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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For Quarter Ended: March 31, 2005
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Nos: 814-00633 and 000-28027
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PACIFIC PEAK INVESTMENTS
-------------------------
(Exact name of registrant as specified in its charter)
Nevada 90-0093439
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(State of Incorporation) (I.R.S. Employer I.D.)
12607 Hidden Creek Way, Suite S, Cerritos, CA 90703
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(Address of principal executive offices and principal place of business)
(562) 623-4040
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(Registrant's Telephone Number)
Pacific Crest Investments
(formerly Bluetorch Inc.)
--------------------------
(Former Names)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such a period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
As of May 12, 2005, the registrant had a total of 472,900 shares of common stock
issued and outstanding.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE
Item 1: Financial Statements 1-9
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 3: Quantitative and Qualitative Disclosures About Market Risk 11
Item 4: Controls and Procedures 12
PART II OTHER INFORMATION
Item 1: Legal Proceedings 12
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 12
Item 3: Defaults Upon Senior Securities 12
Item 4: Submission of Matters to a Vote of Security Holders 12
Item 5: Other Information 12
Item 6: Exhibits 13
SIGNATURES
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
PACIFIC PEAK INVESTMENTS
CONDENSED BALANCE SHEETS
March 31, 2005 December 31, 2004
-------------- -----------------
(Unaudited)
ASSETS
Investments in portfolio companies $ 386,478 $ 377,478
Cash 9,106 43,466
Deferred financing costs - 28,125
Deposits & prepaid expenses 5,557 49,006
Property & equipment, net 21,538 25,720
-------------- -----------------
$ 422,679 $ 523,795
============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable & accrued expenses 161,364 $ 118,970
Loans payable to related parties 20,000 -
Convertible debentures, net of discount 8,824
-------------- -----------------
Total liabilities 181,364 127,794
-------------- -----------------
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; 140,500 and 190,000
shares issued and outstanding 140 190
at March 31, 2005 & December 31, 2004,
respectively
Convertible preferred series C,
$0.001 par value; 10,000,000 shares
authorized; 10,000,000 shares issued
and outstanding 10,000 10,000
Common stock, $0.001 par value;
950,000,000 shares authorized;
542,961,709 and 464,740,114
shares issued and outstanding at
March 31, 2005 and December 31, 2004,
respectively 542,962 464,740
Common stock held in escrow (20,000) (69,643)
Common stock subscriptions receivable (9,600) (9,600)
Additional paid in capital 8,188,812 7,951,858
Accumulated deficit (8,470,999 ) (7,951,544)
-------------- -----------------
Total stockholders' equity 241,315 396,001
-------------- -----------------
$ 422,679 $ 523,795
============== =================
The accompanying notes form an integral part of these financial statements.
1
PACIFIC PEAK INVESTMENTS
SCHEDULE OF INVESTMENTS IN PORTFOLIO COMPANIES
(Unaudited)
March 31, 2005
Description Percent Fair
Company of Business Ownership Cost Value Affiliation
Unboxed Distribution, Inc. Extreme Sports Apparel 100% $ - $ - (1) Yes
Total Sports Distribution, Inc. Extreme Sports Apparel 100% $ - $ - (1) Yes
Island Tribe, Inc. Extreme Sports Apparel 51% $386,478 $386,478 (1) Yes
-------- --------
Investments in portfolio companies $386,478 $386,478
======== ========
(1) Fair value was determined by the Company's board of directors - refer to Note 2 for further explanation of the Company's
methods of determining fair values.
The accompanying notes form an integral part of these financial statements.
2
PACIFIC PEAK INVESTMENTS
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2005 MARCH 31, 2004
--------------- ---------------
REVENUES $ - $ -
--------------- ---------------
EXPENSES
General and administrative (519,455) (395,713)
--------------- ---------------
Total expenses (519,455) (395,713)
--------------- ---------------
Net loss $ (519,455) $ (395,713)
=============== ===============
Basic and diluted - loss per share $ (2.70) $ (4.58)
=============== ===============
Weighted average common shares -
basic and diluted 192,069 86,355
=============== ===============
The accompanying notes form an integral part of these financial statements.
3
PACIFIC PEAK INVESTMENTS
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 and 2004
(Unaudited)
2005 2004
-------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (519,455) $ (395,713)
Adjustments to reconcile net loss to net cash used in
operating activities:
Costs associated with converting stock at a discount - 124,250
Depreciation and amortization expense 4,182 -
Amortization of deferred financing costs 28,125 -
Amortization of beneficial conversion feature 234,926 -
Legal expense associated with conversion of Series B - 2,950
Shares issued for settlement of interest on Series B - 50,000
Changes in operating assets and liabilities:
Deposits and prepaid expenses 43,449 (5,557)
Accounts payable and accrued expenses 42,394 (58,195)
Loans payable - (12,000)
-------------- ------------
Net cash used in operating activities (166,379) (294,265)
-------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments advanced to portfolio investment companies (9,000) (294,554)
-------------- ------------
Net cash used in investing activities (9,000) (294,554)
-------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock - 747,050
Redemption of Series B - (30,000)
Proceeds from issuance of convertible debentures 50,000 -
Additional proceeds from sale of common stock in prior year 91,019 -
-------------- ------------
Net cash provided by financing activities 141,019 717,050
-------------- ------------
Net increase / (decrease) in cash (34,360) 128,231
Cash and cash equivalents, beginning of period 43,466 517
-------------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,106 $ 128,748
============== ============
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Conversion of preferred series B to common stock $ 50 $ -
Common stock issued upon conversion of convertible debentures $ 273,750 $ -
4
The accompanying notes form an integral part of these financial statements.
NOTES TO THE FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS
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 Corp.
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 Corp. only from the date of acquisition, using reverse merger accounting.
The Company's name was changed to Bluetorch Inc. (hereinafter "Bluetorch")
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 (the
"Investment Company Act").
On March 12, 2005, the Company and one of its wholly-owned portfolio
investments, Unboxed Distribution, Inc., signed a Mutual Settlement and Release
Agreement with Gotcha Brands Inc., the Bluetorch licensor, and this agreement
requires 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.
Subsequent to March 31, 2005 and in accordance with the above Mutual Settlement
and Release Agreement, the Company amended its articles of incorporation to
implement a name change of the Company; effective April 25, 2005 the Company's
new name became "Pacific Crest Investments" (hereinafter the "Company") and its
common stock began trading under this new name with a new exchange symbol.
Subsequent to March 31, 2005 and following the public announcement of the
Company's new name, the Company received notice that another corporation had a
name similar to Pacific Crest Investments. In the interests of avoiding
potentially prolonged and expensive litigation, the Company agreed to change its
name from Pacific Crest Investments. Effective May 5, 2005, the Company's new
name is Pacific Peak Investments (hereinafter the "Company").
On March 22, 2005, the Company and one of its wholly-owned portfolio
investments, 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 Total Sports
Distribution, Inc. to cease the selling and marketing of Airwalk apparel.
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 of
these investments in portfolio companies will be included in the Company's
financial statements.
Condensed Financial Statements
The accompanying financial statements have been prepared by the Company without
audit. In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position as of
March 31, 2005 and the results of operations and cash flows for all periods
presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United Sates of America have been condensed or omitted. It is suggested
that these condensed financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's December 31,
2004 audited financial statements on Form 10-K. The results of operations for
the three-month periods ended March 31, 2005 and 2004 are not necessarily
indicative of the operating results for the full years.
Reclassifications
Certain reclassifications have been made to the prior year financial statements
to conform to the current year presentation.
5
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 March 31, 2005, the Company had no revenues and incurred net
losses totaling $8,470,999 for the period from August 26, 2002 (inception)
through March 31, 2005. Additionally, as of March 31, 2005, the Company had
negative working capital of $172,258. 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. It is
intended that these entities will have good growth potential as a result of
access to 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. 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 portfolio investment companies , Total
Sports Distribution, Inc. and Unboxed Distribution, Inc., it is clear that
profitability in both entities is not possible in the near future. In the
three months ended March 31, 2005, 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 investments and so it was in
the best interests of the Company to mitigate the substantial 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.
The Company will, however, continue to fund and invest in Island Tribe,
Inc., a portfolio investment company 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
March 31, 2005, 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.
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. As of March 31, 2005, the Company has raised $912,600 against this
Offering Circular.
On April 27, 2005, the Company filed an additional amendment to the June
24, 2004 Offering Circular, with a new minimum offering share price of
$0.05.
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 the carrying amounts of assets or the
amounts and classification of liabilities that might result should the
Company be unable to continue as a going concern.
6
(2) INVESTMENTS
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.
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:
- - 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.
7
Based on the previous methodology, the Company determined that its investments
in its portfolio companies should be valued at March 31, 2005 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). On March 12,
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, on March 22,
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 $386,478, being the price of $372,000, as
per the Stock Purchase Agreement dated August 20, 2004, plus
additional cash investments by the Company during the fourth quarter
of 2004 and the first quarter of 2005. The Company is continuing with
Island Tribe since it is not subject to any guaranteed minimum
royalties, unlike Unboxed and Total Sports.
(3) EQUITY
Common Stock:
- -------------
During the three months ended March 31, 2005, the Company issued 0 shares of
common stock for cash per its Offering Circulars.
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.
During the three months ended March 31, 2005, the debenture holder converted the
final $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.
During the three months ended March 31, 2005, the debenture holder had converted
the entire $187,500 of the debenture into 53,571,430 shares of common stock.
On March 17, 2005, the Company issued a convertible debenture in a principal
amount of $50,000, convertible into 50,000,000 common shares. During the three
months ended March 31, 2005, the debenture holder converted $30,000 of the
debenture into 30,000,000 shares of common stock. Subsequent to March 31, 2005,
the debenture holder had converted the remaining $20,000 of the debenture into
20,000,000 shares of common stock.
On April 27, 2005, the Company filed an additional amendment to the June 24,
2004 Offering Circular, with a new minimum offering share price of $0.05.
Preferred Stock:
- -----------------
The Company is authorized to issue up to 50,000,000 shares of preferred stock at
$0.001 par value. As of March 31, 2005 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 an Asset Purchase Agreement and 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;140,500 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").
8
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. 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.
(4) LOSS PER SHARE
Subsequent to March 31, 2005, a 2500-to-1 reverse stock split became effective
for the Company's common stock (see Note 5). In accordance with Statements of
Financial Accounting Standards No. 128 Earnings Per Share, as amended, the
per-share computations below reflect such changes in the number of shares. The
following is a reconciliation of the numerators and denominators of the basic
and diluted earnings per share computations for the three months ended March 31,
2005 and 2004:
2005 2004
---- ----
Numerator for basic and diluted loss per share:
Net loss $(519,455 ) $(395,713)
Denominator for basic and diluted loss per share:
Weighted average shares (assuming retroactive 2500-to-1 reverse stock split 192,069 86,355
Basic and diluted loss per share $ (2.70 ) $ (4.58)
(5) SUBSEQUENT EVENTS
Equity transactions
In April 2005, 276,900 shares of Series C Preferred Stock ("Series CPS")
were converted into 276,900 common shares.
Reverse split of common stock
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.
Subsequent to March 31, 2005, the reverse split became effective on Monday,
April 18, 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 changed.
9
Consistent with the acquisition strategy and following the above reverse split,
the board of directors had instructed management to discuss with the holders of
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 were a total of 10,000,000 shares of Series CPS issued and
outstanding at March 31, 2005. As of May 12, 2005, there were 9,723,100 shares
of Series CPS issued and outstanding.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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
Management's Discussion and Analysis of Financial Condition and Results of
Operations section discusses the Company's 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.
Results of Operations
For the three months ended March 31, 2005, the Company has incurred an operating
loss of $519,455. The loss consists primarily of interest related to financing
activities of $306,500, salaries and wages of $42,308, consulting fees for
investment banking, investor relations and legal of $64,764 and write-off of
advances to portfolio investment companies of $91,132.
The loss for the three months ended March 31, 2004 was $395,713. The major
differences between the results of operations for the three months ended March
31, 2005 and 2004 are the interest costs and write-off of advances to portfolio
investment companies in the first quarter of 2005 less reduced payroll costs.
Liquidity and Capital Resources
We had cash totaling $9,106 as of March 31, 2005. Our other assets primarily
consist of investments in portfolio companies of $386,478. Total assets at March
31, 2005 were $422,679. At March 31, 2005 our total liabilities of $181,364,
which were represented by $161,364 of accounts payable and accrued expenses and
$20,000 of convertible debentures.
10
As of March 31, 2005, the Company had no revenues and incurred net losses
totaling $8,470,999 for the period from August 26, 2002 (inception) through
March 31, 2005. Additionally, as of March 31, 2005, the Company had negative
working capital of $172,258. 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 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.
Regarding two of the Company's portfolio investments , 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 portfolio investments and so it was in the best interests of the
Company to mitigate the substantial 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 portfolio investment companies and
that these investments be written-off as of December 31, 2004.
The Company will, however, continue to fund and invest in Island Tribe, Inc., a
portfolio investment in which we own 51% of the issued and outstanding common
stock.
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
investment 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.
Off Balance Sheet Arrangements
None.
Contractual Obligations
Total Less than 1 year
------- ----------------
Convertible Debenture $20,000 $20,000
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES 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.
11
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.
ITEM 4: 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. Based upon that
evaluation, the Company's board of directors and management, including the CEO
and CFO, concluded that, as of March 31, 2005, 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.
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, are adequate.
Changes in Internal Control
There were no significant changes made in the Company's internal controls over
financial reporting, during the quarter ended March 31, 2005, that have
materially affected, or are reasonably likely to materially affect, these
internal controls. Thus, no corrective actions, with regard to significant
deficiencies or material weaknesses, were necessary.
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the quarter ended March 31, 2005, the Company issued an aggregate of
78,221,595 shares of its common stock.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
None
12
ITEM 6: EXHIBITS
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PACIFIC PEAK INVESTMENTS
May 12, 2005 By:/s/ Bruce MacGregor
-------------------------------
Bruce MacGregor, President