity of
our investments may adversely affect our ability to dispose of debt and equity
securities at times when it may be otherwise advantageous for us to liquidate
such investments. In addition, if we were forced to immediately liquidate some
or all of the investments in the portfolio, the proceeds of such liquidation
would be significantly less than the current value of such investments.
Substantially all of our portfolio investments are recorded at fair value as
determined in good faith by our board of directors and, as a result, there is
uncertainty regarding the value of our portfolio investments. At December 31,
2004, approximately 72% of our total assets represented portfolio investments
recorded at fair value. Pursuant to the requirements of the 1940 Act, we value
substantially all of our investments at fair value as determined in good faith
by our board of directors on a quarterly basis. Since there is typically no
readily ascertainable market value for the investments in our portfolio, our
board of directors determines in good faith the fair value of these investments
pursuant to a valuation policy and a consistently applied valuation process.
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 while employing a
consistently applied valuation process for the types of investments we make.
Unlike banks, we are not permitted to provide a general reserve for anticipated
loan losses; we are instead required by the 1940 Act to specifically value each
individual investment on a quarterly basis, and record unrealized depreciation
for an investment that we believe has become impaired, including where
collection of a loan or realization of an equity security is doubtful, or when
the enterprise value of the company does not currently support the cost of our
debt or equity investment. Conversely, we will 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. Without a readily
ascertainable market value and because of the inherent uncertainty of valuation,
the fair value of our investments determined in good faith by the board of
directors may differ significantly from the values that would have been used had
a ready market existed for the investments, and the differences could be
material.
We will adjust quarterly the valuation of our portfolio to reflect the board of
directors' determination of the fair value of each investment in our portfolio.
Any changes in estimated fair value will be recorded in our statements of
operations as "Gain / Loss on investments in portfolio companies."
OUR COMMON STOCK PRICE MAY BE VOLATILE. The trading price of our common stock
may fluctuate substantially. The price of the common stock may be higher or
lower than the price you pay for your shares, depending on many factors, some of
which are beyond our control and may not be directly related to our operating
performance. These factors include the following:
- - Price and volume fluctuations in the overall stock market from time to time;
- - Significant volatility in the market price and trading volume of securities of
business development companies or other financial services companies;
- - Volatility resulting from trading in derivative securities related to our
common stock including puts, calls, long-term equity anticipation securities, or
LEAPs, or short trading positions;
- - Changes in regulatory policies or tax guidelines with respect to business
development companies or regulated investment companies;
- - Actual or anticipated changes in our earnings or fluctuations in our operating
results or changes in the expectations of securities analysts;
- - General economic conditions and trends;
- - Loss of a major funding source; or
- - Departures of key personnel.
Recently, the trading price of our common stock has been volatile. Due to the
continued potential volatility of our stock price, we may be the target of
securities litigation in the future. Securities litigation could result in
substantial costs and divert management's attention and resources from our
business.
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CONVERTIBLE SERIES B PREFERRED STOCK ("SERIES BPS"), 610,000 shares authorized;
190,000 issued and outstanding
The holders of the Series BPS are entitled to receive, at the Company's option,
dividends on the number of shares of Series BPS, which are converted into shares
of Company common stock, at the dividend rate of 6% of the conversion price for
the number of shares converted, payable in cash or in common stock. The dividend
rate is based upon the ten (10) day average of the lowest closing bid price
prior to the date of conversion ("Market Price"). The Series BPS are convertible
into common stock based upon a conversion price equal to the number of shares
being converted divided by 80% of the Market Price described in the preceding
paragraph. All shares of Series B outstanding three (3) years from the date of
issuance shall automatically be converted into common stock based upon the
foregoing formula.
Series BPS have preferred treatment upon liquidation of the Company.
Series BPS holders are entitled to one vote per share of Series BPS.
Series BPS, voting together as a class, have the right to elect one (1)
director.
Subsequent to December 31, 2004, holders of Series BPS converted 49,500 Series
BPS into 28,221,581 common shares.
CONVERTIBLE SERIES C PREFERRED STOCK ("SERIES CPS") 10,000,000 Shares
authorized; 10,000,000 Issued and outstanding
The holders of the Series CPS are not entitled to receive dividends, have no
preferred treatment upon liquidation of the Company and are convertible into
common stock of the Company in an amount equal to the number of Series CPS being
converted. In connection with any reorganizations, merger, consolidation or sale
of assets involving the Company, the number of Series CPS shares outstanding and
the number of shares of Common Stock into which the Series CPS are convertible
will not be affected by any such capital reorganization.
There is no liquidation preference for Series CPS holders.
Series CPS, voting together as a class, have the right to elect two (2)
directors but have no other voting rights.
ITEM 2: DESCRIPTION OF PROPERTY
In March 2004, the Company entered into a four-month lease for 2,526 square feet
of office space located in Cerritos, California. The lease became effective on
April 1, 2004 at a monthly rate of $2,778.00. After the initial four-month
period, the lease is month-to-month.
ITEM 3: LEGAL PROCEEDINGS
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
- --------
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the over-the-counter bulletin board
stock market under the symbol "BTOR.OB".
The market closing, high and low prices at the end of each quarter for 2002
(from inception on August 26, 2002), the years ended December 31, 2003 and 2004
and for the three months ended March 31, 2005, are as follows:
9
YEAR
- -------
2002 CLOSING HIGH LOW
- -------- ---------- -------- -------
September 30 1.65 2.25 1.50
December 31 2.30 2.30 2.25
2003
- ------
March 31 1.75 1.90 1.75
June 30 0.065 0.065 0.065
September 30 0.030 0.035 0.028
December 31 0.027 0.029 0.027
2004
- ------
March 31 0.026 0.026 0.025
June 30 0.027 0.028 0.026
September 30 0.009 0.010 0.009
December 31 0.005 0.006 0.005
2005
- ------
March 31 0.0005 0.0007 0.0005
As of March 31, 2005, there were 542,961,709 shares of common stock issued and
outstanding, held by approximately 320 shareholders of record, of which
20,000,000 of these common shares are held in escrow until conversion from a
convertible debenture.
Dividends on Common Stock
The Company has not declared a cash dividend on its common stock in the last
three fiscal years and the Company does not anticipate the payment of dividends
in the near future. The Company may not pay dividends on its common stock
without first paying dividends on its preferred stock. There are no other
restrictions that currently limit the Company's ability to pay dividends on its
common stock other than those generally imposed by applicable state law.
ITEM 6: SELECTED FINANCIAL DATA
The following table sets forth selected financial data as of and for each of the
two fiscal years ended December 31, 2004 and December 31, 2003 and is derived
from the Company's audited financial statements. The data set forth below should
be read in conjunction with "Item 8: Financial Statements" and related Notes to
Financial Statements appearing elsewhere herein and "Item 7: "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
YEAR ENDED YEAR ENDED
DECEMBER 31, 2004 DECEMBER 31, 2003
-------------------- -------------------
Revenue $ - $ -
Operating income/(loss) $ (2,582,998) $ (5,232,485)
Net income/(loss) $ (2,582,998) $ (5,232,485)
Loss per share, basic and diluted $ (0.01) $ (0.03)
Weighted average number of shares outstanding: 279,386,389 180,828,591
Working capital (deficit) $ (7,197) $ (131,639)
Total assets $ 523,795 $ 559,922
Convertible debentures, net $ 8,824 $ -
Total stockholders' equity $ 396,001 $ 427,766
The revenue from sales of the subsidiary portfolio companies is recorded in the books of the relevant portfolio companies.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
10
This information statement contains forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. These statements relate to
future events or to the Company's future financial performance. In some cases,
you can identify forward-looking statements by terminology such as "may",
"will", "should", "expects", "plans", "anticipates", "believes", "estimates",
"predicts", "potential", "continue" or the negative of such terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. There are a number of factors that could cause
our actual results to differ materially from those indicated by such
forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, we do not assume responsibility
for the accuracy and completeness of such forward-looking statements. We are
under no duty to update any of the forward-looking statements after the date of
this information statement to conform such statements to actual results. The
foregoing management's discussion and analysis should be read in conjunction
with the Company's financial statements and the notes herein.
Critical Accounting Policies and Estimates
Our Management's Discussion and Analysis of Financial Condition and Results of
Operations section discusses our financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. On an on-going basis,
management will evaluate its estimates and judgments, including those related to
revenue recognition, valuation of investments in portfolio companies, accrued
expenses, financing operations, contingencies and litigation. Management will
base its estimates and judgments on historical experience and on various other
factors that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying value of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions. The
most significant accounting estimates inherent in the preparation of our
financial statements include estimates as to the appropriate carrying value of
certain assets and liabilities which are not readily apparent from other
sources, such as the investment in portfolio companies and deferred tax asset
valuation. These accounting policies are described at relevant sections in this
discussion and analysis and in the "Notes to Financial Statements" included in
our Annual Report on Form 10-K for the fiscal year ended December 31, 2004.
Liquidity and Capital Resources
We had cash totaling $43,466 as of December 31, 2004. Our other assets primarily
consist of investments in portfolio companies of $377,478. Total assets at
December 31, 2004 were $523,795. At December 31, 2004 our total liabilities of
$127,794, which were represented by $118,970 of accounts payable and accrued
expenses and $243,750 of convertible debentures.
As of December 31, 2004, the Company had no revenues and incurred net losses
totaling $7,951,544 for the period from August 26, 2002 (inception) through
December 31, 2004. Additionally, as of December 31, 2004, the Company has
negative working capital of $7,197. These factors, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
The Company intends to fund operations through debt and equity financing
arrangements which management believes may be insufficient to fund its capital
expenditures, working capital and other cash requirements for the fiscal year
ending December 31, 2005. Therefore, the Company will be required to seek
additional funds to finance its long-term operations. The successful outcome of
future activities cannot be determined at this time and there is no assurance
that if achieved, the Company will have sufficient funds to execute its intended
business plan or generate positive operating results.
Our Plan of Operation for the Next Twelve Months
As stated above, it has been determined that, as an investment company, we will
only invest in/acquire cash flow positive and profitable businesses. These
entities will have good growth potential as a result of access to additional
capital and/or additional management acumen.
As part of this strategic process, the Company will look beyond action sports
apparel for acquisition opportunities so as to include all apparel and footwear
businesses as well as entities in other consumer product categories that have
the potential for a positive return on investment. The board of directors and
management believe that this new direction will both reduce the risk for the
Company and its shareholders as well as provide the best opportunity for
long-term shareholder value.
11
Regarding two of the Company's subsidiaries, Total Sports Distribution, Inc. and
Unboxed Distribution, Inc., it is clear that profitability in both entities is
not possible in the near future. Subsequent to December 31, 2004, the Company
has signed Mutual Settlement and Release Agreements to cease the licensing
agreements with the licensors for the Airwalk and Bluetorch labels. There were
significant future guaranteed royalty amounts payable by the Company in
accordance with the existing licensing agreements of these two subsidiaries and
so it was in the best interests of the Company to mitigate our potential losses.
Accordingly, it has been determined that it is not in the best interests of the
Company's shareholders to continue the flow of capital to these two subsidiaries
and that these investments be written-off as of December 31, 2004.
We will, however, continue to fund and invest in Island Tribe, Inc., a
subsidiary in which we own 51% of the issued common and outstanding stock.
As a result of the above Mutual Settlement and Release Agreement with the
licensor of the Bluetorch label, we will also rename the investment company,
presently Bluetorch Inc., to accurately reflect the new direction we are taking
and the reality that we will no longer be selling Bluetorch branded apparel
through Unboxed Distribution, Inc. (see Item 8: "Financial Statements").
On June 19, 2003, Bluetorch Inc. filed an Offering Circular that authorizes the
Company to raise up to $3,000,000 via sale of its common stock. Through December
31, 2004, the Company has raised $2,267,057 against this limit. This sum
includes both cash proceeds and conversion of debt.
On June 24, 2004, the Company filed a new Offering Circular that authorized the
Company to raise up to $5,000,000 via sale of its common stock.
On October 18, 2004 and on November 1, 2004 the Company filed amendments to the
June 24, 2004 Offering Circular, reducing the minimum offering share price to
$0.004 and $0.0035, respectively. In addition, these amendments included a
reduction in the authority to raise capital from $5,000,000 to $2,500,000. As of
December 31, 2004, the Company has raised $658,850 against this limit.
Subsequent to December 31, 2004 and up to March 31, 2005, the Company has raised
an additional $243,750 against this limit.
Subsequent to December 31, 2004, on March 15, 2005, the Company filed an
additional amendment to the June 24, 2004 Offering Circular, reducing the
minimum offering share price to $0.001. In addition, these amendments included a
reduction in the authority to raise capital from $2,500,000 to $375,000. As of
March 31, 2005, the Company has raised $40,000 against this limit.
Whereas the Company believes it will be successful with its plans, due to market
factors and economic conditions, no assurance can be given that financing will
be available on favorable terms or at all.
Year ended December 31, 2004
We have incurred additional expenses, which are reflected in our Statements of
Operations for the year ended December 31, 2004. The operating loss of
$2,582,998 for the year ended December 31, 2004 represents expenses for general
and administrative costs (including legal, accounting, consulting and
compensation to the chief executive officer) totaling $1,171,186. General and
administrative expenses reduced from the year ended December 31, 2003 primarily
due to the 2003 non-recurring charge of $2,784,600 related to the rescission of
the Company's previously reported deferred compensation plan. The Company
incurred a loss on investments in portfolio companies of $1,411,812 for the year
ended December 31, 2004, representing the write-off of its investments in
portfolio companies, Total Sports Distribution, Inc. and Unboxed Distribution,
Inc.
Year ended December 31, 2003
The operating loss of $5,232,485 for the year ended December 31, 2003 represents
expenses including design and sampling costs of $138,985 related to efforts
prior to commencement as a BDC, sales and marketing expenses of $153,322,
general and administrative costs (including legal, accounting and compensation
to the chief executive officer) totaling $502,439. Other expenses include
investment banking and related services totaling $731,326, as well as $290,701
representing the expense related to discounts given on shares issued during the
period; the loss for the year ended December 31, 2003 also includes significant
charges as follows: $78,750 resulting from the issuance of 525,000 shares of
common stock in connection with the conversion of Debentures into Series B
Preferred Stock; $2,784,600, related to the rescission of the Company's
previously reported deferred compensation plan; $418,326 for the cost of common
stock warrants issued in connection with Unboxed Distribution, Inc. obtaining a
license, with option to buy, for the Bluetorch trade name; and $134,000 related
to the rescission of a trademark acquisition.
In addition, in 2004 the common stock account was increased (and additional
paid-in capital account was decreased) by $136,096 to reflect the number of
outstanding shares multiplied by the par value.
Subsequent to December 31, 2004, the Company received proceeds of $283,750 from
the sale of its securities. In the opinion of management, available cash is not
sufficient to fund current operations. However, management believes that it can
obtain adequate capital via issuance and sale of its securities.
12
The directors and management have determined that, as a BDC, future investments
will be focused on companies that have entry-level positive cash flow financial
statements. Additionally, the investments must have the potential for growth
based on existing core factors, additional capital infusion if required and, if
necessary, the introduction of an experienced management team that has a
reasonable expectation of expanding the existing business.
Management will be reviewing acquisition opportunities to include all consumer
products categories to provide for a diversification in an expanded portfolio of
subsidiary companies. It is believed that this new direction will increase our
ability to obtain additional capital, reduce the risk for the Company and its
shareholders as well as provide the best opportunity for long-term shareholder
value.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our business activities contain elements of risk. We consider the principal
types of risk to be portfolio valuations and fluctuations in interest rates. We
consider the management of risk essential to conducting our businesses.
Accordingly, our risk management systems and procedures are designed to identify
and analyze our risks, to set appropriate policies and limits and to continually
monitor these risks and limits by means of reliable administrative and
information systems and other policies and programs.
As a BDC, we plan to invest in liquid securities including debt and equity
securities of primarily private companies. Our investments are generally subject
to restrictions on resale and generally have no established trading market. Our
policy is to value substantially all of our investments at fair value. 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 while employing a consistently
applied valuation process for the types of investments we make.
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 policy
considers the fact that no ready market exists for substantially all of the
securities in which we invest. Our valuation policy is intended to provide a
consistent basis for determining the fair value of the portfolio. We will record
unrealized depreciation on investments when we believe that an equity security
is doubtful, or when the enterprise value of the company does not currently
support the cost of our debt or equity investment. Conversely, we will 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. The values of any investments in public securities are determined using
quoted market prices discounted for restrictions on resale. Without a readily
ascertainable market value and because of the inherent uncertainty of valuation,
the fair value of our investments in our portfolio companies determined in good
faith by the board of directors may differ significantly from the values that
would have been used had a ready market existed for the investments and the
differences could be material.
In addition, the illiquidity of our existing investments may adversely affect
our ability to dispose of debt and equity securities at times when it may be
otherwise advantageous for us to liquidate such investments. In addition, if we
were forced to immediately liquidate some or all of the investments in the
portfolio companies, the proceeds of such liquidation may be significantly less
than the current value of such investments.
Because we may borrow money to make investments, our net investment income
before net realized and unrealized gains or losses, or net investment income, is
dependent upon the difference between the rates at which we borrow funds and the
rate at which we invest these funds. As a result, there can be no assurance that
a significant change in market interest rates will not have a material adverse
effect on our net investment income. In periods of rising interest rates, our
cost of funds would increase, which would reduce our net investment income. We
may use a combination of long-term and short-term borrowings and equity capital
to finance our investing activities.
13
ITEM 8: FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Bluetorch Inc.
We have audited the accompanying balance sheet, including the schedule of
investments in portfolio companies, of Bluetorch Inc. (the "Company") as of
December 31, 2004, and the related statement of operations, stockholders' equity
and cash flows for the year ended December 31, 2004. 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 audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit 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
audit provides 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 Bluetorch Inc. as of December
31, 2004, and the results of its operations and cash flows for the year ended
December 31, 2004 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 10 to the
financial statements, the Company has generated no revenues and has incurred
losses totaling $7,951,544 for the period from August 26, 2002 (inception)
through December 31, 2004. 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 10. The accompanying
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Squar, Milner, Reehl & Williamson, LLP
April 13, 2005
Newport Beach, California
14
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Bluetorch Inc.
Cerritos, California
We have audited the accompanying balance sheet of Bluetorch, Inc. as of
December 31, 2003, and the statements of operations, stockholders' equity
and cash flows for the year ended December 31, 2003 and from inception on
August 26, 2002 through December 31, 2002. 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 auditing standards of the Public
Company Accounting Oversight Board in the United States of America. Those
standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed more fully in Note 1 to the financial statements, securities
amounting to $559,405 (99.9% of net assets) at December 31, 2003 have been
valued at fair value as determined by the Board of Directors. We have reviewed
the procedures applied by the directors in valuing such securities and have
inspected underlying documentation; while in the circumstances the procedures
appear to be reasonable and the documentation appropriate, determination of fair
values involves subjective judgment which is not susceptible to substantiation
by auditing procedures.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bluetorch, Inc. as of December
31, 2003 and the results of its operations and its cash flows for the year
ended December 31, 2003 and from inception on August 26, 2002, through
December 31, 2002, 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 10 to
the financial statements, as of December 31, 2003, the Company has
generated no revenues and has incurred losses totaling $5,368,546 for the
period from August 26, 2002 (inception) through December 31, 2003. These
items raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also
described in Note 10. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Stonefield Josephson, Inc.
- ---------------------------------
Santa Monica, California
April 9, 2004
BLUETORCH INC.
BALANCE SHEETS
December 31, 2004 December 31 2003
ASSETS
Investments in portfolio companies $377,478 $559,405
Cash 43,466 517
Deferred financing costs, net 28,125 -
Deposits & prepaid expenses 49,006 -
Property & equipment, net 25,720 -
---------- ----------
$523,795 $559,922
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable and accrued expenses $118,970 $106,156
Loans payable to related parties - 26,000
Convertible debentures, net of discount of $234,926 8,824 -
------- --------
Total liabilities 127,794 132,156
------- --------
Stockholders' equity
Convertible preferred series A, $0.001 par value; 400,000 shares authorized;
0 shares issued and outstanding - -
Convertible preferred series B, $0.001 par value; 610,000 shares authorized;
190,000 and 480,000 shares issued and outstanding at
December 31, 2004 and 2003, respectively 190 480
Convertible preferred series C, $0.001 par value; 10,000,000 shares authorized;
10,000,000 shares issued and outstanding at December 31, 2004
and 2003 10,000 10,000
Common stock, $0.001 par value; 950,000,000 shares authorized;
464,740,114 and 54,277,000 shares issued and outstanding at
December 31, 2004 and 2003, respectively 464,740 54,277
Common stock held in escrow (69,643) -
Common stock subscriptions receivable (9,600) (112,500)
Interest receivable on convertible debentures (23,461) -
Additional paid in capital 7,975,319 5,844,055
Accumulated deficit (7,951,544) (5,368,546)
---------- -----------
Total stockholders' equity 396,001 427,766
---------- ----------
$523,795 $559,922
========== ==========
The accompanying notes form an integral part of these financial statements.
BLUETORCH INC.
SCHEDULE OF INVESTMENTS IN PORTFOLIO COMPANIES
December 31, 2004
DESCRIPTION PERCENT FAIR
COMPANY. . . . . . . . . . OF BUSINESS OWNERSHIP COST VALUE AFFILIATION
Unboxed Distribution, Inc. Extreme Sports Apparel 100% $ 0 $ 0 (1) Yes
Total Sports Distribution, Inc. Extreme Sports Apparel 100% $ 0 $ 0 (1) Yes
Island Tribe, Inc. Extreme Sports Apparel 51% $ 377,478 $ 377,478 (1) Yes
(1) Fair value determined by the Company's board of directors - refer to Note 2 for further explanation on the Company's methods of
determining fair values.
The accompanying notes form an integral part of these financial statements.
15
BLUETORCH INC.
STATEMENTS OF OPERATIONS
From Inception on
For the Year Ended For the Year Ended. August 26, 2002 through
December 31, 2004 December 31, 2003 December 31, 2002
--------------- --------------- ---------------
REVENUES. . . . . . . . . . . . . . . . . . . . $ - $ - $ -
--------------- --------------- ---------------
EXPENSES
General and administrative. . . . . . . . . . . (1,171,186) (5,232,485) (136,061)
Loss on investments in portfolio. . . . . . . . (1,411,812) - -
companies
--------------- --------------- ---------------
Total expenses. . . . . . . . . . . . . . . . . (2,582,998) (5,232,485) (136,061)
--------------- --------------- ---------------
Net loss. . . . . . . . . . . . . . . . . . . . ($2,582,998) ($5,232,485) ($136,061)
=============== =============== ===============
Basic and diluted - loss per share. . . . . . . ($0.01) ($0.03) ($0.01)
=============== =============== ===============
Weighted average common shares -
basic and diluted . . . . . . . . . . . . . . . 279,386,389 180,828,591 24,295,762
=============== =============== ===============
The accompanying notes form an integral part of these financial statements.
16
BLUETORCH INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION ON
AUGUST 26, 2002 THROUGH DECEMBER 31, 2004
SERIES A SERIES B SERIES C
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
AT INCEPTION ON
AUGUST 26, 2002,
as restated for
effect of reverse
merger with Aussie
Apparel and
stock splits
(see Note 1) . . . . . - $ - - $ - - $ - 97,500,000 $ 1,000
Shares issued
in connection with
merger with
Aussie Apparel,
October 29,
2002 (see Note 1) . . . - - 610,000 610 39,590,430 2,639
Shares issued . . . . . 400,000 1,058,824 - - - - 31,500,000 2,100
for acquisition of
trade names
(see Note 7)
Net loss
December 31, 2002 - - - - - - - -
Balance at --------------------------------------------------------------------------------------------
December 31, 2002 400,000 $ 1,058,824 610,000 $ 610 - $ - 168,590,430 $ 5,739
Preferred and
common shares
issued for
compensation,
services and in
connection with
rescission of employee
stock options 10,000,000 10,000 6,191,873 4,963
Shares issued
to a foreign entity
for resale and
recorded on
balance sheet
as stock
subscription
receivable 750,000 50
Shares issued
in connection
with conversion
of convertible
debentures 525,000 35
Creation of stock
option / deferred
compensation plan
Shares issued
in connection
with rescission of
employee
stock options 682,147 682
Shares issued
in connection
with stock
subscription 18,545,818 18,321
Rescission of stock
option / deferred
compensation plan
Issuance of
convertible debenture
with beneficial
conversion feature
Shares issued
in connection with
conversion of Series
B preferred stock . . . (130,000) (130) 5,087,364 5,087
Shares issued
in settlement
of notes payable 18,200,000 18,200
Warrants issued
in connection
with license
agreement/ option
purchase agreement
Shares cancelled
in connection
with rescission of
trademark acquisition . (400,000) (1,058,824) (31,500,000) (2,100)
Shares issued
as settlement
expense in
relation to
rescission
of trademark
acquisition 3,300,000 3,300
Net loss
December 31, 2003
Balance at --------------------------------------------------------------------------------------------
December 31, 2003 - $ - 480,000 $ 480 10,000,000 $10,000 190,372,632 $ 54,277
17
BLUETORCH INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION ON
AUGUST 26, 2002 THROUGH DECEMBER 31, 2004
SERIES A SERIES B SERIES C
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
Shares issued
in connection
with
conversion of
convertible
debentures 37,500,001 37,500
Shares issued
in connection
with stock
subscription 128,049,999 128,049
Shares issued
in connection
with conversion
of series B
preferred stock (260,000) (260) 12,165,953 12,166
Redemption of
Preferred series B (30,000) (30)
Common shares
issued in connection
with penalties
and interest on
conversion of
Preferred series B 1,666,667 1,667
Shares (restricted)
issued in connection
with acquisition of
51% of Island
Tribe, Inc. 30,000,000 30,000
Shares returned
to the Company . . . . (10,000) (10) (5,769,109) (5,769)
Shares issued in connection
with combination
financing . . . . . . . 10,000 10 1,111,111 1,111
Commons shares
held in escrow
(to be released
upon conversion of
convertible . . . . . . 69,642,860 69,643
debenures)
Correction of
common stock par
value amount. . . . . . 136,096
Debt discount
related to beneficial
conversion feature
Reclassification of
interest receivable
on convertible
debentures
Balance at
December 31, 2004 ============ ============ ============ ======== ========== ======= =========== ========
- $ - 190,000 $ 190 10,000,000 $10,000 464,740,114 $464,740
============ ============ ============ ======== ========== ======= =========== ========
18
BLUETORCH INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION ON
AUGUST 26, 2002 THROUGH DECEMBER 31, 2004
Common Stock Less stock Stock options Interest Additional Accumulated Total
Held in Escrow subscription / deferred receivable on paid-in deficit stockholders'
receivable compensation convertible capital equity
debentures
------------- ------------- ------------- --------- ----------- ----------- -------------
AT INCEPTION ON
AUGUST 26, 2002,
as restated for
effect of reverse
merger with Aussie
Apparel and
stock splits
(see Note 1) . . . . . $ - $ - $ - $ - $ - $ - $ 1,000
Shares issued
in connection with
merger with
Aussie Apparel,
October 29,
2002 (see Note 1) . . . - - - - 2,711 - 5,960
Shares issued
for acquisition of
trade names
(see Note 7). . . . . . - - - - 4,722,900 - 5,783,824
Net loss
December 31, 2002 - - - - - (136,061) (136,061)
------------- ------------- ------------- --------- ----------- ----------- -------------
Balance at
December 31, 2002 $ - $ - $ - $ - $4,725,611 $ (136,061) $5,654,723
Preferred and
common shares
issued for
compensation,
services and
in connection with
rescission of
employee stock options. . 1,164,900 1,179,863
Shares issued
to a foreign entity
for resale
and recorded on
balance sheet
as stock
subscription
receivable . . . . . . . (112,500) 112,450 -
Shares issued
in connection
with conversion of
convertible debentures. . 78,715 78,750
Creation of stock
option / deferred
compensation plan . . . . (2,784,600) 2,784,600
Shares issued in
connection with
rescission of
employee
stock options . . . . . . 47,068 47,750
Shares issued in
connection with
stock subscription. . . . 641,492 659,813
Rescission of stock
options / deferred
compensation
plan . . . . . . . . . 2,784,600 (380,250) 2,404,350
Issuance of
convertible debenture
with beneficial
conversion feature. . . 8,000 8,000
Shares issued
in connection with
conversion of
Series B preferred stock. (4,957) -
Shares issued
in settlement
of notes payable. . . . . 479,300 497,500
Warrants issued
in connection
with license
agreement/
option purchase
agreement . . . . . . . . 418,326 418,326
Shares cancelled
in connection
with rescission
of trademark
acquisition . . . . . . (4,722,900) (5,783,824)
Shares issued
as settlement
expense in
relation to
rescission
of trademark
acquisition . . . . . . 491,700 495,000
Net loss
December 31, 2003 (5,232,485) (5,232,485)
Balance at ------------- ------------- ------------- --------- ----------- ----------- -------------
December 31, 2003 $ - $ (112,500) $ - $ - $5,844,055 $(5,368,546) $ 427,766
19
BLUETORCH INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION ON
AUGUST 26, 2002 THROUGH DECEMBER 31, 2004
Common Stock Less stock Stock options Interest Additional Accumulated Total
Held in Escrow subscription / deferred receivable on paid-in deficit stockholders'
receivable compensation convertible capital equity
debentures
--------------- ----------- -------------- ----------------- ------------ --------- ----------
Shares issued in connection
with conversion of
convertible debentures 93,750 131,250
Shares issued in connection
with stock subscription 102,900 1,425,495 1,656,444
Shares issued in connection
with conversion
of series B preferred stock . . . . . . (11,906) -
Redemption of Preferred
series B . . . . . . (29,970) (30,000)
Common shares issued in
connection with penalties
and interest on conversion
of Preferred series B . . 58,333 60,000
Shares (restricted)
issued in connection
with acquisition of
51% of Island Tribe, Inc.. 342,000 372,000
Shares returned to
the Company . . . . . . 5,779 -
Shares issued in
connection with
combination financing. . . . . . . 8,879 10,000
Common shares held in escrow . . . . . . . . . . . . . . .
(to be released upon
conversion of
convertible debentures) . . . (69,643) -
Correction of common
stock par amount . . . . (136,096) -
Debt discount related
to beneficial
conversion features. . . . . . . 375,000 375,000
Reclassification of
interest receivable on
convertible debentures . . . . . . . . . . (23,461) (23,461)
Net loss December 31, 2004 (2,582,998)(2,582,998)
--------------- ----------- -------------- ----------------- ------------ --------- ----------
Balance at December 31, 2004 $ (69,643) $ (9,600) $ - $ (23,461) $ 7,975,319 $(7,951,544) $396,001
--------------- ----------- -------------- ----------------- ------------ --------- ----------
20
BLUETORCH INC.
STATEMENTS OF CASH FLOWS
FROM INCEPTION ON
FOR THE YEAR ENDED FOR THE YEAR ENDED AUGUST 26, 2002 THROUGH
DECEMBER 31, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
Adjustments to reconcile net loss to net cash used in . . . . . . . . $(2,582,998) $(5,232,485) $(136,061)
operating activities:
Depreciation expense. . . . . . . . . . . . . . . . . . . . . . . . 10,813 - -
Amortization of deferred financing costs. . . . . . . . . . . . . . 28,125 - -
Amortization of beneficial conversion feature . . . . . . . . . . . 140,074 - -
Write off of non-used assets. . . . . . . . . . . . . . . . . . . . - - 6,960
Common and preferred shares issued for compensation, services
in connection with employee stock options. . . . . . . . . . . . - 1,179,863 -
Cost associated with cancellation of options. . . . . . . . . . . . - 2,404,350 -
Common shares issued in connection with cancellation of . . . . . . -
employee stock options . . . . . . . . . . . . . . . . . . . . . - 380,250 -
Shares issued for settlement expense. . . . . . . . . . . . . . . . - 495,000 -
Cash payment for settlement expense . . . . . . . . . . . . . . . . - 25,000 -
Beneficial conversion feature . . . . . . . . . . . . . . . . . . . - 8,000 -
Notes payable issued for services . . . . . . . . . . . . . . . . . - 243,750 -
Loss on investments in portfolio investment companies . . . . . . . 1,411,812 - -
Penalties and interest related to conversion of Preferred series B. 60,000 - -
Changes in operating assets and liabilities:
Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - (250,000)
Deposits and prepaid expenses . . . . . . . . . . . . . . . . . . . (3,843) - -
Accounts payable and accrued expenses . . . . . . . . . . . . . . . 12,814 (22,857) 354,013
------------ ------------ ----------
Net cash used in operating activities. . . . . . . . . . . . . (923,203) (519,129) (25,088)
------------ ------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment. . . . . . . . . . . . . . . . . . . . . . . (36,533) - -
Advances to portfolio investment companies. . . . . . . . . . . . . (857,886) (141,079) -
------------ ------------ ----------
Net cash used in investing activities . . . . . . . . . . . . . (894,419) (141,079) -
------------ ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common stock and preferred stock. . . 1,533,445 659,813 -
Common stock subscription receivable collected from prior year. . . 133,000 - -
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . (26,000) - 26,000
Redemption of Preferred series B. . . . . . . . . . . . . . . . . . (30,000) - -
Proceeds from issuance of convertible debentures. . . . . . . . . . 250,126 - -
------------ ------------ ----------
Net cash provided by financing activities . . . . . . . . . . . 1,860,571 659,813 26,000
------------ ------------ ----------
Net increase / (decrease) in cash . . . . . . . . . . . . . . . . . . 42,949 (395) 912
Cash and cash equivalents beginning of period . . . . . . . . . . . . 517 912 -
------------ ------------ ----------
CASH AND CASH EQUIVALENTS END OF PERIOD . . . . . . . . . . . . . . . $ 43,466 $ 517 $ 912
============ ============ ==========
Supplemental disclosure of non-cash investing and financing activities
Stock subscription written off. . . . . . . . . . . . . . . . . . . . $ (112,500) $ - $ -
============ ============ ==========
Common stock subscribed . . . . . . . . . . . . . . . . . . . . . . . $ 142,600 $ 112,500 $ -
============ ============ ==========
Shares issued in settlement of notes payable. . . . . . . . . . . . . $ - $ 497,500 $ -
============ ============ ==========
Warrants issued for investments in portfolio investment companies . $ - $ 418,326 $ -
============ ============ ==========
Shares issued in connection with conversion of convertible debentures $ 131,250 $ 78,750 $ -
============ ============ ==========
Common shares issued for acquisition of 51% of Island Tribe, Inc. . . $ 372,000 $ - $ -
============ ============ ==========
Deferred financing costs and prepaid interest for issuance of
convertible debentures . . . . . . . . . . . . . . . . . . . . . . $ 124,874 $ - $ -
============ ============ ==========
Beneficial conversion feature . . . . . . . . . . . . . . . . . . . . $ (375,000) $ - $ -
============ ============ ==========
21
NOTES TO FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Organization and Business
Mercury Software, a Nevada corporation, was incorporated on January 29, 1997 and
its name was changed to MedEx Corp. on June 24, 2002. Aussie Apparel Group, Ltd.
("Aussie Apparel" or the "Company"), a Nevada corporation, was incorporated on
August 26, 2002. In October 2002, MedEx Corp. issued an aggregate of 6,500,000
(pre-stock split) shares of its common stock to the shareholders of the Company
in connection with the merger of the Company with MedEx Corp., whose name was
then changed to "Aussie Apparel Group, Ltd" on October 21, 2002. Since the
shareholders of the Company became the controlling shareholders of MedEx after
the exchange, the Company was treated as the acquirer for accounting purposes.
Accordingly, the financial statements, as presented here, are the historical
financial statements of the Company and include the transactions of MedEx only
from the date of acquisition, using reverse merger accounting.
The Company's name was changed to Bluetorch Inc. (hereinafter "Bluetorch" or the
"Company") effective November 3, 2003.
On June 19, 2003, the Company became a business development company" ("BDC")
pursuant to applicable provisions of the Investment Company Act of 1940.
Until June 19, 2003 the Company was a development stage enterprise under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 7. Upon
commencing their operations as a BDC, the Company no longer qualified under the
guidelines of SFAS No. 7.
On April 7, 2003 the Company effected a 3-to-1 stock split, followed on May 27,
2003 by an additional 5-to-1 stock split. The accompanying financial statements
have been restated to reflect these stock splits for all periods presented.
Use of Estimates
22
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.
Cash & Cash Equivalents
Cash equivalents include all highly liquid unencumbered debt instruments with
original maturities of three months or less when purchased. The company had no
cash equivalents at December 31, 2004 or 2003.
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. The
Company did not exceed this limit at December 31, 2004 and 2003.
Deferred Financing Costs
Financing costs consist of loan fees on convertible debentures. Loan fees are
amortorized to interest expense over the term of the respective debentures using
a method that approximates the effective interest method.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is recorded using the straight-line method over the estimated
useful lives of the respective assets (two to five years). Maintenance and
repairs are charged to operations when incurred. Betterments and renewals are
capitalized. When property and equipment are sold or otherwise disposed of, the
asset account and related accumulated deprecation account are relieved, and any
gain or loss is included in operations.
Long-Lived Assets
The Company accounts for long-lived asset impairments under SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144"). Consistent with prior guidance, SFAS No. 144 requires a three-step
approach for recognizing and measuring the impairment of assets to be held and
used. The Company recognizes impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amounts. The impairment loss is measured by comparing the fair value
of the asset to its carrying amount. Fair value is estimated based on
discounted future cash flows. Assets to be sold must be stated at the lower of
the assets' carrying amount or fair value and depreciation is no longer
recognized. Prior to SFAS No. 144's adoption, the Company accounted for
impairments under SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." Based upon its most recent
analysis, the Company believes that no impairment of property and equipment
exists at December 31, 2004 and 2003.
Revenue Recognition
The Company has not generated any revenues for the years ended December 31, 2004
and December 31, 2003 or the period from inception on August 26, 2002 through
December 31, 2002, and will in the future recognize revenue based upon the
appreciation of the investments in its portfolio companies.
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,
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.
Income Taxes
The Company accounts for income taxes under SFAS 109, "Accounting for Income
Taxes." Under the asset and liability method of SFAS 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statements carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period the
enactment occurs. A valuation allowance is provided for certain deferred tax
assets if it is more likely than not that the Company will not realize tax
assets through future operations.
23
Segment Reporting
Based on the Company's integration and management strategies, the Company will
operate on a non-consolidated basis. Operations of the portfolio companies will
be reported at the subsidiary level and only the appreciation or impairment will
be included in the Company's financial statements. Since inception, no revenue
has been earned and all operations are domestic.
Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees" and complies with the
disclosure provisions of SFAS No.123, "Accounting for Stock-Based Compensation."
Under APB No. 25, employee compensation cost is recognized over the vesting
period based on the excess, if any, on the date of grant of the fair value of
the Company's shares over the employee's exercise price. When the exercise price
of the employee share options is less than the fair value price of the
underlying shares on the grant date, deferred stock compensation is recognized
and amortized to expense in accordance with FASB Interpretation No. 44 over the
vesting period of the individual options. Accordingly, if the exercise price of
the Company's employee options equals or exceeds the market price of the
underlying shares on the date of grant, no compensation expense is recognized.
Options or shares awards issued to non-employees are valued using the fair value
method and expensed over the period services are provided.
As of December 31, 2004 and December 31, 2003, there were no options
outstanding.
Basic and Diluted Earnings (Loss) Per Share
Basic earnings (loss) per share are determined by dividing the net earnings
(loss) by the weighted average shares of common stock outstanding during the
period. Diluted earnings (loss) per share are determined by dividing the net
earnings (loss) by the weighted average shares of common stock outstanding plus
the dilutive effects of warrants and other convertible securities. 25,237,500,
25,600,000 and 182,000 common stock equivalents, representing common shares
eligible to be converted in relation to preferred stock and warrants, calculated
using the market price on December 31, 2004, December 31, 2003 and December 31,
2002, respectively, have been excluded from the calculation of diluted loss per
share for the years ended December 31, 2004 and 2003, and for the period from
inception on August 26, 2002 through December 31, 2002, respectively, as their
effect would be anti-dilutive.
Advertising Costs
Advertising costs will be expensed as incurred. There were no advertising
expenses for the years ended December 31, 2004 and 2003 or for the period from
inception on August 26, 2002 through December 31, 2002.
Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for the
reporting and display of comprehensive income and its components in the
financial statements. As of December 31, 2004 and December 31, 2003, the Company
has no items that represent comprehensive income and, therefore, has not
included a statement of Comprehensive Income in the Financial Statements.
Significant Recent Accounting Pronouncements
In January 2003, the FASB issued FASB Interpretation ("FIN") No. 46,
"Consolidation of Variable Interest Entities, an Interpretation of ARB 51." The
primary objectives of FIN 46 are to provide guidance on the identification of
entities for which control is achieved through means other than voting rights
(variable interest entities, or ("VIEs") and how to determine when and which
business enterprise should consolidate the VIE. This new model for
consolidation applies to an entity for which either: (1) the equity investors
don't have a controlling financial interest; or (2) the equity investment at
risk is insufficient to finance that entity's activities without receiving
additional subordinated financial support from other parties. In addition, FIN
46 requires that both the primary beneficiary and all other enterprises with a
significant variable interest in a VIE make additional disclosures. As amended
in December 2003, the effective dates of FIN 46 for public entities that are
small business issuers, as defined ("SBIs"), are as follows: (a) For interests
in special-purpose entities ("SPEs"): periods ended after December 15, 2004.
The December 2003 amendment of FIN 46 also includes transition provisions that
govern how an SBI which previously adopted the pronouncement (as it was
originally issued) must account for consolidated VIEs. Management has concluded
that the Company does not have any VIEs and does not believe FIN 46 will have
any significant effect on the Company's future financial statements.
24
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS 150
establishes standards for how a company classifies and measures certain
financial instruments with characteristics of both liabilities and equity, and
is effective for public companies as follows: (i) in November 2003, the FASB
issued FASB Staff Position ("FSP") FAS 150-3 ("FSP 150-3"), which defers
indefinitely (a) the measurement and classification guidance of SFAS 150 for all
mandatorily redeemable non-controlling interests in (and issued by) limited-life
consolidated subsidiaries, and (b) SFAS 150's measurement guidance for other
types of mandatorily redeemable non-controlling interests, provided they were
created before November 5, 2003; (ii) for financial instruments entered into or
modified after May 31, 2003 that are outside the scope of FSP 150-3; and (iii)
otherwise, at the beginning of the first interim period beginning after June 15,
2003. The Company adopted SFAS 150 (as amended) on the aforementioned effective
dates. The adoption of this pronouncement did not have a material impact on the
Company's results of operations or financial condition.
In November 2004, the FASB issued SFAS 151, "Inventory Costs - an amendment of
ARB No. 43, Chapter 4," which clarifies the accounting for abnormal amounts of
idle facility expense, freight, handling costs and wasted material. In Chapter
4 of ARB 43, paragraph 5 previously stated that " under some circumstances,
items such as idle facility expense, excessive spoilage, double freight, and
re-handling costs may be so abnormal as to require treatment as current period
charges ." SFAS 151 requires that such items be recognized as current-period
charges, regardless of whether they meet the criterion of so abnormal (an
undefined term). This pronouncement also requires that allocation of fixed
production overhead to the costs of conversion be based on the normal capacity
of the production facilities. SFAS 151 is effective for inventory costs
incurred in years beginning after June 15, 2005. Management does not believe
this pronouncement will have a significant impact on its future financial
statements.
In December 2004, the FASB issued SFAS 123-R, "Share-Based Payment," which
requires that the compensation cost relating to share-based payment transactions
(including the cost of all employee stock options) be recognized in the
financial statements. That cost will be measured based on the estimated fair
value of the equity or liability instruments issued. SFAS 123-R covers a wide
range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. SFAS 123-R replaces SFAS 123, "Accounting for
Stock-Based Compensation," and supersedes Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." As originally
issued, SFAS 123 established as preferable a fair-value-based method of
accounting for share-based payment transactions with employees. However, that
pronouncement permitted entities to continue applying the intrinsic-value model
of APB Opinion 25, provided that the financial statements disclosed the pro
forma net income or loss based on the preferable fair-value method. Due to a
recent SEC announcement, delaying the effective date, the company is now
required to adopt SFAS 123-R on January 1, 2006. Thus, the Company's financial
statements will reflect an expense for (a) all share-based compensation
arrangements granted on or after January 1, 2006 and for any such arrangements
that are modified, cancelled, or repurchased after that date, and (b) the
portion of previous share-based awards for which the requisite service has not
been rendered as of that date, based on the grant-date estimated fair value.
Management has not determined the future effect of this pronouncement on its
future financial statements.
The FASB issued SFAS 153, "Exchanges of Non-monetary Assets, an amendment of APB
Opinion 29, Accounting for Non-monetary Transactions." The amendments made by
SFAS 153 are based on the principle that exchanges of no monetary assets should
be measured using the estimated fair value of the assets exchanged. SFAS 153
eliminates the narrow exception for no monetary exchanges of similar productive
assets, and replaces it with a broader exception for exchanges of no monetary
assets that do not have commercial substance. A no monetary exchange has
"commercial substance" if the future cash flows of the entity are expected to
change significantly as a result of the transaction. This pronouncement is
effective for no monetary exchanges in fiscal periods beginning after June 15,
2005. Management does not believe that this pronouncement will have a
significant effect on its future financial statements.
Other recent accounting pronouncements issued by the FASB (including its
Emerging Issues Task Force), the AICPA, and the SEC did not or are not believed
by management to have a material impact on the Company's present or future
financial statements.
(2) Investments
Unboxed Distribution, Inc.
On August 21, 2003, the Company formed Unboxed Distribution, Inc. ("Unboxed")
for the purpose of owning and operating the Bluetorch license agreement.
On March 12, 2005, the Company and its wholly-owned subsidiary, Unboxed
Distribution, Inc., signed a Mutual Settlement and Release Agreement with Gotcha
Brands Inc., the Bluetorch licensor, and this agreement requires the Company's
subsidiary, Unboxed Distribution, Inc., to cease the selling and marketing of
Bluetorch apparel. In keeping with this agreement, the Company also agreed to
change its corporate name by April 20, 2005.
25
Total Sports Distribution, Inc.
On October 21, 2003, the Company formed Total Sports Distribution, Inc. ("Total
Sports") for the purpose of owning and operating the True Skate Apparel brand
("TSABrand)". Furthermore, 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, the Company and its wholly-owned subsidiary, Total Sports
Distribution, Inc., signed a Mutual Settlement and Release Agreement with
Collective Licensing International, LLC, the licensor of the Airwalk apparel
brand, and this agreement requires the Company's subsidiary, Total Sports
Distribution, Inc., to cease the selling and marketing of Airwalk apparel.
Island Tribe, Inc.
As noted above, the Company purchased a 51% interest in Island Tribe, Inc., a
surf apparel company. The consideration for this investment was $372,000,
consisting of 30,000,000 restricted common shares in Bluetorch Inc. being issued
at a per-share price of $0.0124. The effective date of this transaction was
August 1, 2004. Over the next 4 years, this purchase agreement provides for the
Company to receive an additional 24% ownership of Island Tribe, Inc. The Company
is obligated to pay certain royalty commissions on future sales of Island Tribe
product for the duration of the agreement, which commenced in 2004 and concludes
in 2016. These royalty commissions range from 8% in 2004 to 2% in 2016, and only
become due and payable each year when annual sales of $372,000 are achieved. No
royalties are due at December 31, 2004.
Valuation of Investments
As required by the SEC's Accounting Series Release ("ASR") 118, the investment
committee of the Company is required to assign a fair value to all investments.
To comply with Section 2(a) (41) of the Investment Company Act and Rule 2a-4
under the Investment Company Act, it is incumbent upon the board of directors to
satisfy themselves that all appropriate factors relevant to the value of
securities for which market quotations are not readily available have been
considered and to determine the method of arriving at the fair value of each
such security. To the extent considered necessary, the board may appoint persons
to assist them in the determination of such value and to make the actual
calculations pursuant to the board's direction. The board must also, consistent
with this responsibility, continuously review the appropriateness of the method
used in valuing each issue of security in the company's portfolio. The directors
must recognize their responsibilities in this matter and whenever technical
assistance is requested from individuals who are not directors, the findings of
such individuals must be carefully reviewed by the directors in order to satisfy
themselves that the resulting valuations are fair.
No single standard for determining "fair value in good faith" can be laid down,
since fair value depends upon the circumstances of each individual case. As a
general principle, the current "fair value" of an issue of securities being
valued by the board of directors would appear to be the amount that the owner
might reasonably expect to receive for them upon their current sale. Methods
that are in accord with this principle may, for example, be based on a multiple
of earnings, or a discount from market of a similar freely traded security, or
yield to maturity with respect to debt issues, or a combination of these and
other methods. Some of the general factors that the directors should consider in
determining a valuation method for an individual issue of securities include:
1) the fundamental analytical data relating to the investment, 2) the nature and
duration of restrictions on disposition of the securities, and 3) an evaluation
of the forces which influence the market in which these securities are purchased
and sold. Among the more specific factors which are to be considered are: type
of security, financial statements, cost at date of purchase, size of holding,
discount from market value of unrestricted securities of the same class at time
of purchase, special reports prepared by analysis, information as to any
transactions or offers with respect to the security, existence of merger
proposals or tender offers affecting the securities, price and extent of public
trading in similar securities of the issuer or comparable companies and other
relevant matters.
The board has arrived at the following valuation method for its investments.
Where there is not a readily available source for determining the market value
of any investment, either because the investment is not publicly traded or is
thinly traded and in absence of a recent appraisal, the value of the investment
shall be based on the following criteria:
1. Total amount of the Company's actual investment ("AI"). This amount shall
include all loans, purchase price of securities and fair value of securities
given at the time of exchange.
2. Total revenues for the preceding twelve months ("R").
3. Earnings before interest, taxes and depreciation ("EBITD")
4. Estimate of likely sale price of investment ("ESP")
5. Net assets of investment ("NA")
6. Likelihood of investment generating positive returns (going concern).
The estimated value of each investment shall be determined as follows:
26
- - Where no or limited revenues or earnings are present, then the value shall be
the greater of the investment's a) net assets, b) estimated sales price, or c)
total amount of actual investment.
- - Where revenues and/or earnings are present, then the value shall be the
greater of one-time (1x) revenues or three times (3x) earnings, plus the greater
of the net assets of the investment or the total amount of the actual
investment.
- - Under both scenarios, the value of the investment shall be adjusted down if
there is a reasonable expectation that the Company will not be able to recoup
the investment or if there is reasonable doubt about the investment's ability to
continue as a going concern.
Based on the previous methodology, the Company determined that its investments
in its subsidiaries should be valued at December 31, 2004 as follows:
- - Unboxed Distribution, Inc.
Unboxed has been valued at $0, due to the Company's decision to discontinue the
flow of capital to this entity. The sales for Unboxed were progressing slowly
and not fast enough to justify the minimum royalties due in 2005 ($130,000) and
2006 ($300,000). In March 2005, Unboxed and Bluetorch signed a Mutual Settlement
and Release Agreement with the licensor of the Bluetorch label. The write down
in the investment in Unboxed for the year ended December 31, 2004 totaled
$927,154.
- - Total Sports Distribution, Inc.
Total Sports has been valued at $0, due to the Company's decision to discontinue
the flow of capital to this entity. It had become apparent that the anticipated
revenue flow for 2005 was not progressing at the rate the board of directors and
management anticipated and would fall well short of expectations. As the board
of directors and management looked at the Company's contractual royalty minimums
for the Airwalk label for 2005 and beyond, it became clear that the Company was
not going to be able to meet the revenue objectives from which the royalty
minimums were based. These minimums were $920,000 in 2005 with an additional
$3,960,000 due between 2006 and 2008. In addition, this situation was going to
negatively impact Total Sports' ability to market and sell the TSABrand label.
As previously noted, in March 2005, Total Sports and Bluetorch signed a Mutual
Settlement and Release Agreement with the licensor of the Airwalk label. The
write down in the investment in Total Sports for the year ended December 31,
2004 totaled $484,658.
- - Island Tribe, Inc.
Island Tribe has been valued $377,458, being the price of $372,000, as per the
Stock Purchase Agreement dated August 20, 2004, plus an additional cash
investment by the Company during the fourth quarter of 2004. We are continuing
with Island Tribe since it is not subject to any guaranteed minimum royalties,
unlike Unboxed and Total Sports.
(3) Property and Equipment
Property and equipment approximate the following at December 31, 2004 and 2003:
2004 2003
--------- -----
Computer hardware and software $ 31,406 $ -
--------- -----
Furniture and Fixtures . . . . 5,127 -
--------- -----
36,533 -
Accumulated depreciation . . . (10,813) -
--------- -----
$ 25,720 $ -
========= =====
(4) Asset Purchase Agreement
On December 15, 2002, the Company acquired the Hot Tuna, Xisle and the
children's surf brands, Piranha Boy and Piranha Girl, and trademarks from
Federation Group Limited ("FGL" or the "Seller") in exchange for an aggregate of
a $250,000 deposit payable in cash, 19,500,000 shares of the Company's common
stock and 400,000 shares of the Company's Series A preferred stock (the "Series
APS"). $25,000 of the cash deposit was paid, with $125,000 of the cash deposit
satisfied in shares of the Company's common stock.
The trademarks were valued at the cash deposit and fair value of the shares
issued, both common and preferred.
27
The common stock and preferred stock were issued but never delivered to the
seller. The Company contends that the Seller never delivered the proper items
necessary to market the trade name. The parties began conversations regarding
amending the agreement during the quarter ended June 30, 2003. Subsequently, in
November 2003, the Company entered into a settlement agreement, pursuant to
which that original agreement has been rescinded. Accordingly, the Company has
returned all trademarks and related assets. In exchange, FGL has returned
28,200,000 of the Company's common shares plus 400,000 shares of the Company's
Series APS to the Company, which has cancelled the shares. 3,300,000 common
shares were retained by FGL as a settlement expense, which has been valued at
$495,000 on the accompanying financial statements; also recognized as part of
the settlement expense is the $25,000 cash deposit paid.
As the intent and economic substance of the settlement is in fact an unwinding
of the original Asset Purchase Agreement, all amounts have been reversed out at
the amount at which they were originally recognized. Accordingly, as of December
31, 2003 the Company has provided for the net impact of this agreement as if it
had been executed September 30, 2003. The entire value of the trademarks has
been reversed and $5,783,824 charged to equity for the original value of the
common and preferred shares
(5) Notes Payable
Notes payable to four parties, payable on demand or by May 31, 2005, were issued
on May 30, 2003 in exchange for consulting and other services, carrying interest
at 8% per annum; total amount of notes issued was $325,000. These notes were
converted to 15,000,000 shares of common stock during the year ended December
31, 2003.
(6) Convertible Debentures
On April 1, 2003 the Company issued a $25,000 convertible debenture, convertible
at the holder's option into common shares at a price equal to the lesser of 75%
of the lowest closing bid price over the 15 trading days prior to conversion or
100% of the average closing prices bid over the 20 trading days prior to
conversion. The debenture was repaid during the quarter ended September 30, 2003
and unamortized debt issue costs were charged to expense.
On November 8, 2004, the Company issued a convertible debenture of $187,500,
convertible at the holder's option into common shares at a price of $0.0035 per
share. All principal is due on the maturity date of November 8, 2006 and the
interest rate is 9.15%. The Company received net proceeds totaling $125,063, net
of deferred financing costs of $28,125 and prepaid interest totaling $34,312. As
of December 31, 2004, the debenture holder had converted $131,250 of the
debenture into 37,500,001 shares of common stock. Subsequent to December 31,
2004, the debenture holder had converted an additional $56,250 of the debenture
into 16,071,429 shares of common stock.
On December 14, 2004, the Company issued a convertible debenture of $187,500,
convertible at the holder's option into common shares at a price of $0.0035 per
share. All principal is due on the maturity date of December 14, 2006 and the
interest rate is 9.15%. The Company received net proceeds totaling $125,063, net
of deferred financing costs of $28,125 and prepaid interest totaling $34,312. As
of December 31, 2004, the debenture holder had not converted any of this
debenture into shares of common stock. Subsequent to December 31, 2004, the
debenture holder had converted $187,500 of the debenture into 53,571,430 shares
of common stock.
The convertible feature of the above convertible debentures provides for a rate
of conversion that is below market value. Such feature is normally characterized
as a "beneficial conversion feature" ("BCF"). Pursuant to Emerging Issues Task
Force ("EITF") Issue No. 98-5, "Accounting For Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratio" and
EITF Issue No. 00-27, "Application of EITF Issue No. 98-5 To Certain Convertible
Instruments," the Company has estimated the fair value of such BCF to be
approximately $375,000 related to these debentures and recorded such amount as a
debt discount. Such discount is being amortized to interest expense over the
term of the notes. Amortization expense during the year ended December 31, 2004
approximated $140,000.
Amortization expense of deferred financing costs for these convertible
debentures totaled $28,125 for the year ended December 31, 2004.
(7) Income Taxes
During the years ended December 31, 2004 and 2003 the provision for taxes
(substantially all deferred) differs from the amounts computed by applying the
U.S. Federal income tax rate of 34% to income before provision for taxes as a
result of the following:
28
2004 2003
---- ----
Computed "expected" tax (benefit) expense (34%) (34%)
Addition to (reduction) in income taxes
resulting from:
State income taxes, net of federal benefit (4%) -
Change in deferred tax asset valuation allowance 38% 16%
Non-deductible expenses - 18%
----- -----
- -
----- -----
The effects of temporary differences, that give rise to significant portions of
deferred tax assets and liabilities at December 31, 2004 and 2003, are presented
below:
2004 2003
---- ----
Deferred tax assets:
Tax net operating loss carry-forwards 1,368,000 880,000
Investments 565,000 -
----------- -----------
Total gross deferred tax asset 1,933,000 880,000
Less valuation allowance (1,933,000) (880,000)
----------- -----------
Total net deferred tax asset $ - $ -
----------- -----------
The valuation allowance increased by $1,053,000 during the year ended December
31, 2004. The current provision for income taxes for the years ended December
31, 2004 and 2003 is not significant.
At December 31, 2004, the Company had net tax operating loss carry-forwards of
approximately $3,421,000 available to offset future taxable federal and state
income. If not utilized to offset future taxable income, the carry-forwards will
expire in various years through 2014. In the event the Company were to
experience a greater than 50% change in ownership as defined in Section 382 of
the Internal Revenue Code, the utilization of the Company's tax net operating
loss carry-forwards could be severely restricted.
(8) Rescission of Options
During the year ended December 31, 2003, the Company granted 33,150,000 options
to employees (after giving effect to two forward splits), all of which would
have vested from March 2004 through March 2007. In accordance with APB 25, a
$2,784,600 compensation cost was included in deferred compensation costs, to be
recognized over the future vesting period.
Subsequent to the issue of the options, the Company obtained agreements from
employees to rescind all of these options, in exchange for restricted common
shares to be issued immediately. Accordingly, the $2,784,600 option cost,
previously deferred, has been charged to operations in the year ended December
31, 2003.
(9) Stockholders' Equity
Preferred Stock
The Company is authorized to issue up to 50,000,000 shares of preferred stock at
$0.001 par value. As of December 31, 2004 the Company has issued the following
shares:
Convertible series A preferred stock ("Series APS"), 400,000 shares originally
authorized; none issued and outstanding
These shares were issued in connection with the Asset Purchase Agreement
described in Note (4). The shares were cancelled in connection with the
rescission of the transactions contemplated by the Asset Purchase Agreement in
November 2003.
Convertible series B preferred stock ("Series BPS"), 610,000 shares
authorized;190,000 issued and outstanding
The holders of the Series BPS are entitled to receive dividends on the number of
shares of Series BPS, which are converted into shares of Company common stock,
at the dividend rate of 6% of the conversion price for the number of shares
converted, payable in cash or in common stock. The dividend rate is based upon
the ten (10) day average of the lowest closing bid price prior to the date of
conversion ("Market Price").
The Series BPS are convertible into common stock based upon a conversion price
equal to the number of shares being converted divided by 80% of the Market Price
described in the preceding paragraph. All shares of Series B outstanding three
(3) years from the date of issuance shall automatically be converted into common
stock based upon the foregoing formula.
29
Series BPS have preferred treatment upon liquidation of the Company. The holders
of Series BPS are entitled, upon liquidation, dissolution or winding up of the
Company, to receive 120% of the outstanding unconverted principal amount of the
Series BPS before the holders of common shares and any other class or series of
preferred stock.
Series BPS have preferred treatment upon liquidation of the Company.
Series BPS holders are entitled to one vote per share of Series BPS.
Series BPS, voting together as a class, have the right to elect one (1)
director.
Subsequent to December 31, 2004, holders of Series BPS converted 49,500 shares
of Series BPS into 28,221,581 common shares.
Convertible series C preferred stock ("Series CPS"), 10,000,000 shares
authorized; 10,000,000 issued and outstanding
The holders of the Series CPS are not entitled to receive dividends and are
convertible into common stock of the Company in an amount equal to the number of
Series CPS being converted. In connection with any reorganizations, merger,
consolidation or sale of assets involving the Company, the number of Series CPS
shares outstanding and the number of shares of Common Stock into which the
Series CPS are convertible will not be affected by any such capital
reorganization.
There is no liquidation preference for Series CPS holders.
Series CPS, voting together as a class, have the right to elect two (2)
directors but have no other voting rights.
Equity Transactions
Year ended December 31, 2003:
During the year ended December 31, 2003, the Company issued 18,545,818 common
shares, in exchange for which it received cash proceeds totaling $423,263.
During the year ended December 31, 2003, the Company issued 6,191,873 shares of
common stock (adjusted for splits) to employees, consultants and other vendors
for services, for $519,863, the market value of the shares on the dates issued.
The total cost has been reflected in charges to the accompanying financial
statements, as follows: $368,662 has been included in General and Administrative
expense; the balance of $151,201, representing the difference between the value
of services rendered and the market value of shares issued, has been charged to
shares issued at a discount in exchange for services.
During the year ended December 31, 2003, the Company issued 682,147 shares of
common stock to five current and former employees in exchange for their
agreement to the rescission by the Company of 33,150,000 options (as adjusted
for the 5:1 split which took effect May 21, 2003), which had been granted during
the quarter ended March 31, 2003. The full $47,750 cost of these shares, at
market value at date of issuance, has been charged to "write-off of deferred
compensation" expense in the accompanying statements of operations for the year
ended December 31, 2003.
During the year ended December 31, 2003, the Company issued 525,000 shares (as
adjusted for splits) of common stock to former holders of convertible
debentures, which had been converted to Series B Preferred Stock during the
period from inception through December 31, 2002, in satisfaction for an offer of
Inducement to convert. $78,750, the market value of the shares on the date of
issuance, has been reflected as debt conversion costs.
On March 7, 2003, the Company issued 750,000 shares (as adjusted for splits) of
common stock, valued at their market value of $112,500, to a foreign entity for
resale under Regulation S. As these shares have not yet been resold by the
foreign entity, and no consideration has been received, the shares have been
reflected in common stock subscriptions receivable on the accompanying financial
statements
On June 18, 2003, the Company issued an aggregate of 10,000,000 of its Series C
Preferred Shares to one certain officer and director, in lieu of the rescission
of stock options, and to two consultants in exchange for services provided of
$367,500, based on fair market value of the underlying common shares. The Series
C Preferred Shares are convertible on a 1:1 basis into shares of the Company's
common stock.
During the year ended December 31, 2003, 5,087,364 shares of common stock were
issued in connection with a shareholder's election to convert 130,000 shares of
Preferred Series B.
During the year ended December 31, 2003, 18,200,000 common shares were issued in
satisfaction of notes payable in the amount of $413,000.
30
During the year ended December 31, 2003, with shareholder approval, the Company
issued warrants for the purchase of 15 million shares of the Company's common
stock at exercise prices ranging from $.05 to $.10 per share in connection with
a licensing agreement for Unboxed Distribution, Inc. distribute under. The
estimated value of the options totaled approximately $418,326 at the date of
grant. The value of the options was estimated using the Black-Scholes option
pricing model with the following assumptions: risk-free interest of 5.5%;
dividend yield of 0%; volatility factor of the expected market price of the
Company's common stock of 173.5%; and a term of 5 years. This amount has been
included in the valuation of the investment. These warrants were exercisable
upon issuance.
Year ended December 31, 2004:
During the year ended December 31, 2004, the Company issued 128,049,999 common
shares in exchange for which it received cash proceeds totaling $1,533,945.
The Company also issued 30,000,000 restricted common shares for the purchase of
a 51% interest in Island Tribe, Inc., valued at $372,000, based on the market
value of its common stock at the date of acquisition. (see Note 2). The number
of shares issued was based on a formula whereby the shareholders of Island Tribe
received $372,000 of the Company's restricted common stock. Restricted stock
cannot be sold until held for a minimum of twelve months.
During the year ended December 31, 2004, 5,769,109 common shares and 10,000
Series CPS were returned to the Company.
The common stock subscriptions receivable of $9,600 in the accompanying balance
sheet at December 31, 2004 consists of amounts receivable from an investment
banking company related to the purchase of common shares.
During September 2004, 10,000 shares of Series CPS stock were issued in
connection with the issuance of 1,111,111 shares of common stock for total
proceeds of $10,000.
On November 8, 2004, the Company issued a convertible debenture of in the
principal amount of $187,500, convertible at the holder's option into common
shares at a price of $0.0035 per share. As of December 31, 2004, the debenture
holder had converted $131,250 of the debenture into 37,500,001 shares of common
stock. Subsequent to December 31, 2004, the debenture holder had converted the
remaining $56,250 of the debenture into 16,071,429 shares of common stock.
On December 14, 2004, the Company issued an additional convertible debenture in
the principal amount of $187,500, convertible into 53,571,430 common shares of
the Company. As of December 31, 2004, the debenture holder had not converted any
of this debenture into shares of common stock. Subsequent to December 31, 2004
and through March 31, 2005, the debenture holder had converted the total
$187,500 of this debenture into 53,571,430 shares of common stock. The
unconverted shares of these convertible debentures are being held in an escrow
account and are presented as such in the accompanying financial statements.
During the year ended December 31, 2004, 12,165,953 common shares were issued
upon conversion of Series BPS. An additional 166,667 common shares were issued
as settlement for penalties and interest in connection with the conversion of
these Series BPS.
Subsequent to December 31, 2004, 28,221,581 shares of common stock were issued
in connection with a shareholders' election to convert shares of Series BPS.
(10) Going Concern
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern, which contemplates, among other things, the
realization of assets and satisfaction of liabilities in the normal course of
business. As of December 31, 2004, the Company had no revenues and incurred net
losses totaling $7,951,544 for the period from August 26, 2002 (inception)
through December 31, 2004. Additionally, as of December 31, 2004, the Company
has negative working capital of $7,197. These factors, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
The Company intends to fund operations through debt and equity financing
arrangements which management believes may be insufficient to fund its capital
expenditures, working capital and other cash requirements for the fiscal year
ending December 31, 2005. Therefore, the Company will be required to seek
additional funds to finance its long-term operations. The successful outcome of
future activities cannot be determined at this time and there is no assurance
that if achieved, the Company will have sufficient funds to execute its intended
business plan or generate positive operating results.
Management plans to take the following steps in response to these problems:
- - Revenue
It has been determined that, as an investment company, the Company will only
invest in/acquire cash flow positive and profitable businesses. These entities
will have good growth potential as a result of access to additional capital
and/or additional management acumen.
31
As part of this strategic process, the Company will look beyond action sports
apparel for acquisition opportunities so as to include all apparel and footwear
businesses as well as entities in other consumer product categories that have
the potential for a positive return on investment. It is believed that this new
direction will both reduce the risk for the Company and its shareholders as well
as provide the best opportunity for long-term shareholder value.
Regarding two of the Company's subsidiaries, Total Sports Distribution, Inc. and
Unboxed Distribution, Inc., it is clear that profitability in both entities is
not possible in the near future. Subsequent to December 31, 2004, the Company
has signed Mutual Settlement and Release Agreements to cease the licensing
agreements with the licensors for the Airwalk and Bluetorch. There were
significant future guaranteed royalty amounts payable by the Company in
accordance with the existing licensing agreements of these two subsidiaries and
so it was in the best interests of the Company to mitigate our potential losses.
Accordingly, it has been determined that it is not in the best interests of the
Company's shareholders to continue the flow of capital to these two
subsidiaries.
We will, however, continue to fund and invest in Island Tribe Inc., a
subsidiary in which we own 51% of the issued common stock.
- - Financing
On June 19, 2003, Bluetorch Inc. filed an Offering Circular that authorizes the
Company to raise up to $3,000,000 via sale of its common stock. Through December
31, 2004, the Company has raised $2,267,057 against this limit. This sum
includes both cash proceeds and conversion of debt.
On June 24, 2004, the Company filed a new Offering Circular that authorized the
Company to raise up to $5,000,000 via sale of its common stock.
On October 18, 2004 and on November 1, 2004 the Company filed amendments to the
June 24, 2004 Offering Circular, reducing the minimum offering share price to
$0.004 and $0.0035, respectively. In addition, these amendments included a
reduction in the authority to raise capital from $5,000,000 to $2,500,000. As of
December 31, 2004, the Company has raised $658,850 against this limit.
Subsequent to December 31, 2004 and up to March 31, 2005, the Company has raised
an additional $243,750 against this limit.
Subsequent to December 31, 2004, on March 15, 2005, the Company filed an
additional amendment to the June 24, 2004 Offering Circular, reducing the
minimum offering share price to $0.001. In addition, these amendments included a
reduction in the authority to raise capital from $2,500,000 to $375,000. As of
March 31, 2005, the Company has raised $40,000 against this limit.
Whereas the Company believes it will be successful with its plans, due to market
factors and economic conditions, no assurance can be given that 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.
(11) Subsequent Events
Equity Transactions
On March 17, 2005, the Company issued a convertible debenture in a principal
amount of $50,000, convertible into 50,000,000 common shares, which were issued
and held in escrow. At the date of this report, the entire convertible debenture
has been converted into 50,000,000 common shares.
Subsequent to December 31, 2004, 28,221,581 shares of common stock were issued
in connection with a shareholders' election to convert shares of Series BPS.
Licensing Agreements
On March 12, 2005, the Company and its wholly-owned subsidiary, Unboxed
Distribution, Inc., signed a Mutual Settlement and Release Agreement with Gotcha
Brands Inc., the Bluetorch licensor, and this agreement requires the Company's
subsidiary, Unboxed Distribution, Inc., to cease the selling and marketing of
Bluetorch apparel. In keeping with this agreement, the Company also agrees to
change its corporate name by April 20, 2005.
On March 22, 2005, the Company and its wholly-owned subsidiary, Total Sports
Distribution, Inc., signed a Mutual Settlement and Release Agreement with
Collective Licensing International, LLC, the licensor of the Airwalk apparel
brand, and this agreement requires the Company's subsidiary, Total Sports
Distribution, Inc., to cease the selling and marketing of Airwalk apparel.
Strategic Direction
On March 18, 2005, the Company announced that it had created and implemented a
revised business model. The underlying objective of this evaluation was to
ensure that the company pursues a business approach that has the potential of
producing fundamental value for its shareholders.
32
The directors and management have determined that, as a BDC, future investments
will be focused on companies that have entry-level positive cash flow financial
statements. Additionally, the investments must have the potential for growth
based on existing core factors, additional capital infusion if required and, if
necessary, the introduction of an experienced management team that has a
reasonable expectation of expanding the existing business.
Management will be reviewing acquisition opportunities to include all consumer
products categories to provide for a diversification in an expanded portfolio of
subsidiary companies. It is believed that this new direction will both reduce
the risk for the Company and its shareholders as well as provide the best
opportunity for long-term shareholder value.
The company will continue to provide funding for Island Tribe Inc., a subsidiary
in which Bluetorch Inc. owns 51% of the common stock.
Regarding two of the Company's subsidiaries, Total Sports Distribution, Inc. and
Unboxed Distribution, Inc., the board and management have determined that these
investments are not in conformity with the new business model in terms of
current and future profitability. Therefore, it has been determined that it is
not in the best interests of the company or its shareholders to continue the
flow of capital to these two subsidiaries. Accordingly, the Company has written
off its investments in these two subsidiaries.
Reverse split of common stock (unaudited)
On March 29, 2005, the Company announced that its board of directors has
approved a 2500-to-1 reverse stock split of the company's common stock.
The reverse split will be effective on Monday, April 18, 2005 to the holders of
record of Bluetorch Inc. common stock as of the close of business on March 31,
2005. The new share certificates, evidencing the reverse stock split, will be
issued by the company's transfer agent when certificates are physically
surrendered, by issuing one new share for every two thousand five hundred shares
surrendered, or if part of the DTC System, shares will be automatically adjusted
on the same basis. Fractional shares will be issued in connection with the
reverse split. Following the reverse split, the company's ticker symbol on the
OTC-BB will also change. Once Bluetorch is informed of its new symbol, a press
release will be issued with the new symbol.
Consistent with this acquisition strategy and following the above reverse split,
the board of directors has instructed management to discuss with the holders of
the Series CPS the voluntary conversion of approximately 250,000 Series CPS
shares into common stock; the objective of this process would be to obtain
majority shareholder approval for the Company to (i) amend its articles of
incorporation to increase the authorized capital, if required, to allow the
Company to obtain the required additional capital to pursue its acquisition
strategy; and (ii) amend the articles of incorporation to change the name of the
Company, in accordance with the settlement agreement between Unboxed
Distribution, Inc, a wholly-owned subsidiary of the Company, and Gotcha Brands
Inc., the licensor of the Bluetorch label. The Series CPS have anti-dilution
protection that precludes a reverse split of the Series CPS, even though all
common shares are reverse split. There are a total of 10,000,000 shares of
Series CPS currently issued and outstanding.
Amendment to Offering Circular (unaudited)
Subsequent to December 31, 2004, on March 15, 2005, the Company filed an
additional amendment to the June 24, 2004 Offering Circular, reducing the
minimum offering share price to $0.001. In addition, these amendments included a
reduction in the authority to raise capital from $2,500,000 to $375,000. As of
March 31, 2005, the Company has raised $30,000 against this limit.
Directors (unaudited)
On March 11, 2005, Shane Traveller resigned as a director of the Company and
Kenneth Wiedrich was appointed to the board of directors.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL
DISCLOSURES
None.
ITEM 9A: CONTROLS AND PROCEDURES
Evaluation of Controls and Procedures
The Company's board of directors and management, including the Chief Executive
Officer ("CEO") and Chief Financial Officer ("CFO"), evaluated the effectiveness
of the design and operation of the Company's disclosure controls and procedures,
as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act as of a date (the
"Evaluation Date"), within 90 days prior to filing the Company's December 31,
2004 Form 10-K. Based upon that evaluation, the Company's board of directors and
management, including the CEO and CFO, concluded that, as of December 31, 2004,
the Company's disclosure controls and procedures were effective in alerting
management on a timely basis to material Company information that would be
required to be included in our periodic filings with the SEC.
33
Based on their most recent evaluation as of the Evaluation Date, the CEO and the
CFO have also concluded that the other controls and procedures, that are
designed to ensure that information required to be disclosed in our periodic
filings with the SEC, have not been adequate, resulting in a pattern of late
filings which the board of directors and management have now taken specific
steps to correct.
Changes in Internal Control
There were no significant changes made in the Company's internal controls over
financial reporting, during the quarter ended December 31, 2004, that have
materially affected, or are reasonably likely to materially affect, these
internal controls. In April 2005 the board of directors and management have
taken steps to correct the procedures regarding the timeliness of the periodic
filings with the SEC.
PART III
- ---------
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS
The names and ages of each of the current directors and executive officers of
the Company are as follows:
NAME AGE POSITION
- ---------- ------- ---------------
Bruce MacGregor 46 President, CEO and Director
Bernard Gurr 47 Chief Financial Officer and Company Secretary
Read Worth 49 Director
Kenneth Wiedrich 58 Director (Appointed March 11, 2005)
Bruce MacGregor - President, Chief Executive Officer & Director, Bluetorch
Inc.
Mr. MacGregor brings over 20 years of experience in the sporting goods and
apparel industries.
Mr. MacGregor's background includes:
- - President/C.O.O. of L.A.Gear, where he restructured the business in order
to sell the NYSE company.
- - V.P. Marketing of Avia, where he helped grow the brand from $3 million to
$200 million in sales revenue in 5 years.
- - C.O.O. of Razor USA, LLC, where he led the company from $15 million to
$200 million in sales revenue.
Bernard Gurr - Chief Financial Officer, Bluetorch Inc.
Mr. Gurr joined the Company in August 2004 and his background includes:
- - 9 years as Chief Executive Officer of the Sydney Rugby League Football
Club, a high profile, professional sports franchise in Australia.
- - Director of Finance for World Cup USA 1994, Inc., the Organizing Committee
for the 1994 soccer World Cup in the U.S.A.
- - Senior Manager at Ernst & Young, the global financial services firm.
Read Worth - Director, Bluetorch Inc. (Non-executive)
Mr. Worth brings over 15 years of experience in apparel merchandising to the
Company. His work background includes time spent with RLX Polo Sport, Nike and
Patagonia while he was Senior Vice President of Champs (Foot Locker division)
where he built their private label business from zero to $485 million in sales
revenue.
Kenneth Wiedrich - Director, Bluetorch Inc. (Non-executive) (Appointed March
11, 2005)
Mr. Wiedrich has over 33 years of experience in operational accounting and
finance functions in a variety of businesses within the service, construction
and manufacturing industries. Mr. Wiedrich has experience with government cost
accounting methods and all related government acquisition regulations. In his
capacity as the Chief Financial Officer for RI-Tech, Inc., he was responsible
for the day to day administrative functions of the company, as well as all
accounting and financial aspects of the business. Mr. Wiedrich presently serves
as the Chief Financial Officer and Secretary of S3 Investment Company and GTREX,
Inc. Mr. Wiedrich will now be designated the Audit Committee's "financial
expert".
Compliance with Section 16(a) of the Exchange Act
Based solely upon a review of forms 3, 4 and 5 furnished to the Company, the
Company is not aware of any person who at any time during the fiscal year ended
December 31 ,2004, was a director, officer or beneficial owner of more than ten
percent of the Common Stock of the Company, and who failed to file, on a timely
basis, reports required by Section 16(a) of the Securities Exchange Act of 1934
during such fiscal year.
34
ITEM 11: EXECUTIVE COMPENSATION
The following tables provide summary information for the years 2004 and 2003
concerning cash and non-cash compensation paid or accrued by the Company to or
on behalf of the Company's chief executive officer, chief financial officer and
directors.
BLUETORCH INC.
SUMMARY COMPENSATION TABLES
Annual Compensation
Name & Principal Position Year Salary (US$) Bonus($) Other Compensation
Bruce MacGregor 2003 $ 91,100 None None
President & CEO
Bruce MacGregor 2004 $ 132,000 None None
President & CEO
Bernard Gurr 2004 $ 41,666 None None
Chief Financial Officer
(August 2004 to present)
Scott Battenburg 2004 $ 58,333 None None
Chief Financial Officer
(January 2004 through July 2004)
Long Term Compensation
Awards Payouts
Name & Position Year Restricted Stock Securities underlying LTIP Payouts
Stock awards(S) ($) Options / SARS(#) ($)
2001 None None None
2002 None None None
2003 None None None
2004 None None None
Options/SAR Grants in Last Fiscal Year (Individual Grants)
Name & Position Number of Securities Percent of Total Exercise of Base Expiration Date
Underlying Options/ Options/SARs Price ($/Sh)
SARs (1) Granted to Employees
in Fiscal Year
Bruce MacGregor None None None
President & CEO
Bernard Gurr None None None
Chief Financial Officer
(August 2004 to present)
Scott Battenburg None None None
Chief Financial Officer
(January to July 204)
In February 2003, Mr. MacGregor was granted 2,400,000 options at an exercise price of $0.246
per share, which vest 25% per year. These options were rescinded in lieu of the issuance to
Mr. MacGregor of Series C preferred stock..
DIRECTOR COMPENSATION
Name Year Salary (US$) Other Compensation
Shane Traveller 2004 $18,000 None
(Resigned March 11, 2005)
2003 None None
Read Worth 2004 $ 3,600 None
2003 None None
35
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following tables sets forth, as of March 31, 2005, the name, address and the
number of shares of the Company's common stock, held of record or beneficially
by each person who held of record, or was known by the Company to own
beneficially, more than 5% of the 395,097,255 shares of common stock issued and
outstanding, and the name and shareholdings of each director and of all officers
and directors as a group.
CLASS OF STOCK NAME AND ADDRESS OF NUMBER OF SHARES PERCENT OF CLASS
BENEFICIAL OWNER BENEFICIALLY OWNED(1) (1)
- ----------------------------------------------------------------------------------------------------------------
Executive Officers & Directors
- ----------------------------------------------------------------------------------------------------------------
Common Stock Bruce MacGregor 16,585,718 7.3%
C/ 12607 Hidden Creek Way, Suite S
Cerritos, CA 90703
Common Stock Read Worth 582,143 Less than 1%
C/ 12607 Hidden Creek Way, Suite S
Cerritos, CA 90703
Common Stock Bernard Gurr -0- 0%
C/ 12607 Hidden Creek Way, Suite S
Cerritos, CA 90703
Common Stock Kenneth Wiedrich (appointed March 11, 2005) -0- 0%
C/ 12607 Hidden Creek Way, Suite S
Cerritos, CA 90703
ALL EXECUTIVE OFFICERS & DIRECTORS AS A GROUP 17,224,111 7.3%
(1) The number of shares and percentages of class beneficially owned by
the entities/persons above is determined under rules promulgated by the SEC and
the information is not necessarily indicative of beneficial ownership for any
other purpose. Under such rules, beneficial ownership includes any shares as to
which the individuals has sole or shared voting power or investment power and
also any shares as to which the individual has the right to acquire within 60
days through the exercise of any stock option or other right. The inclusion
herein of such shares, however, does not constitute an admission that the named
stockholder is a direct or indirect beneficial owner of such shares. Unless
otherwise indicated, each person or entity named in the table has sole voting
power and investment power (or shares such power with his or her spouse) with
respect to all shares of capital stock listed as owned by such person or entity.
The following table sets forth, as of March 31, 2005, the name, address and the
number of shares of the Series B preferred stock, held of record or beneficially
by each person who held of record, or was known by the Company to own
beneficially, more than 5% of the 140,500 shares of Series B preferred stock
issued and outstanding, and the name and shareholdings of each director and of
all executive officers and directors as a group.
SERIES OF PREFERRED NAME & ADDRESS OF NUMBER OF SHARES PERCENT OF
STOCK BENEFICIAL OWNER BENEFICIALLY OWNED CLASS
- -----------------------------------------------------------------------------------------------------------------------
Series B Preferred Stock Jerry Mann 38,000 27.0%
312 Stuart St 3rd Floor
Boston, MA 02116
Series B Preferred Stock Craig Wexler 17,000 12.1%
312 Stuart St 3rd Floor
Boston, MA 02116
Series B Preferred Stock Lawrence Wexler 28,000 19.9%
312 Stuart St 3rd Floor
Boston, MA 02116
Series B Preferred Stock Peter Zatir 41,000 29.2%
312 Stuart St 3rd Floor
Boston, MA 02116
Series B Preferred Stock Michael Dix 13,500 9.6%
312 Stuart St. 3rd Floor
Boston, MA 02116
ALL EXECUTIVE OFFICERS & DIRECTORS AS A GROUP None N/A
36
The following table sets forth, as of March 31, 2005, the name, address and the
number of shares of the Series C preferred stock, held of record or beneficially
by each person who held of record, or was known by the Company to own
beneficially, more than 5% of the 10,000,000 shares of Series C preferred stock
issued and outstanding, and the name and shareholdings of each director and of
all executive officers and directors as a group.
SERIES OF PREFERRED NAME & ADDRESS OF NUMBER OF SHARES PERCENT OF
STOCK BENEFICIAL OWNER BENEFICIALLY OWNED CLASS
- -------------------------------------------------------------------------------------------------------------------
Series C Preferred Stock Bruce MacGregor 4,440,000 44.4%
C/ 12607 Hidden Creek Way, Suite S
Cerritos, CA 90703
Series C Preferred Stock Abbeyfield Trading, Ltd. 1,009,375 10.1%
C/ 12607 Hidden Creek Way, Suite S
Cerritos, CA 90703
Series C Preferred Stock Mega Plan Investments, Ltd. 1,009,375 10.1%
C/ 12607 Hidden Creek Way, Suite S
Cerritos, CA 90703
Series C Preferred Stock Interfund Management 768,750 7.7%
C/ 12607 Hidden Creek Way, Suite S
Cerritos, CA 90703
Series C Preferred Stock Marie A. Murphy 750,000 7.5%
C/ 12607 Hidden Creek Way, Suite S
Cerritos, CA 90703
Series C Preferred Stock Marge Rohr 737,500 7.4%
C/ 12607 Hidden Creek Way, Suite S
Cerritos, CA 90703
Series C Preferred Stock Peak Solutions 500,000 5.0%
C/ 12607 Hidden Creek Way, Suite S
Cerritos, CA 90703
ALL EXECUTIVE OFFICERS & DIRECTORS AS A GROUP 4,440,000 44.4%
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In May 2002, the Company acquired substantially all of the assets of Sanotech
Group SPL ("SGS") from STG Corp in exchange for an aggregate of 22,987,800
shares of its common stock, which were issued to the STG shareholders (the "STG
Acquisition"). In connection with the STG Acquisition, the Company issued an
aggregate of $545,000 of convertible debentures to eight persons. Prior to the
STG Acquisition, STG had acquired the assets of SGS from the SGS shareholders.
In August 2002, the Company agreed to return to SGS all of the assets formerly
owned by SGS in exchange for delivery to the Company of a number of the shares
of the common stock issued to the former SGS shareholders in connection with the
STG Acquisition. An aggregate of 20,876,064 were returned to the Company and
these shares were cancelled in November 2002.
In October 2002, the Company issued an aggregate of 19,500,000 shares of its
common stock to the shareholders of Aussie Apparel Group Ltd. ("Aussie Apparel")
in connection with the merger of Aussie Apparel with and into MedEx Corp. whose
name was changed to "Aussie Apparel Group Ltd", as the surviving entity.
In November 2002, the Company issued an aggregate of 545,000 shares of its
Series BPS in exchange for $545,000 face amount of its convertible debentures
upon the conversion thereof, which were issued in connection with the STG
Acquisition in May 2002. An aggregate of 105,000 shares of the Company's common
stock was also issued to the holders of the convertible debentures in connection
with the conversion of the convertible debentures into the Series BPS.
The holders of the Series BPS are entitled to receive dividends on the number of
shares of Series BPS, which are converted into shares of Company common stock,
at the dividend rate of 6% of the conversion price for the number of shares
converted, payable in cash or in common stock. The dividend rate is based upon
the ten (10) day average of the lowest closing bid price prior to the date of
conversion ("Market Price").
37
The Series BPS are convertible into common stock based upon a conversion price
equal to the number of shares being converted divided by 80% of the Market Price
described in the preceding paragraph. All shares of Series BPS outstanding three
(3) years from the date of issuance shall automatically be converted into common
stock based upon the foregoing formula.
An affiliate of Dutchess Advisors Ltd. ("Dutchess") and its principals were
shareholders of STG and received shares of the Company's common stock in
connection with the STG Acquisition. In connection with the rescission of the
STG Acquisition, Dutchess and its principals returned substantially all of their
shares to the Company for cancellation. Dutchess was issued 65,000 shares of
Series BPS in connection therewith.
In connection with the STG Acquisition, Irwin R. Dyer III and Marion Day,
principals of SGS were elected directors of the Company on May 9, 2002. Michael
Novielli, a principal of Dutchess, was elected President of the Company on April
3, 2002 and as a director of the Company on May 9,2002. Messrs. Dyer, Day and
Novielli resigned their positions with the Company on November 26, 2002. Between
April 1, 2002 and June 30, 2002, Dutchess was paid $107,500 in consulting fees
by the Company. Mr. Novielli was reimbursed $21,934 for expenses incurred on
behalf of the Company. The Company reimbursed Mr. Douglas Leighton, a principal
of Dutchess, $12,603 during this period.
During the same period, Mr. Dyer was paid consulting fees of $102,001 and Mr.
Day was paid $75,000 by the Company. In addition, Messrs Dyer and Day were
reimbursed $62,642 and $20,808, respectively, by the Company for expenses
incurred on behalf of the Company.
On April 1, 2003, the Company issued a Debenture (the "Debenture") in the face
amount of $25,000 to Dutchess which was payable on April 1, 2007 and bears
interest at the rate of six percent (6%) per annum, which was payable in cash or
common stock at the option of the Company. The Debenture was convertible into
the Company's common stock at a rate of the lesser of (i) 75% of the average of
the lowest closing bid price for the 15 trading days prior to conversion or (ii)
100% of the average of the closing bid prices for the 20 trading days
immediately preceding April 3, 2003. This Debenture was retired in October 2003.
On February 6, 2004, the Company completed the redemption of 365,000 of the
Series BPS held by Dutchess Private Equities Fund Ltd.
In addition, on April 1, 2003, the Company entered into an Investment Agreement
("IA Agreement") with Dutchess pursuant to which Dutchess agreed to purchase up
to $4,000,000 of the Company's common stock over a 24-month period ending April
1, 2005. The purchase price shall be equal to 93% of the lowest bid price during
the 10-day period prior to the date the Company requests that Dutchess purchase
common stock.
The Company has granted registration rights to Dutchess with respect to the
shares of its common stock underlying the Debenture and the IA Agreement.
On April 8, 2003, the Company entered into a License/Distributorship Agreement
with Frontier International Holdings Pty Ltd ("Frontier"), with respect to the
Hot Tuna, Xisle, Piranha Boy and Piranha Girl trademarks in Australia, New
Zealand, Fiji, New Caledonia and Pacific Islands, on an exclusive basis and
Singapore and Malaysia on a non-exclusive basis. The initial term of this
agreement was to be for 10 years with an option in favor of Frontier for an
additional 10-year term. Royalties of 6% of net sales in the territories
described above were to be payable by Frontier to the Company. These agreements
were assigned to Frontier in January 2004.
In December 2002, the Company acquired the Hot Tuna (surf and wakeboarding),
Xisle (surf/skate) and the children's surf brands, Piranha Boy and Piranha Girl,
and trademarks from Federation Group Limited ("FGL") in exchange for an
aggregate of 6,690,000 shares of the Company's common stock and 400,000 shares
of its Series APS. The holders of the Series APS were entitled to receive a
yearly dividend of Series APS payable in shares of common stock equal to five
cents ($0.05) per share times the 400,000 shares or $20,000 divided by 95% of
the market price of the Company's common stock on January 1 of each year. The
Series APS was also convertible into shares of the Company's common stock equal
to the number of Series APS being converted divided by 85% of the market price
at the time of conversion. This transaction was rescinded in November 2003. The
Series APS was cancelled and Federation returned all but 3,300,000 shares of the
Company's common stock issued in connection with this transaction.
On February 20, 2003, the Company's board of directors authorized the issuance
of 33,150,000 options to certain officers and directors at an exercised price of
$0.24 per share. These options were rescinded on May 30, 2003 and an aggregate
of 682,147 shares of common stock were issued in lieu thereof.
On April 7, 2003 and on May 27, 2003, the Company effected a 3-for-1 and 5-for-1
forward stock split.
38
On September 8, 2003, Unboxed entered into a License Agreement (with option to
purchase) with Gotcha Brands, Inc ("Gotcha") and, in connection therewith,
issued 15,000,000 warrants to Gotcha principals.
On September 8, 2003 and September 9, 2003, the Company's board of directors and
shareholders approved an increase in the authorized capital of the Company to
950,000,000 shares of common stock at a par value $0.001 and 50,000,000 shares
of preferred stock a par value $0.001.
On May 30, 2003, the Company filed the appropriate documents with the Securities
and Exchange Commission to become a "Business Development Company" ("BDC") under
the Investment Company Act of 1940; the Company officially became a BDC on June
19, 2003.
Also, on May 30, 2003, the Company (i) cancelled $400,000 of notes in exchange
for the issuance of a $600,000 debenture, (ii) authorized the issuance of
10,000,000 shares of Series C preferred stock, of which 4,750,000 shares were
issued to Bruce MacGregor, 4,750,000 shares to Davenport Investments Limited and
500,000 to Peak Solutions and (iii) issued 5,167,500 shares of common stock in
exchange for the cancellation of $198,600 of debt owed to certain officers,
directors, consultants and vendors.
On November 23, 2003, the Company exchanged $212,500 of debt held by certain
shareholders for 500,000 shares of common stock.
On October 10, 2003, the Company entered into a Stock Purchase Agreement ("SPA")
with Dutchess Private Equities Fund, L.P. ("Dutchess") Dutchess agreed to
purchase up to $1,800,000 of the Company's common stock over a twelve-month
period. From October 24, 2003 through March 31, 2004, the Company issued
58,566,667 shares of common stock under the SPA. Such shares were issued
pursuant to Regulation E under the Securities Act of 1933, as amended.
On January 26, 2004, Scott Battenburg resigned as a director and Read Worth was
appointed a director of the Company. Mr. Battenburg was appointed the Company's
Chief Financial Officer and Secretary, effective January 26, 2004.
Effective July 31, 2004, Mr. Battenburg resigned as Chief Financial Officer and
Mr. Bernard Gurr was appointed Chief Financial Officer on August 2, 2004.
An aggregate of 16,679,169 shares of common stock were issued from October 1,
2003 through February 9, 2004, pursuant to the conversion of Series BPS, of
which Dutchess received 15,504,452 shares. Dutchess no longer owns any Series
BPS.
On March 11, 2005, Shane Traveller resigned as a director of the Company and
Kenneth Wiedrich was appointed to the board of directors.
Effective February 1, 2003, the Company issued an aggregate of 6,630,000 options
to acquire shares of common stock at an exercise price of $0.246 per share, to
certain officers and/or consultants of the Company for services rendered namely:
Name No. Of Shares Vesting Period
- --------------- --------------------- ------------------
Bruce MacGregor 2,400,000 25% per year commencing Feb. 1, 2004 thru Feb. 1, 2007
Read Worth 1,800,000 Same per year
Stewart Kawamura 750,000 Same per year
Rod Williams 1,500,000 Same per year
Gigi Carrano 180,000 Same per year
These options were cancelled on May 30, 2003.
On March 1, 2003, the Company issued an aggregate of 1,168,875 shares of
restricted common stock to employees and/or consultants for services rendered,
namely:
39
Name No: of Shares Date Of Issuance
- ---------------- ------------------- -----------------------
Read Worth 300,000 25% on March 1,2003
25% on April 1,2003
25% on July 1, 2003
25% on October1, 2003
Rod Williams 75,000 Same 25% and dates as above
Scott Battenburg 45,000 Same 25% and dates as above
Gigi Carrano 36,000 Same 25% and dates as above
John Kraus 22,500 Same 25% and dates as above
Howard Salomon 60,000 100% on March 1, 2003
David Lasell 30,000 100% on March 1, 2003
IC12 Pty., Ltd. 30,000 100% on March 1, 2003
GISBEX 150,000 100% on March 1, 2003
On September 8, 2003, the Company's wholly-owned subsidiary, Unboxed
Distribution, Inc., entered into a License Agreement (with an option to
purchase) ("Bluetorch License") with Gotcha Brands, Inc. ("Gotcha") with respect
to the Bluetorch trademark for use in the United States, Mexico and Canada.
Unboxed has the option to acquire, after three years, the Bluetorch trademark in
certain categories. The term of the Bluetorch License is three years and four
months, commencing September 8, 2003. The Bluetorch License shall automatically
renew for three additional six-year terms or Unboxed may acquire the Bluetorch
Trademark in the territories and categories in which Unboxed is selling products
as long as Unboxed is not in material breach of the Bluetorch License and
Unboxed has reached the guaranteed domestic monthly minimum royalty ("Minimum
Royalty").
On March 12, 2005, the Company and its wholly-owned subsidiary, Unboxed
Distribution, Inc., signed a Mutual Settlement and Release Agreement with Gotcha
Brands Inc., the Bluetorch licensor, and this agreement requires the Company's
subsidiary, Unboxed Distribution Inc., to cease the selling and marketing of
Bluetorch apparel. In keeping with this agreement, the Company also agrees to
change its corporate name by April 20, 2005.
On October 21, 2003, the Company's other wholly owned subsidiary, Total Sports
Distribution, Inc., entered into a License Agreement (with an option to
purchase) ("TSA License") with Krash Distribution Inc. ("Krash") with respect to
the use of the TSA Trademark in the United States, Mexico and Canada
("Territory"). The TSA License is for a term of three years and six months,
commencing July 1, 2004. The TSA License is automatically renewable for three
additional terms of five years or Total Sports may acquire the TSA Trademark
utilized in the Territory only or globally so long as Total Sports is not in
material breach of the TSA License and Total Sports has reached the guaranteed
domestic monthly minimum royalty ("Minimum Royalty").
The TSA License provides for a royalty equal to 4% for the net sales per year on
sales of the licensed products. The Minimum Royalty shall be $28,000 in 2004,
$140,000 for 2005, $350,000 for 2006 and $520,000 for 2007. Total Sports has
paid Krash $20,000 in 2003 as an advance against the 2004 Minimum Royalty.
The option price for the TSA Trademark shall consist of the greater of (i) the
total royalties paid to Krash from July 1, 2004 through December 31, 2007 or
(ii) $1,008,000. If Total Sports parent is a BDC entity at the time of the
exercise of the option, said sum shall be paid 25% in cash, 25% in free trading
stock and 50% in restricted stock. If Total Sports parent is not a BDC entity,
said sum shall be paid 35% in cash and 65% in restricted stock.
Total Sports entered into a License Agreement with Collective Licensing
International, LLC ("Collective") with respect to the Airwalk Trademark owned by
Collective. This License Agreement became effective on July 1, 2004. The
License Agreement was for a term of 5 years commencing on July 1, 2004 and
relates only to the geographic area known as the United States of America.
Total Sports had agreed to pay to Collective guaranteed payments ranging from
$280,000 for the six months ended December 31, 2004 up to $1,920,000 for 2008.
On March 22, 2005, the Company and its wholly-owned subsidiary, Total Sports
Distribution Inc., signed a Mutual Settlement and Release Agreement with
Collective Licensing International, LLC, the licensor of the Airwalk apparel
brand, and this agreement requires the Company's subsidiary, Total Sports
Distribution Inc., to cease the selling and marketing of Airwalk apparel.
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Annual Report on Form 10-K for the year ended December 31, 2003 was audited
by Stonefield Josephson, Inc. (Certified Public Accountants).
The Company changed auditors to Squar, Milner, Reehl & Williamson, LLP
(Certified Public Accountants) on June 14, 2004.
40
AUDIT FEES
For the fiscal year ended December 31, 2004, Squar, Milner, Reehl, Williamson &
LLP billed the Company $13,900, for services rendered for the audit of the
Company's annual financial statements included in its report on Form 10-K and
the reviews of the financial statements included in its reports on Forms 10-Q
filed with the SEC.
For the fiscal year ended December 31, 2003, Stonefield Josephson, Inc. billed
the Company $40,397, for services rendered during the audit of the Company's
annual financial statements included in its report on Form 10-K and the reviews
of the financial statements included in its reports on Forms 10-Q filed with the
SEC.
TAX FEES
For the fiscal year ended December 31, 2004, Squar, Milner, Reehl & Williamson,
LLP billed the Company $0, in connection with the preparation of tax returns and
the provision of tax advice.
For the fiscal year ended December 31, 2003, Stonefield Josephson, Inc. billed
the Company $0, in connection with the preparation of tax returns.
ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) All Financial Statements.
(b) Exhibits: None.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, this 15th day of April 2005.
BLUETORCH INC.
By: /S/ Bruce MacGregor
-----------------------
Bruce MacGregor,
President & Chief Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act 1934, this report has been duly signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
NAME POSITION DATE
- -------------- -------------------- ---------
BRUCE MACGREGOR PRESIDENT, CHIEF EXECUTIVE 2005
OFFICER AND DIRECTOR
BERNARD GURR CHIEF FINANCIAL OFFICER 2005
READ WORTH DIRECTOR 2005
KENNETH WIEDRICH DIRECTOR 2005
CERTIFICATION
I, Bruce MacGregor, certify that:
1. I have reviewed this Annual Report on Form 10-K of Bluetorch Inc;
2. Based on my knowledge, this annual report does not contain any untrue
statements of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have;
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of the date of this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
41
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions);
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditor any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 15, 2005
BY: /S/ BRUCE MACGREGOR
--------------------------
Bruce MacGregor
President & Chief Executive Officer
CERTIFICATIONS
I, Bernard Gurr, certify that:
1. I have reviewed this Annual Report on Form 10-K of Bluetorch Inc;
2. Based on my knowledge, this annual report does not contain any untrue
statements of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have;
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of the date of this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions);
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditor any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 15, 2005
BY:_BERNARD GURR
-------------------------
Bernard Gurr
Chief Financial Officer
42
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Bruce MacGregor, Chief Executive Officer of Bluetorch Inc., certify, pursuant
to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act
of 2002, that, to the best of my knowledge:
(1) the Annual Report of the Company on Form 10-K for the years ended December
31, 2004 and December 31, 2003 (the "Report") fully complies with the
requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and result of operations of the Company.
/s/ Bruce MacGregor
---------------------
Bruce MacGregor
President & Chief Executive Officer
April 15, 2005
43