Sovereign Exploration Associates International, Inc. Form 10-K 10-13-06
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 205409
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2006
or
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 333-29903
SOVEREIGN EXPLORATION ASSOCIATES INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
Utah 30-0123229
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State or other jurisdiction of (I.R.S. Employer
Incorporation or organization Identification No.)
503 East Washington Avenue, Suite 2D, Newtown, Pennsylvania 18940
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (215) 968-0200
Securities registered pursuant to Section 12(b) of the Act: N/A
Securities registered pursuant to section 12(g) of the Act: N/A
Indicate by check mark if the registrant is a well-known seasoned, inssuer, as
defined in Rule 405 of the Securities Act [ ] Yes [X] No
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act [ ] Yes [X] No
Note - Checking this box above will not relieve any registrant required to file
reports pursuant to Section 13 of 15(d) of the Exchange Act from their
obligations under those Sections.
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 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] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act).
[ ] Yes [X] No
The aggregate market value of the voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant's most recently completed second fiscal
quarter, is $4,362,422.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 26,203,166 shares of
Common Stock, par value $.001 per share, as of September 30, 2006
DOCUMENTS INCORPORATED BY REFERENCE
None.
PART I
Item 1. Business.
Sovereign Exploration Associates International, Inc. (the "Corporation" or the
"Company") was incorporated in Utah in 1980. The Corporation on January 13,
2004, elected to be treated as a business development company under the
Investment Company Act of 1940 (the "1940 Act"). A business development company
is a kind of investment company that invests primarily in, and makes available
significant managerial assistance to, eligible portfolio companies that may not
have ready access to capital through conventional financial channels.
There was a change in control of the Corporation on October 17, 2005. The
Corporation, then known as CALI Holdings, Inc., on that date entered into an
Exchange Agreement (the "Exchange Agreement") with Sovereign Exploration
Associates International, Inc., a Pennsylvania corporation now known as Historic
Discoveries, Inc. ("Historic Discoveries"). As a result of the Exchange
Agreement, Historic Discoveries became a wholly-owned subsidiary of the
Corporation and the former shareholders of Historic Discoveries received 90% of
the capital stock of the Corporation. All of the Directors and officers of the
Corporation resigned, and new Directors and officers took office. Immediately
prior to and in connection with the entry into the Exchange Agreement, the
Corporation disposed of substantially all of its assets. For a fuller
description of these transactions, see Item 13 - Certain Relationships and
Related Transactions.
The Corporation on September 22, 2006, withdrew its election to be a business
development company. The Corporation is now devoted to the continued
exploration, discovery and recovery of shipwrecks of historic and intrinsic
value. The Corporation carries on this business through subsidiaries and
controlled companies.
The Business of Historical Shipwreck Recovery
Searching for and salvaging historical shipwrecks is a multistage process. The
Corporation generally seeks to identify and recover artifacts from historical
shipwrecks dating from 1500 to 1900. The wrecked ships themselves generally were
made of wood and have completely disintegrated. The Corporation therefore seeks
to recover valuable and historically interesting artifacts from the shipwreck
sites.
An initial step is locating promising sites for exploration. The Corporation has
conducted extensive research into historical shipwrecks. It currently focuses on
inshore, shallow-water sites that tend to be less costly and to provide the
Corporation with a higher likelihood of greater recovery-per-dive than achieved
by deep-water recovery operations. The Corporation also takes into account the
effect of local laws, which vary in the degree to which a salver must share
recovered items with governmental authorities.
The Corporation generally must obtain an exploratory or disturbance permit
before commencing exploratory operations. The permit gives the holder the
exclusive right to conduct exploratory operations in the area covered by the
permit. The Corporation holds or has rights to a number of these permits and
considers that they make up a significant portion of its net worth; in many
cases, the permits are owned by a third party who contracts with a subsidiary or
controlled company of the Corporation. During the exploratory operations, the
Corporation seeks to locate shipwrecks and to confirm their identification
through examination of a limited number of salvaged items. Both exploratory and
salvage operations are dependent upon favorable weather conditions. For
operations off the coast of Nova Scotia, where several of the Corporation's
sites are located, these are restricted to the warmer months of the year.
A separate recovery permit is required before the Corporation can make any
substantial recoveries from a site. Recoveries under a recovery permit require
the involvement of a science team, which examines recovered items and turns its
findings over to the applicable governmental authority. The artifacts must be
thoroughly documented in accordance with commonly accepted historical and
archaeological standards. These records will be retained by the Corporation and
made available to researchers by request. After items have been recovered and
examined, it generally is necessary to negotiate an in-kind sharing of recovered
items with the governmental authority. In the Corporation's experience, this
negotiation can take a year or more.
The Corporation then can began realizing on the recovered items through a
deaccession process. An effort will be made to keep a deaccessioned artifact in
the public domain by offering museums and similar institutions the opportunity
to purchase the artifact at fair market value as determined by the average of no
less then two independent appraisers adhering to the standards of the Appraisers
Association of America standards. Consideration will be given to institutions in
the region of origin.
The eventual deaccession will follow one of three options:
o Sale - In order of preference, artifacts may be sold for fair market value
to a museum, university or public institution collection; by publicly
advertised auction to the highest bidder; or by private sale based upon
fair market value.
o Exchange - With approval of the Board of Directors, artifacts can be
exchanged for another artifact from a qualified museum, university or
public institution collection to further complete the present collection of
that institution, when the exchanging institution has a policy allowing for
final deaccession to a private entity.
o Gift - With approval from the Board of Directors, artifacts may be
deaccessed to a qualified museum, university or public institution
collection to further complete a given collection.
Typically it will take a period of two to three years from the Corporation's
location of a shipwreck to when it begins to realize on its recoveries. The
Corporation may also realize returns from its intellectual property rights with
respect to historically significant or interesting shipwrecks, such as the
development and sale of documentaries and television specials, but these are
expected to be no more than a secondary revenue source. They may, however,
increase interest in sales of recovered artifacts. In an initial use of the
Corporation's intellectual property, the Corporation has entered into a media
partnership with Principle Pictures, Inc., planning the creation of at least
five television documentaries and a series of companion books, educational
tools, and interactive websites.
The Corporation's Subsidiaries
The Corporation conducts its operations through its subsidiaries and controlled
companies. These entities generally lease all major equipment, including dive
ships, for only the period of time it is actually used in operation. However,
equipment may be owned if it appears to be advantageous to do so, particularly
with less costly technological materials, such as compressors, small zodiac
boats, and dive equipment for recovery teams, that require minimal maintenance
and have relatively long life-cycles. Operations are conducted primarily by
part-time and contracted explorers, divers, historians, marine archaeologists,
and other personnel. The Corporation, including its subsidiaries, has only 7
full-time employees.
The Corporation generally intends to finance specific recovery efforts through a
system of project finance. The Corporation will form a special-purpose entity,
typically a limited liability company, to conduct a specific recovery effort.
The special-purpose entity will be managed by a subsidiary of the Corporation
and will seek investment from affluent individuals to fund its operations. Such
investors may be collectors who seek an in-kind share of recovered items,
individuals who are attracted by the opportunity to participate in a
historically significant recovery effort, or investors attracted by the entity's
potentially large gains. The Corporation's share of proceeds will be reduced by
the share distributable to the entity's investors, which will vary with the
amount of investment received.
Historic Discoveries, Inc.
Historic Discoveries is the Corporation's primary subsidiary and is wholly-owned
by the Corporation. The Corporation acquired Historic Discoveries in connection
with the change in control on October 17, 2005, and it has since made additional
investments in Historic Discoveries. Historic Discoveries has two wholly-owned
subsidiaries, Artifact Recovery & Conservation Inc. ("ARC") and Sea Research,
Inc. ("SRI").
The Corporation and Historic Discoveries have agreed to distribute 20% of the
net profits arising out of the exploitation of permits, licenses, finder fees
rights, contracts and other rights (collectively, "permits") held by ARC to its
former corporate parent, Sovereign Marine Explorations, Inc.("SME"), and to
distribute 20% of the net profits arising out of the exploitation of permits
held by SRI to its former corporate parent, Sea Hunt, Inc. ("Sea Hunt"). See Item
13 - Certain Relationships and Related Transactions.
Artifact Recovery & Conservation Inc.
ARC holds permits for some of the Corporation's most promising sites. ARC has
already recovered substantial artifacts from Le Chameau, a French ship lost off
Cape Lorembec, Cape Breton Island, Nova Scotia, on August 27, 1725. The Chameau
carried extensive ladings of specie, military supplies, trade goods, and
commercially-consigned freight, as well as the personal effects of wealthy
passengers. ARC submitted artifacts from the Chameau and other ships to the Nova
Scotia government for artifact selection in 2005, and the selection process was
completed in March 2006. The Corporation expects to begin realizing revenues
from the deaccession of these artifacts in the near future.
ARC has also conducted extensive exploratory efforts in Fantome Cove, near
Prospect, Nova Scotia. The H.M.S. Fantome and accompanying ships are believed to
have been lost in Fantome Cove on November 24, 1814. The Fantome is particularly
historically significant, as it played a role in the War of 1812 and potentially
could have been carrying plunder from the sacking of Washington in August 1814.
ARC's exploratory efforts have confirmed that it has located at least two
historical shipwrecks, although it has not specifically confirmed that either
wreck is that of the Fantome. During its most recent reconnaissance efforts in
late summer, 2006, ARC identified two very large concretion fields, and its
divers observed flatware, artifacts, ship fittings, and thousands of coins in
the concretions.
Because Fantome Cove is in Canadian waters but may involve British ships and
American plunder, any shipwrecks there may be subject to competing claims. The
United Kingdom has filed a formal notice on the H.M.S. Fantome that could
represent a challenge to the Corporation's plans for a recovery in Fantome Cove.
ARC was notified on August 31, 2006, by the Nova Scotia Department of Tourism,
Culture & Heritage that its application for a Class B recovery permit for the
Fantome Cove treasure trove site has not been approved. A Class B permit is
required before ARC can make any substantial recoveries from the site. The
Department has recommended that ARC and its project partner, Le Chameau
Explorations Limited, secure permission from the United Kingdom. The
Corporation's management and counsel believe that the admiralty and treaty laws
governing the site will substantiate ARC's and Le Chameau Explorations Limited's
interest as license holder. The Corporation is considering its options.
Sea Research, Inc.
SRI holds the rights to seven sites, several of which have multiple ships of
Spanish, French and British origin. The wrecked ships are believed to have
contained diverse cargoes, including money, bullion, religious and military
artifacts, jewelry, and other personal items. SRI also owns an exploratory
vessel, the Sea Quest, through its wholly-owned subsidiary, Sea Quest, Inc. See
Item 13 - Certain Relationships and Related Transactions.
Sovereign Exploration Associates International of Spain, Inc.
Sovereign Exploration Associates International of Spain, Inc. ("SEAI - Spain"),
a wholly-owned subsidiary of the Corporation, was acquired in November 2005 from
unrelated parties in exchange for $800,000 of convertible debentures. The
debentures are due on November 15, 2006, with accrued interest at a rate of 6%
per annum. The Corporation may, at any time prior to November 15, 2006, convert
the principal amount of the debentures into common stock of the Corporation at
the average closing price of the Corporation's common stock for the ten business
days prior to the conversion date. The debenture holders may, at any time after
November 15, 2006, convert the principal amount of the debenture into common
stock of the Corporation at the average closing price of the Corporation's
common stock for the ten business days prior to the conversion date. SEAI -
Spain has secured the finder's rights to four shipwrecks in Spain with potential
historic and intrinsic value.
Cautionary Statement Regarding Forward-Looking Statements
This Annual Report on Form 10-K may contain forward-looking statements which
include assumptions about future market conditions, operations and financial
results. These statements are based on current expectations and are subject to
risks and uncertainties. They are made pursuant to safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. The Corporation's actual
results, performance or achievements in the future could differ significantly
from the results, performance or achievements discussed or implied in such
forward-looking statements herein and in prior Securities and Exchange
Commission ("SEC") filings by the Corporation. The Corporation assumes no
obligation to update these forward-looking statements or to advise of changes in
the assumptions on which they were based. Factors that could cause or contribute
to such differences include, but are not limited to, changes in the competitive
environment of the Corporation, general economic and business conditions,
industry trends, and changes in government rules and regulations and
environmental rules and regulations.
SEC Filings
The Corporation's Quarterly Reports on Form 10-Q for the periods ended December
31, 2005, and March 31, 2006, and its Proxy Statement dated September 8, 2006,
were based on preliminary information that has in some cases been corrected in
this Annual Report on Form 10-K.
The Corporation is an SEC reporting company and, pursuant to Section 15(d) of
the Securities Exchange Act of 1934, it is required to file Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K with
the SEC. However, the Corporation is not registered under Section 12 of the
Securities Exchange Act of 1934. Accordingly, the Corporation is not required to
provide proxy statements, information statements, or annual reports to its
shareholders, although it may optionally do so, and its investors are not
required to file Forms 3, 4, or 5 or Schedules 13D or 13G with the SEC.
Further information about the Corporation is available at its website,
www.sea-int.com. Although the Corporation does not currently post its SEC
filings on its website because of its limited number of full-time personnel,
those filings are available online via the SEC's EDGAR program at the SEC's
website, www.sec.gov.
Item 1A. Risk Factors.
The Corporation's Business Is Inherently Risky and Speculative
The Corporation's business of historic shipwreck exploration and recovery is
inherently risky, and the risks predominate at each step of the Corporation's
business model.
The value of the Corporation is largely dependent on permits giving the
Corporation (through its subsidiaries and controlled companies) the exclusive
right to exploration for historical shipwrecks in specified areas. The value of
these permits is dependent, to a substantial degree, upon the research and data
assembled by the Corporation indicating that a historical shipwreck is likely to
be in the area. Although the Corporation has access to a substantial amount of
research and data, which has been compiled during various projects, all such
research and data regarding shipwrecks is imprecise, incomplete and unreliable,
as it is often composed of, or affected by, numerous assumptions, rumors,
"legends," historical and scientific inaccuracies, and inaccurate
interpretations that have become a part of such research and data over time. The
shipwrecks sought by the Corporation generally have long disintegrated, and
confirming their locations is difficult. Even if the shipwrecks are accurately
located in waters covered by the Corporation's permits, the shipwrecks may have
been salvaged or may not have had anything of value on board at the time of the
sinking.
Underwater recovery operations are inherently difficult and dangerous and may be
delayed or suspended by weather, sea conditions or other natural hazards.
Further, such operations may be undertaken more safely during certain months of
the year than during others. These risks are particularly great in the waters
off Nova Scotia, where many of the shipwrecks sought by the Corporation are
believed to be located. There can be no assurances that the Corporation will be
able to conduct search and/or recovery operations only during such favorable
periods. In addition, even though sea conditions in a particular search location
may be somewhat predictable, the possibility exists that unexpected conditions
in a search area may occur and that such unexpected conditions might adversely
affect operations. Further, it is possible that natural hazards may prevent or
significantly delay search and recovery operations.
From time to time, it will be necessary to contract with third parties for
additional equipment and/or labor necessary for the location and recovery of
wreck sites. There can be no assurance that third party contracts will be
available to the Corporation. The availability of specialized recovery equipment
may present a problem, and the cost of obtaining the use of such equipment to
conduct recovery operations is uncertain and will depend on, in part, the
location and condition of the wreckage to be recovered.
Persons and entities other than the Corporation and its affiliates may claim
title to the shipwrecks. Even if the Corporation is successful in locating and
recovering shipwrecks, there is no assurance of establishing the rights to
property recovered as against governmental entities, prior owners, or other
attempted salvers claiming an interest therein. There is also a risk of theft of
valuable items at sea, both before and after their recovery, by pirates or
poachers and while in transit to a safe destination.
Even after the location of a historical shipwreck has been confirmed, it may
require a period of years before the Corporation can realize revenue from
salvage operations. The Corporation generally must obtain a recovery permit
before the Corporation can make any substantial recoveries from the site.
Salvage operations generally require a substantial period of time to complete.
Recovered items must be carefully examined by the Corporation's science team.
The Corporation then must negotiate with applicable government authorities,
which generally are entitled to retain a portion of the recovered items. The
issuance of recovery permits and negotiations with governmental authorities may
result in delays particularly if there is public sentiment against salvage,
there are multiple governmental claims to the shipwreck, or the recovered items
are especially valuable or historically significant.
Even if valuable items can be located and recovered, it is difficult to predict
the price that may be realized for these items. The items may have been damaged
by salt water or by natural sea conditions. The value of the recovered items
will fluctuate with a precious metals market that has been highly volatile in
recent years. Moreover, the entrance into the market of a large supply of
similar items from shipwrecks, including those located and recovered by the
Corporation, could itself depress the market for these items. The methods and
channels that may be used in the disposition of the recovered items are
uncertain at present and may include one or a combination of several
alternatives. Ready access to buyers for disposition of any artifacts or other
valuable items recovered cannot be assured and delays in the disposition of such
items are very possible.
As a result of these risks, an investment in the Corporation should be
considered speculative.
Need for Additional Capital
Although the Corporation has recovered a number of valuable items in its salvage
operations to date, it has not yet realized any revenues from these salvage
operations, and any revenues it realizes in the near future are unlikely to be
sufficient to fund the Corporation's operations. In addition, the Corporation
has minimal financial resources. Accordingly, the Corporation can continue its
operations only if it or its subsidiaries or controlled companies can raise
additional working capital.
Legal and Political Risks
Historical shipwreck recovery is highly regulated and can be a high-profile
political issue, due to jurisdictional disputes, public concern over
historically significant shipwrecks, and archaeological and environmental
concerns.
A localized group in Nova Scotia has forwarded the idea to repeal the Nova
Scotia Treasure Trove Act. This action remains on the horizon. However, the
Corporation's legal representation in Nova Scotia indicates the likelihood that
it will not move forward and if it does that the Corporation may be
"grandfathered" for a period of time.
The United Kingdom has filed a formal notice on the H.M.S. Fantome that could
represent a challenge to the Corporation's plans for a recovery in Fantome Cove.
The Corporation's subsidiary ARC was notified on August 31, 2006, by the Nova
Scotia Department of Tourism, Culture & Heritage that its application for a
Class B recovery permit for the Fantome Cover treasure trove site has not been
approved. A Class B permit is required before ARC can make any substantial
recoveries from the site. The Department has recommended that permission be
secured from the United Kingdom. The Corporation is considering its options.
Increasing international interest in the protection of underwater cultural
heritage has been indicated by the United Nations Educational, Scientific and
Cultural Organization (UNESCO) Convention on the Protection of the Underwater
Cultural Heritage. The Convention generally would raise standards in terms of
conduct of exploration and salvage and focus on improving science and archeology
efforts. The Convention was adopted by UNESCO in 2001 but has not yet been
widely adopted by the nations of the world, including Canada or the United
States, and has not yet entered into force with respect to the nations that have
adopted it. The Corporation believes that it will be able to comply with the
Convention if it comes into force, although compliance may increase its costs.
Legal Exposure
In the period leading up to the change in control of the Corporation on October
17, 2005, the Corporation, under its prior management, disposed of a number of
its assets for aggregate consideration of $20 and issued 800,000,000 shares
(800,000 shares on a split-adjusted basis) for consideration the receipt of
which the Corporation's present management has been unable to confirm. In
addition, in the period from October 17, 2005, to September 22, 2006, although
the Corporation had elected treatment as a business development company under
the 1940 Act, the Corporation may not have met all of the requirements for
treatment as a business development company, and some of the activities of it or
its affiliates raised questions under the 1940 Act. The Corporation accordingly
could face legal exposure in the event of either private litigation or a SEC
enforcement action with respect to events either before or after the change in
control. Neither the SEC nor any private litigant has expressed a present
intention of bringing such an action against the Corporation.
Dependence on Key Personnel
The Corporation's success will depend largely on the skills of its key
management personnel, who currently function without employment contacts. The
loss of one or more of the Corporation's key management personnel may materially
and adversely affect its business and results of operations. The Corporation
cannot guarantee that it will be able to replace any key management personnel in
the event that their services become unavailable.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2. Properties.
The Company's principal offices are located at 503 Washington Avenue, Suite
2D, Newtown, Pennsylvania and 333 North Avenue, Suite 2B, Wakefield,
Massachusetts. The offices in Pennsylvania and Massachusetts are leased by the
Company's affiliates Monarch Group of Pennsylvania, LLC and Boston Market
Strategies, Inc., respectively, and the Company utilizes some of the space. The
offices are sufficiently equipped for the business of the Company as now
conducted.
Item 3. Legal Proceedings.
On June 30, 2005, the Company entered into a Settlement Agreement and
General Release ("Settlement Agreement") among members of the Company's former
management and their affiliates, James E. Jenkins, Charles Gianetto, KMA Capital
Partners Ltd., KMA Capital Partners, Inc. and CF Holdings, LLC (collectively,
the "Fomer Management Parties"). The purpose of the Settlement Agreement was to
reach a comprehensive resolution to the disputes between the Company and the
Former Management Parties, in particular an arbitration demand filed by KMA
Capital Partners, Ltd. on or about December 29, 2005 (American Arbitration
Association Case No.: 33-180-00463-05) relating to an Exchange Agreement dated
October 17, 2005. The Settlement Agreement provides that the Former Management
Parties release all claims that they may have against the Company, its parents,
subsidiaries, affiliates, predecessors, successors, assigns, partners, agents,
representatives and attorneys (collectively, "affiliated parties") and that the
Company releases all claims it may have against the Former Management Parties.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
Sovereign Exploration Associates International, Inc. Common Stock, par value
$.001 per share ("Common Stock"), is traded over the counter on the OTC Bulletin
Board ("OTCBB") under the symbol "SVXA." The following table sets forth, for the
period indicated, the range of high and low closing prices reported by the
OTCBB. Such quotations represent prices between dealers and may not include
markups, markdowns, or commissions and may not necessarily represent actual
transactions.
Quarter Ending High Low
9/30/04 100.00 70.00
12/31/04 70.00 1.00
3/31/05 20.00 4.00
6/30/05 250.00 7.00
9/30/05 16.00 .50
12/31/05 4.50 .20
3/31/06 3.80 .35
6/30/06 .88 .45
9/30/06 .63 .35
HOLDERS
As of September 1, 2006, there were 78 shareholders of record of the Company's
common stock.
Unregistered Sales of Equity Securities and Use of Proceeds
In the period from July to October, 2005, the Corporation issued an aggregate of
836,600 (split-adjusted) shares of Common Stock in exchange for outstanding
debentures of the Corporation. The Corporation believes that prior management
relied upon the exemption from registration contained in Section 4(2) of the
Securities Act of 1933 (the "1933 Act").
On July 21, 2005, the Corporation, under prior management, issued 80,000
(split-adjusted) shares of Common Stock in connection with the CALI Holdings
Escrow#3 Performance Cap. Present management has no further information
concerning the nature of this issuance or the exemption from registration on
which prior management relied.
On October 5, 2005, the Corporation, under prior management, issued 800,000
(split-adjusted) shares of Common Stock to KMA Capital Partners Ltd. The
Corporation does not possess any documentation or knowledge regarding the
consideration for which these shares were issued to KMA Capital Partners Ltd.,
nor has it been able to confirm that any consideration was received. The shares
were issued in a transaction exempt from registration under Section 4(2) of the
1933 Act, and the shares originally bore a restrictive legend. Subsequently,
prior management caused the legend to be removed, and 400,000 shares were sold
on the open market in December 2005. These shares were the subject of an
arbitration between current and prior management; see Item 13 - Certain
Relationships and Related Transactions. The remaining 400,000 shares have again
been legended.
On October 14, 2005, the Corporation, under prior management, issued 747,267
(split-adjusted) shares of Common Stock in exchange for $262,700 that previously
had been held in escrow on behalf of a corporation and an individual. The
Corporation believes that prior management relied upon the exemption from
registration contain in Section 4(2) of the 1933 Act.
On November 15, 2005, the Corporation issued $800,000 of convertible debentures
in exchange for disturbance permits and other assets now held by SEAI - Spain.
The debentures are due on November 15, 2006 with accrued interest at a rate of
6% per annum. The Corporation may, at any time prior to November 15, 2006,
convert the principal amount of the debentures into Common Stock of the
Corporation at the average closing price of the Corporation's common stock for
the ten business days prior to the conversion date. The debenture holders may,
at any time after November 15, 2006, convert the principal amount of the
debentures into Common Stock of the Corporation at the average closing price of
the Corporation's common stock for the ten business days prior to the conversion
date. The Corporation relied upon the exemption from registration contained in
Section 4(2) of the 1933 Act.
On December 26, 2005, the Corporation issued 100,000 shares of common stock for
100% ownership of the stock of Sea Quest, Inc. Sea Quest, Inc. was owned 50% by
a private un-related individual and 50% owned by Sea Hunt Holding, LLC, which is
owned by the Chairman of the Corporation.
Subsequent to the reverse split on January 17, 2006, pursuant to the Exchange
Agreement of October 17, 2005, the Corporation issued 11,791,368 shares of the
Corporation's common stock to SME in exchange for its 50% interest in Historic
Discoveries, and 11,791,368 to Sea Hunt in exchange for its 50% interest in
Historic Discoveries. Officers and directors of the Corporation hold certain
executive positions in Historic Discoveries, SME, and Sea Hunt.
In each case when securities were issued in reliance upon an exemption from
registration pursuant to Section 4(2) of the 1933 Act, the recipients took the
securities for investment purposes without a view to distribution and had access
to information concerning the Corporation and its business prospects, as
required by the Securities Act. In addition, there was no general solicitation
or advertising for the purchase of the Corporation's securities. The securities
were issued only to persons with whom the Corporation had a direct personal
preexisting relationship, and after a thorough discussion. Finally, the
Corporation's stock transfer agent has been instructed not to transfer any of
such shares, unless such shares are registered for resale or there is an
exemption with respect to their transfer. All certificates representing the
remaining shares bear restrictive legends as required by the 1933 Act.
Item 6. Selected Financial Data.
The selected financial data should be read in conjunction with the Corporation's
"Management's Discussion and Analysis of Financial Condition and Result of
Operations" and the Financial Statements and notes thereto. As discussed in Note
A to the Financial Statements, on January 13, 2004, the Corporation elected to
be treated as a business development company under the 1940 Act. Prior to that
time, it was an operating company. As a business development company, the
Corporation prepares its financial statements as an investment company.
Different accounting principles are used in the preparation of financial
statements of a business development company under the 1940 Act and, as a
result, the financial results for periods prior to the Corporation's election
are not comparable to later periods.
On October 17, 2005, the Corporation entered into an Exchange Agreement,
resulting in a change in control of the Corporation. Immediately prior to that
time and in connection with the entry into the Exchange Agreement, the
Corporation divested substantially all of its assets except for its investment
in one portfolio company.
On September 22, 2006, the Corporation withdrew its election to be treated as a
business development company. As a result, the Corporation will in the future
prepare its financial statements as an operating company. Accordingly, the
financial results shown below are not expected to be representative of the
Corporation's financial results in the future.
All per share numbers have been adjusted to reflect a 1000-to-1 reverse stock
split on January 17, 2006, a 100-to-1 reverse stock split on January 4, 2005,
and a 40-to-1 reverse stock split on August 13, 2004.
For the Year Ended June 30,
2006 2005 2004 2003 2002
Total Operating Income 543,488 281,383 884,680 46,200 210,400
Revenues
Net Operating (Loss) (1,577,859) (1,072,446) (1,245,534) (1,667,297) (2,358,947)
Net Operating (Loss) (0.12) (280.75) (34,643.78) (185,536.35) (712,262.13)
Per Common Share
Total Assets 2,248,615 3,010,660 3,574,738 238,758 198,667
Total Liabilities 2,850,927 577,889 989,645 472,422 188,683
Net Assets (602,312) 2,432,771 2,585,093 (233,664) 9,984
Net Asset Value (0.0230) 43.57 21,306.35 (17,549.03) 1,937.73
Per Common Share
Dividends Declared 0 0 0 0 0
Per Common Share
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following information should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this Form 10-K.
Overview
The Corporation was a financial service company providing financing and advisory
services to small and medium-sized companies throughout the United States.
Effective January 5, 2004, the Corporation's shareholders approved the proposal
to allow the Corporation to elect to be treated as a business development
company ("BDC") under the 1940 Act. The Corporation on September 22, 2006,
withdrew its election to be treated as a BDC. Following the withdrawal of its
election, the Corporation carries on a marine recovery and explorations
business, which it conducts through subsidiaries and controlled companies, and
will be managed so that it will not be subject to the provisions of the 1940
Act.
During the period it was a BDC, the Corporation invested either directly in the
equity of a company through equity shares or through a debt instrument. The
Corporation's debt instruments usually did not have a maturity of more than five
years. Interest was either currently paid or deferred.
Investment opportunities were identified for the Corporation by the management
team. Investment proposals may, however, come to the Corporation from many
sources, and may include unsolicited proposals from the public and from
referrals from banks, lawyers, accountants and other members of the financial
community. The management team brings an extensive network of investment
referral relationships.
The Corporation prepared its financial statements in accordance with accounting
principles generally accepted in the United States of America for investment
companies. For a summary of all of its significant accounting policies,
including the critical accounting policies, see financial statements. Because
the Corporation has withdrawn its BDC election and will not in future periods
prepare its financial statements as an investment company, the financial
statements discussed herein may not be comparable to those in future periods.
The increasing complexity of the business environment and applicable
authoritative accounting guidance required the Corporation to closely monitor
its accounting policies. The Corporation had identified three critical
accounting policies that require significant judgment. The following summary of
the Corporation's critical accounting policies is intended to enhance your
ability to assess its financial condition and results of operation and the
potential volatility due to changes in estimates.
Valuation of Investments
At June 30, 2006, 93.97% of the Corporation's total assets represented
investments recorded at fair value. Value as defined in Section 2(a)(41) of the
1940 Act, is (i) the market price for those securities for which a market
quotation is readily available and (ii) for all other securities and assets,
fair value is determined in good faith by the board of directors. Since there is
typically no readily ascertainable market value for the investments in its
portfolio, the Corporation valued substantially all of its investments at fair
value as determined in good faith by the board of directors pursuant to a
valuation policy and consistent valuation process. Because of the inherent
uncertainty in determining the fair value of investments that do not have a
readily ascertainable market value, the fair value of its 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.
Initially, the fair value of each such portfolio investment was based upon
original cost. There is no single standard for determining fair value in good
faith. As a result, determining fair value requires the judgment be applied to
the specific facts and circumstances of each portfolio investment. The Board of
Directors considers fair value to be the amount which the Corporation may
reasonably expect to receive for portfolio securities when sold on the valuation
date. The Corporation analyzed and valued each individual investment on a
quarterly basis, and recorded unrealized depreciation for an investment that it
believed had become impaired, including where collection of a loan or
realization of an equity security was doubtful. Conversely, the Corporation
would record unrealized appreciation if it believed that the underlying
portfolio company had appreciated in value and, therefore, the Corporation's
equity security had also appreciated in value. Without a readily ascertainable
market value and because of the inherent uncertainty of valuation, the fair
value of the Corporation's 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 favorable or unfavorable
differences could be material.
In the valuation process, the Corporation used financial information received
monthly, quarterly, and annually from the portfolio companies, which include
both audited, and unaudited financial information supplied by portfolio
companies management. This information was used to determine financial
condition, performance and valuation of the portfolio investments. Valuation
should be reduced if a company's performance and potential have significantly
deteriorated. If the factors, which led to the reduction in valuation, are
overcome, the valuation may be restated.
Another key factor used in valuation of the equity investments was recent
arms-length equity transactions entered into by the investment company that the
Corporation utilized to form a basis for its underlying value. Many times the
terms of these equity transactions may not be identical to those of the
Corporation and the impact on these variations as it relates to market value may
be impossible to quantify.
Any changes in estimated fair value are recorded in the statements of operations
as "Net increase (decrease) in unrealized (depreciation) appreciation."
Valuation of Equity Securities
With respect to private equity securities, each investment was valued using
industry valuation benchmarks and then the value was assigned a discount
reflecting the illiquid nature of the investment, as well as the Corporation's
minority non-control positions. When an external event such as a purchase
transaction, public offering, or subsequent equity sale occurred, the pricing
indicated by the external event would be used to corroborate the Corporation's
private equity valuation. Securities that are traded in the over-the-counter
market or on a stock exchange would generally be valued at the prevailing bid
price on the valuation date. However, restricted and unrestricted publicly
traded securities may have been valued at discounts from the public market value
due to restrictions on sale, the size of its investment or market liquidity
concerns.
Valuation of Loans and Debt Securities
As a general rule, the Corporation did not value its loans or debt securities
above cost, but loans and debt securities were subject to fair value write-down
when the asset is considered impaired.
Financial Condition
The Corporation's assets decreased by $762,045 or 25.31% to $2,248,615 during
the year ended June 30, 2006.
During the Corporation's fiscal year ended June 30, 2006, the Corporation valued
its equity and investment holdings in accordance with the established valuation
policies (see "Valuation of Investments and Equity Holdings") above.
The cash and cash equivalents approximated 0.03% and 1.03% of total assets as of
June 30, 2006 and 2005, respectively.
Results of Operations
The results of operations for the year ended June 30, 2006 reflect the net
effects of the Exchange Agreement completed on October 17, 2005.
After October 17, 2005, a new management of officers and directors assumed
control of the Corporation.
The financial effect of this transaction is reflected in the financial
statements for the year ended June 30, 2006. The accounting treatment of this
transaction increased the Corporation's realized loss by $(2,620,117) and
increased the unrealized loss by $(716,649).
Dividends and Interest
Dividends and interest income on investments for the years ended March 31, 2006
and 2005 were $40,283 and $72,895, respectively. The decrease in interest and
dividends was primarily due to the sources of income shifting from a
transactional base business to the Corporation not receiving interest income
from its portfolio companies.
Management Fees
Management fees for the years ended March 31, 2006 and 2005 were $450,603 and
$208,488, respectively. The majority of these management fees were earned by the
prior management of the Corporation in the quarter ending September 30, 2005.
Operating Expenses
Total operating expenses for the year ended June 30, 2006 and 2005 was
$2,121,347 and $1,353,829. A significant component of total operating expenses
was general and administrative expenses of $372,990 and $373,712. The increase
in general and administrative expenses would have been less but for the bad debt
expense of $143,232 for the non-portfolio company assets that were written-off
in October 2005 as part of the divestiture of assets prior to the Exchange
Agreement dated October 17, 2005. A second component of total operating expenses
was professional fees of $304,378 for the year ended June 30, 2006 and $373,712
for the year ended June 30, 2005. The decrease in professional fees is primarily
due to the Corporation using employees rather than outside consultants to
complete due diligence on potential portfolio companies.
The $600,000 in costs was for the termination of employment and consulting
agreements as part of the Exchange Agreement dated October 17, 2005.
Liquidity and Capital Resources
At June 30, 2006 and 2005, the Corporation had $570 and $31,034 respectively in
cash and cash equivalents.
The Corporation does not expect its cash on hand and cash generated from
operations to be adequate to meet its cash needs at its current level of
operations, including the next twelve months. The Corporation intends to seek to
raise additional funds from investors, either directly or through its subsidiary
or controlled companies, including special-purpose entities formed to conduct
specific marine salvage operations. There can be no assurance that the
Corporation's fund-raising efforts will be successful. The Corporation also
expects to realize some revenues from the sale of previously salvaged artifacts
by a subsidiary, although these revenues by themselves are not expected to be
sufficient to fund the Corporation's operating costs.
Private Portfolio Company Investments
The following is a list of the private companies in which the Corporation had an
investment in and advances to including the fair market value, which
approximates cost of such securities, at June 30, 2006:
Name of Company Cost FMV
Historic Discoveries, Inc. $ 1,273,010 $1,273,010
Gulf Coast Records, LLC - Investment and Note
Receivable 1,006,717 -
Sovereign Exploration Associates International
of Spain, Inc. 840,035 840,035
---------------- -----------
Total $ 3,119,762 $2,113,045
================ ===========
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Corporation's investment activities contained elements of risk. The portion
of the Corporation's investment portfolio consisting of equity or equity-linked
debt securities in private companies was subject to valuation risk. Because
there was typically no public market for the equity and equity-linked debt
securities in which it invested, the valuation of the equity interest in the
portfolio is stated at "fair value" and determined in good faith by the Board of
Directors on a quarterly basis in accordance with the Corporation's investment
valuation policy.
In the absence of a readily ascertainable market value, the estimated value of
the Corporation's portfolio may have differed significantly from the value that
would be placed on the portfolio if a ready market for the investments existed.
Any changes in valuation were recorded in the Corporation's Statement of
Operations as "Net unrealized appreciation (depreciation) on investment".
At times a portion of the Corporation's portfolio may have included marketable
securities traded in the over-the-counter market. In addition, there may have
been a portion of the Corporation's portfolio for which no regular trading
market existed. In order to realize the full value of a security, the market
must have traded in an orderly fashion or a willing purchaser must be available
when a sale is to be made. Should an economic or other event occur that would
not allow the markets to trade in an orderly fashion the Corporation may not
have been able to realize the fair value of its marketable investments or other
investments in a timely manner.
As of June 30, 2006, the Corporation did not have any off-balance sheet
investments or hedging investments.
Impact of Inflation
The Corporation did not believe that its business was materially affected by
inflation, other than the impact inflation may have on the securities markets,
the valuations of business enterprises and the relationship of such valuation to
underlying earnings, all of which will influence the value of the Corporation's
investments.
Item 8. Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Sovereign Exploration Associates International, Inc. (F/K/A Cali Holdings, Inc.)
Orlando, Florida
We have audited the balance sheets of Sovereign Exploration Associates
International, Inc. (F/K/A Cali Holdings, Inc.) as of June 30, 2006 and 2005,
and the related statements of operations, changes in net assets and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the 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 audits provided 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 Sovereign Exploration
Associates International, Inc. as of June 30, 2006 and 2005, and the results of
operations and cash flows for the years then ended, in conformity with U.S.
generally accepted accounting principles.
/s/Baumann, Raymondo & Company PA
Baumann, Raymondo & Company PA
Tampa, Florida
October 6, 2006
SOVEREIGN EXPLORATION ASSOCIATES INTERNATIONAL, INC.
(F/K/A - CALI Holdings, Inc.)
BALANCE SHEETS
June 30, 2006 June 30, 2005
--------------- ------------------
Assets
Investments in and advances to affiliates $ 2,113,045 $ 1,777,765
Cash and cash equivalents 570 31,034
Accounts receivable 135,000 3,692
Fixed assets, net of accumulated depreciation - 9,658
Notes receivable - 439,732
Other assets - 254,207
Goodwill - 489,000
Security deposit - 5,572
--------------- ------------------
Total assets $ 2,248,615 $ 3,010,660
=============== ==================
Liabilities and Shareholders' Equity
Accounts payable and accrued expenses $ 347,528 $ 77,989
Due to related parties 817,929 -
Related party note payables 763,630 -
Notes payable, convertible debt 800,000
Notes payable 121,840 499,900
--------------- ------------------
Total liabilities 2,850,927 577,889
--------------- ------------------
Commitments and contingencies - -
Shareholders' equity
Class A - Preferred stock, no par value, 10,000 shares
authorized, none issued and outstanding - -
Class B - Preferred stock, no par value, 10,000 shares
authorized, none issued and outstanding - -
Class C - Convertible Preferred stock, $.001 par value,
10,000 shares authorized, none issued and
outstanding as of June 30, 2006 and 10,000 shares
issued and outstanding as of June 30, 2005 - 10,000
Class D - Preferred stock, no par value, 10,000 shares
authorized, none issued and outstanding - -
Common stock, $.001 par value, 250,000,000,000 shares
authorized and 26,203,166 issued as of June
30, 2006; 2,000,000,000 shares authorized and 55,837
outstanding as of June 30, 2005 26,203 56
Capital in excess of par value 19,532,917 17,316,337
Stock subscription receivable - (4,760)
Accumulated undistributed net income (loss) (19,146,159) (14,231,534)
Net unrealized depreciation of investments (1,015,273) (657,328)
--------------- ------------------
Total shareholders' equity (602,312) 2,432,771
--------------- ------------------
Total liabilities and shareholders' equity $ 2,248,615 $ 3,010,660
=============== ==================
Net asset value per share $ (0.0230) $ 43.57
=============== ==================
SOVEREIGN EXPLORATION ASSOCIATES INTERNATIONAL, INC.
(F/K/A - CALI Holdings, Inc.)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2006 AND 2005
-----------------------------------
2006 2005
-----------------------------------
OPERATING INCOME:
Interest and dividend income:
Control investments $ 40,283 $ 72,895
-----------------------------------
Total interest and dividend income 40,283 72,895
-----------------------------------
Fee and other income:
Control investments 450,603 208,488
Other 52,602 -
-----------------------------------
Total fee and other income 503,205 208,488
-----------------------------------
Total operating income 543,488 281,383
-----------------------------------
OPERATING EXPENSES
Salaries and wages 802,680 700,879
Termination of employment and consulting
agreements 600,000 -
General and administrative 372,890 205,375
Professional fees 304,978 373,712
Interest 40,184 70,996
Depreciation and amortization 615 2,867
-----------------------------------
Total operating expenses 2,121,347 1,353,829
-----------------------------------
OPERATING (LOSS) BEFORE
INCOME TAXES (1,577,859) (1,072,446)
Provision for income taxes - -
-----------------------------------
NET OPERATING (LOSS) $ (1,577,859) $ (1,072,446)
-----------------------------------
SOVEREIGN EXPLORATION ASSOCIATES INTERNATIONAL, INC.
(F/K/A - CALI Holdings, Inc.)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2006 AND 2005
--------------------------------
2006 2005
--------------------------------
Net realized gain (loss) on investments
Control investments, net $(2,620,117) $256,436
--------------------------------
Total net realized gain (loss) on
investments (2,620,117) 256,436
--------------------------------
Net unrealized (depreciation) on
investments
Portfolio company investments, net (716,649) (529,371)
--------------------------------
Total net unrealized (depreciation)
on investments (716,649) (529,371)
--------------------------------
Total net loss on investments (3,336,766) (272,935)
--------------------------------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ (4,914,625) $ (1,345,381)
================================
NET OPERATING LOSS PER COMMON SHARE:
Basic $ (0.12) $ (280.75)
Diluted $ (0.12) $ (280.75)
--------------------------------
NET LOSS PER COMMON SHARE
Basic $ (0.36) $ (352.19)
Diluted $ (0.36) $ (352.19)
--------------------------------
WEIGHTED AVERAGE SHARES OF COMMON
STOCK OUTSTANDING:
Basic 13,626,187 3,820
Diluted 13,626,187 3,820
--------------------------------
DIVIDENDS DECLARED PER COMMON SHARE $ - $ -
================================
SOVEREIGN EXPLORATION ASSOCIATES INTERNATIONAL, INC.
(F/K/A - CALI Holdings, Inc.)
SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFILIATES
June 30, 2006
Fair
Company Industry Investment Cost Value
-------------------------------------------------------------------------------------------------------------------------
Historic Discoveries, Inc. Marine Exploration Common Stock - 100% $ 1,273,010 $ 1,273,010
-------------------------------------------------------------------------------------------------------------------------
Sovereign Exploration Associates
International of Spain, Inc. Marine Exploration Common Stock - 100% 840,035 840,035
-------------------------------------------------------------------------------------------------------------------------
Gulf Coast Records, LLC Recording Label Member Interest - 49% 173,868 -
-------------------------------------------------------------------------------------------------------------------------
Gulf Coast Records, LLC Recording Label Note Receivable
8% Interest; no
repayment terms 832,849 -
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
Total investments in and advances to affiliates $ 3,119,762 $ 2,113,045
-------------------------------------------------------------------------------------------------------------------------
SOVEREIGN EXPLORATION ASSOCIATES INTERNATIONAL, INC.
(F/K/A - CALI Holdings, Inc.)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED JUNE 30, 2006 AND 2005
------------------------------------------
2006 2005
------------------- -------------------
Operations:
Net operating (loss) $ (1,577,859) $ (1,072,446)
Provision for income taxes - -
Net realized gain (loss) on investments (2,620,117) 256,436
Net unrealized (depreciation) of
investments (716,649) (529,371)
------------------- -------------------
Net (decrease) in net assets resulting
from operations (4,914,625) (1,345,381)
------------------- -------------------
Shareholder distributions:
Common stock dividends - -
------------------- -------------------
Net decrease in net assets resulting
from shareholder distributions - -
------------------- -------------------
Capital share transactions:
Issuance of common stock, net 1,854,667 1,096,242
Issuance of preferred stock - -
Cancellation of preferred stock -
Other 24,875 237,965
------------------- -------------------
Net increase in net assets resulting
from capital share transactions 1,879,542 1,334,207
------------------- -------------------
Total (decrease) in net assets (3,035,083) (11,174)
Net assets beginning of period 2,432,771 2,443,945
=================== ===================
Net assets end of period $ (602,312) $ 2,432,771
Net asset value per common share $ (0.0230) $ 43.57
=================== ===================
Common shares outstanding at end of period
(post reverse split) 26,203,166 55,837
=================== ===================
SOVEREIGN EXPLORATION ASSOCIATES INTERNATIONAL, INC.
(F/K/A - CALI Holdings, Inc.)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2006 AND 2005
2006 2005
-------------------------------------
Operating activities:
Net (decrease) in net assets resulting from
operations $ (4,914,625) $ (1,345,381)
Adjustments to reconcile net (decrease) in
net assets resulting from operations to net
cash (used in) operating activities:
Net unrealized appreciation
(depreciation) on investments, net (716,649) 529,371
Net realized gain (loss) on investments (2,620,117) (256,436)
Net change in investments in and
advances to affiliates 2,643,541 -
Deferred income tax - (75,324)
Depreciation and amortization 615 2,867
Bad debt expense - 33,643
Stock issued for services - 98,947
(Increase) decrease in:
Accounts receivable (131,308) (3,692)
Stock subscription receivable 4,760 (60)
Other assets 254,207 (209,207)
Deposits 5,572 4,428
Goodwill 489,000 -
Other - -
Increase (decrease) in:
Accounts payable and accrued expenses 269,539 (22,816)
Due to related parties 817,929 -
-------------------------------------
Net cash (used in) operating activities (3,897,536) (1,243,660)
-------------------------------------
Investing activities:
Decrease (increase) in notes receivable 439,732 (924,316)
Loss on disposition of assets 9,043 5,352
Purchase of property and equipment - (9,932)
Purchase of investments, portfolio companies - (46,100)
-------------------------------------
Net cash provided by (used in) investing
activities 448,775 (974,996)
-------------------------------------
Financing activities:
Proceeds from notes payable to related
parties 1,563,630 682,623
Payment of notes payable to related parties - (100,000)
Issuance of common stock, net 1,854,667 1,235,321
-------------------------------------
Net cash provided by financing activities 3,418,297 1,817,944
-------------------------------------
Net (decrease) in cash and cash
equivalents (30,464) (400,712)
Cash, beginning of period 31,034 431,746
-------------------------------------
Cash, end of period $ 570 $ 31,034
=====================================
Supplemental disclosure of cash flow
information:
Interest paid $ - $ 42,359
Taxes paid - -
SOVEREIGN EXPLORATION ASSOCIATES INTERNATIONAL, INC.
(F/K/A - CALI Holdings, Inc.)
NOTES TO FINANCIAL STATEMENTS
June 30, 2006
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company Activities
Sovereign Exploration Associates International, Inc. (the "Company") was
incorporated in the state of Utah in 1980. The Company was formerly known as
CALI Holdings, Inc. On October 26, 2005 the Company changed its name from CALI
Holdings, Inc. to Sovereign Exploration Associates International, Inc.
On January 5, 2004 the Company's shareholders consented to the proposal to allow
the Company to adopt business development company ("BDC") status under the
Investment Company Act of 1940 ("1940 Act"). A BDC is a specialized type of
Investment Company under the 1940 Act. A BDC may primarily be engaged in the
business of furnishing capital and managerial expertise to companies that do not
have ready access to capital through conventional financial channels; such
companies are termed "eligible portfolio companies". The Company, as a BDC, may
invest in other securities, however, such investments may not exceed 30% of the
Company's total asset value at the time of such investment. The Company filed
its BDC election with the Securities and Exchange Commission ("SEC") (Form
N-54A) on January 13, 2004.
Basis of Presentation
Different accounting principles are used in the preparation of financial
statements of a business development company under the 1940 Act and therefore,
the financial statements are presented using the guidelines outlined under the
1940 Act. By becoming a BDC, the Company has effected a change in accounting
principle and no longer consolidates its investments in portfolio companies in
accordance with Article 6 of Regulation S-X under the Securities Act of 1933 and
Securities Exchange Act of 1934 in which a BDC does not consolidate portfolio
company investments, including those in which it has a controlling interest.
Certain reclassifications have been made to the June 30, 2005 amounts to make
them consistent with the June 30, 2006 classifications.
Revenue Recognition
The Company recognizes revenue using the accrual method of accounting. The
accrual method provides for a better matching of revenues and expenses. The
Company also accrues interest income on loans made to various portfolio
companies. The Company accrues the interest on such loans until the portfolio
company has the necessary cash flow to repay such interest. If the Company's
analysis of the portfolio company's performance indicates that the portfolio
company may not have the ability to pay the interest and principal on a loan,
the Company will make an allowance provision on that entity and in effect cease
recognizing interest income on that loan until all principal has been paid.
However, the Company will make exceptions to this policy if the investment is
well secured and in the process of collection.
For certain investment companies, the Company provides management services and
recognizes an agreed upon fixed monthly fee ("Fee Income") and expenses. Fee
Income includes fees for services rendered by the Company to portfolio companies
and other third parties such as diligence, structuring, transaction services,
management services, and other advisory services. Diligence, structuring, and
transaction services fees are generally recognized as income when services are
rendered or when the related transactions are completed. Management and other
advisory services fees are generally recognized as income as the services are
rendered.
SOVEREIGN EXPLORATION ASSOCIATES INTERNATIONAL, INC.
(F/K/A - CALI Holdings, Inc.)
NOTES TO FINANCIAL STATEMENTS
June 30, 2006
Advertising Costs
Advertising costs are charged to operations when incurred.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These estimates and assumptions 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 revenues and expenses
during the reporting period. Actual results could differ from these estimates.
Net (Loss) Per Common Share
Net (Loss) per common share is computed using the weighted average of shares
outstanding during the periods presented in accordance with Statement of
Financial Accounting Standards No. 128, Earnings Per Share. Any references to
amounts per share or weighted average common shares in these financial
statements have been restated to reflect reverse splits.
Cash and Cash Equivalents
For the propose of the statement of cash flows, cash and cash equivalents
includes time deposits with original maturities of three months or less.
Segments
The Company operates as one segment as defined by the Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information.
Fixed Assets
Fixed assets are stated at cost. The cost of equipment is charged against income
over their estimated useful lives, using the straight-line method of
depreciation. Repairs and maintenance which are considered betterments and do
not extend the useful life of equipment are charged to expense as incurred. When
property and equipment are retired or otherwise disposed of, the asset and
accumulated depreciation is removed from the accounts and the resulting profit
and loss are reflected in income.
Goodwill and Other Intangibles
The Company records goodwill in accordance with Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets. Intangible
assets such as goodwill are not amortized; instead the Company will review the
goodwill not less frequently than annually to see if it has been impaired. If
impairment occurs, it will be recorded as an expense in the period that it
occurs. During the year ended June 30, 2006, goodwill was adjusted by $489,000
to zero ($0) pursuant to the divestiture of assets prior to the Exchange
Agreement on October 17, 2005. During the year ended June 30, 2005, no
adjustments for impairment to goodwill were made.
For additional information, see Note Q - Subsequent Events.
SOVEREIGN EXPLORATION ASSOCIATES INTERNATIONAL, INC.
(F/K/A - CALI Holdings, Inc.)
NOTES TO FINANCIAL STATEMENTS
June 30, 2006
NOTE B - INVESTMENTS
Valuation of Investments
The most significant estimate inherent in the preparation of the Company's
financial statements is the valuation of its investments and the related
unrealized appreciation or depreciation.
The Company values its investments, with respect to securities for which market
quotations are readily available, at the market value of such securities, and
with respect to other securities and assets, at fair value as determined in good
faith by the Board of Directors. Market quotations were not readily available
for any of the Company's investments at June 30, 2006, and, accordingly, all of
the Company's investments were valued at fair value, which approximates the cost
of those investments. The Company analyzes the investments on a regular basis
and records unrealized gains or losses if and when an investment significantly
gains or loses market value as determined by a good faith standard.
For additional information, see Note Q - Subsequent Events.
Year ended June 30, 2006
The Company had investments in three controlled portfolio companies as of June
30, 2006.
1. Historic Discoveries, Inc.
2. Sovereign Exploration Associates International of Spain, Inc. (SEAI -
SPAIN)
3. Gulf Coast Records, LLC
Artifact Recovery & Conservation, Inc. and Sea Research, Inc. are wholly owned
subsidiaries of Historic Discoveries, Inc. Sea Quest, Inc., acquired in December
2005, is a wholly-owned subsidiary of Sea Research, Inc.
Artifact Recovery & Conservation, Inc. (ARC)
Artifact Recovery & Conservation, Inc. (ARC) has secured the rights to five (5)
sites; several of the sites have revealed multiple ships with historic and
intrinsic value. Currently ARC operates recovery operations on two of the five
sites. ARC manages its own dive teams and oversees operations for contracted
recovery teams. Management is in the process of preparing time lines and
operating plans for the other sites.
Sea Research, Inc. (SR)
Sea Research, Inc. (SR) has secured the rights to seven (7) sites; several of
the sites have revealed multiple ships with historic and intrinsic value.
Currently SR is preparing to initiate recovery operations on one of the seven
sites and developing timelines for the remainder of the portfolio.
Sovereign Exploration Associates International of Spain, Inc. (SEAI - SPAIN)
Sovereign Exploration Associates International of Spain, Inc. (SEAI-SPAIN) has
secured the finder's rights to four (4) shipwrecks in Spain with potential
historic and intrinsic value, thereby expanding SR's current holdings.
SOVEREIGN EXPLORATION ASSOCIATES INTERNATIONAL, INC.
(F/K/A - CALI Holdings, Inc.)
NOTES TO FINANCIAL STATEMENTS
June 30, 2006
NOTE B - INVESTMENTS, continued
Gulf Coast Records, LLC
Gulf Coast Records, LLC is an independent record label. In 2005, Gulf Coast was
developing record artist Glenn Cummings. There has been no activity in the
development or promotion of this artist since September 2005. Current management
is reviewing its options regarding this portfolio company and whether it wants
to maintain its position or divest its holdings in the future.
Current management does not possess adequate information to determine the proper
fair market value of Gulf Coast Records, LLC, at this time, and has reduced the
value of the investment and note receivable to zero. Once management receives
the necessary information, it will update the fair market value of these assets.
Current management is actively negotiating with the management of Gulf Coast
Records, LLC regarding the recovery of the Company's investment.
The investment in Historic Discoveries, Inc. and the investment in Sovereign
Exploration Associates of Spain Inc., individually and in total of the two
investments, exceed 25% of the total investments, at fair value, reflected in
the financial statements presented herein.
Year ended June 30, 2005
The Company had investments in six controlled (portfolio) corporations as of
June 30, 2005.
Buehler Earth & Waterworks, LLC.
Buehler Earth & Waterworks, LLC specialized in site development and
infrastructure construction including, but not limited to, clearing, earthwork,
utility construction, storm drainage, curbs, sidewalks, roadwork including
sub-base, base and asphalt placement.
Buehler Earth & Waterworks, LLC mission was to provide a full line of site
construction and related services to the land/site development industry
(public/private) utilizing a team approach to deliver the highest in quality
work seeking expeditious performance without compromising either cost efficiency
or good safety practices.
Buehler Earth & Waterworks, LLC. had a 100% interest in BEW Landscape &
Irrigation, LLC. BEW Landscape & Irrigation, LLC. provided plants and irrigation
to wholesale and retail distribution outlets.
On March 21, 2005 Buehler Earth & Waterworks, LLC sold its 75% interest in
Advance Pool Technologies, Inc. to the other 25% investor for $155,880.
Buehler Earth & Waterworks, LLC was a Florida Limited Liability Company in which
the Company had a 51% interest. In addition, the Company received an ongoing
monthly management fee in the amount of $5,000.
On September 21, 2005, the company sold its 51% interest in Buehler Earth and
Waterworks, LLC for $110,000 to Buehler's managing member.
SOVEREIGN EXPLORATION ASSOCIATES INTERNATIONAL, INC.
(F/K/A - CALI Holdings, Inc.)
NOTES TO FINANCIAL STATEMENTS
June 30, 2006
NOTE B - INVESTMENTS, continued
Sports Nation, Inc.
Sports Nation, Inc. was involved in all aspects of the sports memorabilia
merchandising industry. Sports Nation's management has over 50 years of combined
experience in product development, licensing, mass merchandise, retail, and
direct marketing & sales. Through years of specializing in sourcing and selling
the finest caliber sports memorabilia and collectible products, Sports Nation
had forged numerous strategic relationships with companies and individuals in
sports marketing, including agents and athletes, manufacturers, authenticators,
and retailers.
Sports Nation Inc was a Nevada Corporation, which was owned 100% by the Company.
TSB Financial Services, Inc.
TSB Financial Services, Inc. obtained financing for various commercial real
estate transactions through strategic relationships with outside funding sources
and provides professional consulting services to portfolio companies of CALI
Holdings, Inc. and other outside companies. TSB Financial Services, Inc. serves
customers nationally from its headquarters in Orlando, Florida.
TSB Financial Services, Inc. was a Florida corporation, which was owned 100% by
the Company.
TS&B Gaming & Entertainment Corporation
TS&B Gaming & Entertainment Corporation was formed on March 18, 2004 to invest
in gaming, hotels and other ventures. TS&B Gaming & Entertainment Corporation
had minimal business activity through June 30, 2005.
TS&B Gaming & Entertainment Corporation is a Florida corporation that was 100%
owned by the Company.
TS & B Ventures, Inc.
TS & B Ventures, Inc. was formed in April, 2004 to raise money from the private
equity market. TS & B Ventures, Inc. had minimal business activity through June
30, 2005.
TS & B Ventures, Inc. was a Florida corporation that was 100% owned by the
Company.
Wellstone Acquisition Corporation
Wellstone Acquisition Corporation is a non-reporting SEC registrant. Wellstone
Acquisition had no business activity for the year ending June 30, 2005.
Wellstone Acquisition Corporation was a Delaware corporation that was owned 66
2/3% by the Company.
Other Investments
The Company had investments in three other companies as of June 30, 2005.
KMA Capital Partners, Ltd.
KMA Capital Partners, Ltd. provided business consulting and financial services
to small and mid-cap companies. KMA Capital Partners, Ltd. was a Florida Limited
Partnership in which the Company had a 25% interest.
SOVEREIGN EXPLORATION ASSOCIATES INTERNATIONAL, INC.
(F/K/A - CALI Holdings, Inc.)
NOTES TO FINANCIAL STATEMENTS
June 30, 2006
NOTE B - INVESTMENTS, continued
Gulf Coast Records, LLC
Gulf Coast Records, LLC is an independent record label for recording artist
Glenn Cummings. Glenn Cummings has released his debut CD "BIG" and his second
single entitled "Good Old Days".
Gulf Coast Records, LLC is a Florida Limited Liability Company in which the
Company has a 49% limited partnership interest. In addition, the Company
received an ongoing monthly management fee in the amount of $5,000.
The Gulf Coast Records team includes Bryan Switzer, former manager of a major
record label and H.L. Voelker who acted as production consultant on Glenn's
album.
On June 30, 2004 Gulf Coast Records formed Hare Scramble, LLC. Hare Scramble,
LLC is a Florida Limited Liability Company involved in music publishing and is
100% owned by Gulf Coast Records, LLC.
On July 27, 2005, CALI Holdings retained a legal firm to assist in filing a
selling stockholder registration statement for its to-be-formed portfolio
company Gulf Coast Records, Inc and its to-be-wholly-owned subsidiary Gulf Coast
Records, LLC. The purpose of the offering was to make Gulf Coast a separate SEC
reporting company and to secure a qualification for quotation of its securities
on the Over the Counter Bulletin Board.
On July 28, 2005 Gulf Coast Records entered into a joint venture with Brick
Agency, LLC which was recently formed by Bryan Switzer. Brick Agency is a stand
alone artist management company that will sign Glenn Cummings and other
established artists to management contracts.
NEX2U, Inc.
NEX2U is in the multimedia catalog industry. Through the new patent-pending
STM(TM) Technology, NEX2U takes existing print catalogs and transforms them into
highly interactive, highly profitable direct mail experiences.
The Company owned less than 5% of the outstanding stock of NEX2U, Inc.
Dispositions of Investments
Year ended June 30, 2005: During the year ended June 30, 2005, the Company sold
two of its investments to a related party.
1. Cummings Financial Services, Inc. - The Company sold its 51% interest
in Cummings Financial Services on June 30, 2005 for $782,723.
2. Home Savings Plan, Inc. - The Company sold its 51% interest in Home
Savings Plan, Inc. for $1,000
Year Ended June 30, 2006
On September 21, 2005, the Company sold its 51% interest in Buehler Earth and
Waterworks, LLC for $110,000 to Buehler's managing member.
See Note J for divestiture of all portfolio companies and other assets. For
additional information, see Note Q - Subsequent Events.
SOVEREIGN EXPLORATION ASSOCIATES INTERNATIONAL, INC.
(F/K/A - CALI Holdings, Inc.)
NOTES TO FINANCIAL STATEMENTS
June 30, 2006
NOTE C - FIXED ASSETS
Prior to the effective execution of the Exchange Agreement on October 17, 2005,
the fixed assets of the Company consisting of computer and office equipment were
sold pursuant to a warranty bill of sale for $10 to KMA Capital Partners Ltd.
Inc of Texas. Depreciation expense for the years ended June 30, 2006 and 2005
was $615 and $2,867, respectively. Current management has requested the
appropriate documentation from the management of KMA Capital, Ltd., in an effort
to determine the effect these transactions had on shareholders and to assess any
subsequent actions that may be required by current management.
NOTE D - STOCK ISSUED FOR SERVICES
During the year ended June 30, 2006, the Company did not issue any stock for
services. During the year ended June 30, 2005, prior management issued 10,000
shares ($10,000) of the Company's preferred stock and 97 (post-split) shares
($88,947) of the Company's common stock for various professional consulting
services. The value assigned to the above shares is based on the stocks' traded
market price on or about the date the shares were issued and are included in
professional fees.
NOTE E - UNREALIZED GAINS (LOSSES) ON INVESTMENTS
For the years ended June 30, 2006 and 2005, the Company recognized unrealized
depreciation on the Company's investments in the amount of $716,649 and
$529,371, respectively.
NOTE F- INCOME TAXES
Year Ended June 30, 2006
Pursuant to the Exchange Agreement dated October 17, 2005, substantial ownership
of the Company was transferred and according to provisions of the Internal
Revenue Code, this transaction eliminated all of the loss carryforwards for
federal income tax purposes starting with fiscal year ending June 30, 2006.
Year Ended June 30, 2005
There is a deferred tax asset of approximately $1,922,017 due to tax net
operating loss carryforwards reduced to zero by a valuation allowance as of June
30, 2005. There are no deferred tax liabilities at June 30, 2005.
Deferred Tax Assets: 6/30/2005
Receivable Allowance $ -
Loss Carryforwards 1,922,017
Less Valuation Allowance (1,922,017)
-------------------
Net Deferred Tax Assets $ -
===================
Deferred Tax Liabilities
Unrealized Gains $ -
SOVEREIGN EXPLORATION ASSOCIATES INTERNATIONAL, INC.
(F/K/A - CALI Holdings, Inc.)
NOTES TO FINANCIAL STATEMENTS
June 30, 2006
NOTE F- INCOME TAXES, continued
At June 30, 2005, the Company had approximately $6,310,320 of tax net operating
loss carryforwards that expire as follows:
Expiration Date Amount
2022 $ 2,350,469
2023 1,581,566
2024 1,486,950
2025 891,335
$ 6,310,320
NOTE G - LEASE ARRANGEMENTS
The Company leased office and operating facilities under short-term operating
leases located in Orlando, Florida. Pursuant to the Exchange Agreement, the
Company terminated its lease agreement for this office space. Subsequent to the
execution of the Exchange Agreement, the Company maintains shared office space
in Pennsylvania and Massachusetts with unrelated companies controlled by certain
officers of the Company. These companies sublet space to the Company on a
month-to-month basis with monthly rent of $4,010, with no formal subleases.
Rent expense for the years ended June 30, 2006 and 2005 was $66,792 and
$106,239, respectively.
NOTE H - NOTES PAYABLE
As of June 30, 2006
The following are convertible debentures as of June 30, 2006 that were not
converted as part of the Exchange Agreement dated October 17, 2005:
---------------------------------------------------------------------------------
8% convertible debenture to an individual dated May 27, 2005 with $ 23,034
an initial principal balance of $21,000 due no later than May 27,
2006; outstanding principal and interest. This convertible
debenture is currently in dispute.
---------------------------------------------------------------------------------
5.25% convertible debenture to a company dated June 29, 2005 with $ 91,212
an initial principal balance of $40,000 due no later than June
29, 2008; outstanding principal and interest. This convertible
debenture is currently in dispute.
---------------------------------------------------------------------------------
8% convertible debenture to an individual dated May 18, 2005 with $ 7,594
an initial principal balance of $35,000 due no later than May 18,
2006; outstanding principal and interest. This convertible
debenture is currently in dispute.
---------------------------------------------------------------------------------
Total notes payable $ 121,840
==========
SOVEREIGN EXPLORATION ASSOCIATES INTERNATIONAL, INC.
(F/K/A - CALI Holdings, Inc.)
NOTES TO FINANCIAL STATEMENTS
June 30, 2006
NOTE H - NOTES PAYABLE, continued
As of June 30, 2005
The following are convertible debentures as of June 30, 2005:
8% convertible debenture to an individual due no later than
August 2, 2005 convertible to 50% of the closing bid price
of the common stock on the date the Company issues such
conversion notice. $ 6,300
8% convertible debenture to an individual due no later than
August 11, 2005 convertible to 50% of the closing bid price
of the common stock on the date the Company issues such
conversion notice. 50,000
8% convertible debenture to an individual due no later than
August 21, 2005 convertible to 50% of the closing bid price
of the common stock on the date the Company issues such
conversion notice. 50,000
8% convertible debenture to an individual due no later than
May 27, 2006 convertible to 50% of the closing bid price of
the common stock on the date the Company issues such
conversion notice. 21,000
8% convertible debenture to an individual due no later than
May 27, 2006 convertible to 50% of the closing bid price of
the common stock on the date the Company issues such
conversion notice. 27,350
8% convertible debenture to an individual due no later than
June 1, 2006 convertible to 50% of the closing bid price of
the common stock on the date the Company issues such
conversion notice. 50,950
8% convertible debenture to Sprout Investments, LLC due no
later than May 27, 2006 convertible at a price equal to
$.005 per share of common stock. In the event the Company's
common stock is trading at $.005 or less, the Company will
immediately amend the offering circular for the currently
effective 1E registration statement. 88,000
8% convertible debenture to Sequoia International due no
later than September 30, 2005 convertible to 50% of the
closing bid price of the common stock on the date the
Company issues such conversion notice. 20,000
8% convertible debenture to Sequoia International due no
later than September 30, 2005 convertible to 50% of the
closing bid price of the common stock on the date the
Company issues such conversion notice. 85,000
8% convertible debentures to an Sequoia International due no
later than September, 2005 convertible to 50% of the closing
bid price of the common stock on the date the Company issues
such conversion notice 26,300
SOVEREIGN EXPLORATION ASSOCIATES INTERNATIONAL, INC.
(F/K/A - CALI Holdings, Inc.)
NOTES TO FINANCIAL STATEMENTS
June 30, 2006
NOTE H - NOTES PAYABLE, continued
--------------------------------------------------------------------------------
8% convertible debentures to Sequoia International, Inc. due
no later than October 30, 2005 convertible to 50% of the
closing bid price of the common stock on the date the
Company issues such conversion notice 50,000
8% convertible debentures to Sequoia International, Inc. due
no later than October 30, 2005 convertible to 50% of the
closing bid price of the common stock on the date the
Company issues such conversion notice 25,000
------------
Total $ 499,900
Less Current Portion 499,900
------------
$ 0
============
The Company incurred interest expense of $40,184 and $70,996 for the years ended
June 30, 2006 and 2005, respectively.
NOTE I - RELATED PARTY NOTES PAYABLE
As of June 30, 2006, $128,519 was owed to certain officers of the Company. These
funds were advanced to the Company for cash flow purposes in the form of demand
notes bearing no interest.
In connection with the Exchange Agreement discussed in Note K, Historic
Discoveries, Inc. agreed to pay an aggregate of $600,000 to the Company's former
management in partial consideration for the termination of executive management
contracts and a consulting contract with the Company. Sea Hunt, Inc., a related
party to the Company, advanced $300,000 at the closing of the Exchange Agreement
and Venture Planning Inc. provided, and subsequently paid, a note for the
remaining $300,000. Both Sea Hunt, Inc. and Venture Planning Inc. are controlled
by the Company's Chairman, Peter Knollenberg. Because the underlying prior
executive management and consulting contracts were obligations of the Company,
the Company has agreed to repay the full $600,000 plus accrued interest of
$35,111 to Sea Hunt, Inc. and Venture Planning Inc.
NOTE J - DIVESTITURE OF ALL PORTFOLIO COMPANIES AND OTHER ASSETS
Immediately prior to and in connection with the execution of the Exchange
Agreement, the Company divested all of its assets including the investment in
all portfolio companies, notes receivable, and all remaining assets except for
its investment in, and its note receivable due from Gulf Coast Records, LLC and
other assets consisting of prepaid legal fees and security deposits of $7,375.
As of June 30, 2006, the investment in and the note receivable due from Gulf
Coast has been reduced to zero. Current management is actively negotiating with
the management of Gulf Coast Records, LLC regarding the recovery of the
Company's investment. As of June 30, 2006, the prepaid legal fees and security
deposits of $7,375 were written-off.
SOVEREIGN EXPLORATION ASSOCIATES INTERNATIONAL, INC.
(F/K/A - CALI Holdings, Inc.)
NOTES TO FINANCIAL STATEMENTS
June 30, 2006
NOTE J - DIVESTITURE OF ALL PORTFOLIO COMPANIES AND OTHER ASSETS, continued
Prior to the effective date of the Exchange Agreement dated October 17, 2005,
two separate bills of sales required the following lists of assets of the
Company to be sold to KMA Capital, Ltd. of Texas for total consideration of $10
and Kairos Holdings, Inc. for a total consideration of $10:
Sold to KMA Capital Ltd. of Texas:
Sports Nation, Inc., Buehler Earth & Waterworks, LLC, Brokerage account of
CALI at NevWest, TS&B Financial Services, Inc., Wellstone Acquisition
Corporation, TS&B Gaming & Entertainment Corp., TSB Ventures, Inc., three
Dell notebook computers, and office and computer equipment
Sold to Kairos Holdings, Inc.:
Nine limited partnership units of KMA Capital Partners, Ltd., which
represented a 25% ownership interest in this company. See Note B.
Current management does not have any information regarding the valuation or
ownership of these companies.
NEX2U, Inc. is listed as a portfolio company investment as of September 30,
2005; however, it was not included in either of the above referenced bills of
sale included in the Exchange Agreement dated October 17, 2005. As of September
30, 2005, this portfolio company had a cost basis of $16,000. The Company has
requested documentation from prior management regarding the transfer of NEX2U,
Inc. to Kairos Holdings, Inc., and the consideration for such transfer.
On September 21, 2005, prior management sold the Company's 51% interest in
Buehler Earth and Waterworks, LLC for $110,000 to Buehler's managing member.
Current management does not have any information regarding the valuation of
these companies.
NOTE K - EXCHANGE AGREEMENT
The Company on October 17, 2005 entered into an Exchange Agreement with Historic
Discoveries, Inc., a Pennsylvania corporation then known as Sovereign
Exploration Associates International, Inc. The Exchange Agreement provided that
Historic Discoveries, Inc. would contribute 100% of its capital stock to the
Company in exchange for 90% of the capital stock of the Company. As a result,
Historic Discoveries, Inc. became a wholly-owned portfolio company of the
Company and the former shareholders of Historic Discoveries, Inc. gained a
controlling interest in the Company. In addition, all of the Directors of the
Company resigned and new Directors took office. The Company valued its
investment in Historic Discoveries, Inc. at fair value, for which cost was used
as a fair approximation. The fair value of Historic Discoveries, Inc. on October
17, 2005 was $1,161,410. For more information about Historic Discoveries, Inc.,
see Note B.
The Exchange Agreement provided that at a future point, but in no event later
than April 1, 2006, the Company would conduct a reverse stock split, following
which Historic Discoveries, Inc. would have 90% ownership of the Company. The
reverse stock split and issuance of shares to the former shareholders of
Historic Discoveries, Inc. was effected on January 17, 2006. See Notes M and O.
SOVEREIGN EXPLORATION ASSOCIATES INTERNATIONAL, INC.
(F/K/A - CALI Holdings, Inc.)
NOTES TO FINANCIAL STATEMENTS
June 30, 2006
NOTE K - EXCHANGE AGREEMENT, continued
The Exchange Agreement contemplated that the Company would dispose of
substantially all of its assets, except for its investment in Gulf Coast
Records, LLC and certain other assets. See Note J. The Exchange Agreement also
provided for the termination of the Company's executive management contracts
with James E. Jenkins, its then President and Chief Executive Officer, and
Charles Giannetto, its then Secretary and General Counsel, and for the
termination of its consulting contract with KMA Capital Partners Ltd.
(collectively, "Former Management"). In consideration thereof, Historic
Discoveries, Inc. agreed to pay Former Management an aggregate of $600,000 and
to provide them with 5% of the Company's Common Stock. The $600,000 was paid by
related parties, whom the Company has agreed to repay; see Note I. Because
certain disputes subsequently arose between the Company and Former Management,
the Common Stock was not issued to Former Management. Former Management then
commenced an arbitration proceeding, which was resolved by the Settlement
Agreement and General Release described in Note L.
Agreements
Prior to the Exchange Agreement, there is a Revenue Agreement as outlined in
Exhibit B of the Exchange Agreement, that requires 20% revenue participation
payable to the original owners of the permits from the net recovery of the
shipwrecks for the permits that have been assigned to the subsidiaries of the
Company's portfolio company, Historic Discoveries, Inc. The 20% revenue
participation allows Historic Discoveries, Inc. to defer permit transfer fees
and align site permit cost with revenue generation, eliminating the exposure
associated with sites that do not produce a material number of artifacts.
Historic Discoveries, Inc. is only required to pay the 20% revenue participation
when sites produce net revenue. The 20% revenue participation also provides
Historic Discoveries, Inc. the right of first refusal on future sites, creating
a mechanism for Historic Discoveries, Inc. and its operating companies to build
site inventory while deferring the associated cost and reducing financial risk.
The Revenue Agreement with the original owners was executed prior to October 17,
2005.
The original owners of these permits are the beneficial owners of the
controlling interest in the stock received in the Exchange Agreement.
Additionally, officers and directors of the Company hold certain executive
positions in Historic Discoveries, Inc. and its subsidiaries.
The Fantome project (Fantome Cove Treasure Trove License 150, LLC. a subsidiary
of ARC) sold a 2.06% equity interest for a capital investment of $412,000, and
the LeChameau project (Interspace Explorations, LLC, a subsidiary of ARC) sold a
26.0% ownership interest and 40% profit participation interest for $390,000.
Management intends to assess the Company's liability under these agreements on a
periodic basis. No liability has been recorded for these agreements as of June
30, 2006.
NOTE L - SETTLEMENT AGREEMENT AND GENERAL RELEASE
The Company on June 30, 2006, entered into a Settlement Agreement and General
Release (the "Settlement Agreement") with Former Management, KMA Capital
Partners, Inc., and CF Holdings, LLC (collectively, the "Settlement Agreement
Parties") in order to reach a comprehensive resolution of their disputes. The
Settlement Agreement provides that the Settlement Agreement Parties release all
claims that they may have against the Company, its parents, subsidiaries,
affiliates, predecessors, successors, assigns, partners, agents,
representatives, and attorneys (collectively, "affiliated parties") and that the
Company releases all claims it may have against the Settlement Agreement Parties
and their respective affiliated parties.
SOVEREIGN EXPLORATION ASSOCIATES INTERNATIONAL, INC.
(F/K/A - CALI Holdings, Inc.)
NOTES TO FINANCIAL STATEMENTS
June 30, 2006
NOTE L - SETTLEMENT AGREEMENT AND GENERAL RELEASE, continued
The Settlement Agreement also provides that the Corporation will issue 303,333
shares of Common Stock to KMA Capital Partners, Inc. (the successor by merger to
KMA Capital Partners Ltd.), 303,333 shares of Common Stock to Mr. Jenkins, and
303,334 shares of Common Stock to Mr. Giannetto. Because of concerns as to the
legality of such issuance at a time when the Company has elected to be treated
as a BDC, such shares have not yet been issued. In addition, the Company agreed
to remove stop-trading orders with respect to 400,000 shares of Common Stock
held by KMA Capital Partners, Inc., and Mr. Jenkins and Mr. Giannetto agreed to
provide their reasonable cooperation and assistance in providing certain
information to the Company.
In connection with the Settlement Agreement, the Company on the same date
entered into a Leak Out Agreement with KMA Capital Partners, Inc., KMA Capital
Partners, Ltd., Mr. Giannetto, and Mr. Jenkins. The Leak Out Agreement provides
the Company with certain repurchase rights with respect to the shares referenced
in the preceding paragraph and obligates the Company to make and keep at all
times public information available in accordance with Rule 144 under the
Securities Act of 1933.
For further information, see Note Q - Subsequent Events.
NOTE M - SHAREHOLDERS' EQUITY
As of June 30, 2006
As of June 30, 2006, the authorized capital of the Company is 250,000,000,000
shares of common stock (with voting rights), par value $.001.
The Company has authorized 10,000 shares of Class A, no par, preferred stock and
has no issued and outstanding shares as of June 30, 2006. The Class A preferred
stock has conversion rights to the Company's common stock (with voting rights)
of 4-1.
As of June 30, 2006, the Company has authorized 10,000 shares of convertible
Class C, par value $.001 per share, preferred stock. The Class C preferred stock
was cancelled as part of the reverse stock split in January 2006.
As of June 30, 2005
As of June 30, 2005 the authorized capital of the company is 2,000,000,000
shares of common voting stock par value $.001 per share.
The Company had authorized 10,000,000 shares of Class A, no par, preferred stock
and has issued and outstanding 3,725,000 shares. The Class A preferred stock has
conversion rights to the Company's common voting stock of 4-1.
The Company had authorized but not issued 10,000,000 shares of Class B, no par,
preferred stock.
The Company had authorized and issued 10,000,000 shares of convertible Class C,
..001 per share, preferred stock. The Class C preferred stock has conversion
rights to the Company's common voting stock of 1-1.
SOVEREIGN EXPLORATION ASSOCIATES INTERNATIONAL, INC.
(F/K/A - CALI Holdings, Inc.)
NOTES TO FINANCIAL STATEMENTS
June 30, 2006
NOTE M - SHAREHOLDERS' EQUITY, Continued
If at any time or time to time, there is a capital reorganization of the common
stock (reverse split, forward split, etc.) the number of Class C preferred stock
authorized, issued and outstanding, and the number of shares of common stock
into which such Class C preferred shall not be entitled to vote such shares
(except as otherwise expressly provided herein or as required by law, voting
together with the common stock as a single class), but shall be entitled to
notice of any stockholders' meeting in accordance with the Company's bylaws. In
lieu of voting rights, the holders of Class C preferred, voting as a class shall
be entitled to elect two of the Board of Directors at each meeting.
The Company had authorized but not issued 10,000,000 shares of Class D, no par,
preferred stock.
The Company originally reported 53,430,283 outstanding shares of Common Stock,
on a pre-split basis, in its financial statements for the year ended June 30,
2005. The Company has determined that this number was in error and that there
were 55,837,330 outstanding shares of Common Stock, on a pre-split basis, as of
June 30, 2005. The following chart shows all events affecting the number of
shares of Common Stock outstanding in the year ended June 30, 2006, with shares
reported on a pre-split basis prior to January 17, 2006:
Event Date(s) Shares
Shares outstanding June 30, 2005 55,837,330
CALI Holdings Escrow#3 Performance Cap July 21, 2005 80,000,000
Shares issued for debentures - quarter ended Sept. 30, 2005 Various 418,600,000
Shares outstanding Sept. 30, 2005 554,437,330
Shares issued for debentures - quarter ended Dec. 31, 2005 Various 418,000,000
KMA Capital Partners Ltd. (see below) Oct. 5, 2005 800,000,000
Sequoia International, Inc. (per Escrow Agreement) (see below) Oct. 14, 2005 556,166,667
Per Escrow Agreement (see below) Oct. 14, 2005 191,700,000
Acquisition of Sea Quest, Inc. (see below) Dec. 26, 2005 100,000,000
Shares outstanding Dec. 31, 2005 2,620,303,997
Shares outstanding after 1000-to-1 reverse stock split (see Note O) Jan. 17, 2006 2,620,304
Issued per Exchange Agreement (see Note K) Jan. 17, 2006 23,582,736
Issued as a result of rounding in reverse stock split Jan. 17, 2006 126
Shares outstanding Mar. 31, 2006 26,203,166
Shares outstanding June 30, 2006 26,203,166
For further information, see Note Q - Subsequent Events.
SOVEREIGN EXPLORATION ASSOCIATES INTERNATIONAL, INC.
(F/K/A - CALI Holdings, Inc.)
NOTES TO FINANCIAL STATEMENTS
June 30, 2006
Issuance of Stock
On October 5, 2005, the prior management of the Company issued 800,000,000
shares (800,000 common shares post reverse split of January 17, 2006) of
restricted common stock (with voting rights) to KMA Capital Partners, Ltd. The
Company was in dispute with prior management and related consulting firm, over
the subsequent sale of 400,000 shares of this restricted stock. See Note L for
the Settlement Agreement with prior management and related consulting firm.
On October 14, 2005, the prior management issued the 556,166,667 common shares
(556,166 common shares post reverse split of January 17, 2006) referred to in
Note H of the September 30, 2005 Form 10-Q to Sequoia International, Inc. and
therefore, has satisfied the Escrow Agreement with Sequoia International, Inc.,
in which the Company had received $166,850 and would in turn disburse
556,166,667 shares into an escrow account at the discretion of Sequoia.
On October 14, 2005, the prior management issued the 191,700,000 common shares
(191,700 common shares post reverse split of January 17, 2006) referred to in
Note H of the September 30, 2005 Form 10-Q to an individual and therefore, has
satisfied the Escrow Agreement with that individual, in which the Company had
received $95,850 and would in turn disburse 191,700,000 shares into an escrow
account at the discretion of the individual.
On December 26, 2005, the Company issued 100,000 shares of common stock for 100%
ownership of the stock of Sea Quest, Inc. Sea Quest, Inc. is a wholly owned
subsidiary of Sea Research, Inc. Sea Quest, Inc. was owned 50% by a private
unrelated individual and 50% owned by Sea Hunt Holding, LLC, which is owned by
the Chairman of the Company.
On January 17, 2006, the Board of Directors authorized a 1,000 to 1 reverse
stock split of the Company's $.001 par value common stock. As a result of the
reverse split, 2,535,359,053 shares were returned to the Company and additional
paid in capital was increased by $2,535,359.
Pursuant to the Exchange Agreement, the owners of the stock of Historic
Discoveries, Inc. and Sea Hunt, Inc. collectively were to receive 90% of the
outstanding shares of the Company, post reverse split. Two of the former
officers of the Company, and a management consulting firm (KMA Capital Partners,
Ltd.) collectively were to receive an aggregate 5% of the outstanding shares of
the Company, post reverse split.
On January 17, 2006, the Board of Directors cancelled the 10,000 shares of
Series A Convertible Preferred Stock, no par value, and the 9,990 shares of
Series C Convertible Preferred Stock, no par value. The Series A Preferred
shares were partially owned by the prior management (3,750 shares) and
indirectly owned by the Company through its portfolio company Historic
Discoveries, Inc. (6,250 shares). Pursuant to the Exchange Agreement, the
Company had the authority to cancel and retire the shares of prior management.
The Company determined that it was in the best interests of the Company's
shareholders to cancel and retire all issued and outstanding shares of Series A
Convertible Preferred Stock.
All references in the accompanying financial statements to the number of common
shares and per share amounts for 2006 and 2005 have been restated to reflect the
reverse stock split in January 2006.
SOVEREIGN EXPLORATION ASSOCIATES INTERNATIONAL, INC.
(F/K/A - CALI Holdings, Inc.)
NOTES TO FINANCIAL STATEMENTS
June 30, 2006
NOTE N - CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially expose the Company to concentrations of
credit risk, consist principally of cash, investments in portfolio companies,
and notes receivable.
As of June 30, 2006, the Company maintains its cash accounts with financial
institutions located in Pennsylvania. The Federal Deposit Insurance Corporation
(FDIC) guarantees the Company's deposits in financial institutions up to
$100,000 per account.
The Company's deposits with financial institutions that exceeded federally
insured guarantees amounted to $0 as of June 30, 2006. Historically, the Company
has not experienced any losses on its deposits in excess of federally insured
guarantees.
As of June 30, 2006, the fair value of the investment in Historic Discoveries,
Inc. or $1,273,010 is approximately 60.25% of the total investments, at fair
value, which approximates cost, of $2,113,045.
The investment in Historic Discoveries, Inc. and the investment in Sovereign
Exploration Associates International of Spain, Inc., individually and in total
of the two investments, exceeds 25% of the total investments, at fair value
which approximates cost, reflected in the financial statements presented herein.
As of June 30, 2006, a note receivable in the amount of $832,849 offset by an
allowance to reduce the market value of this note and investment to zero from
Gulf Coast Records is included in Investments in and advances to affiliates in
the accompanying balance sheets. Current management is reviewing its options
regarding this portfolio company and whether it wants to maintain its position
or divest its holdings in the future, while actively negotiating with the
management of Gulf Coast Records, LLC regarding the recovery of the Company's
investment. The Company has recently received information from the management of
Gulf Coast Records, LLC that has caused the Company to reduce the fair market
value to zero at this time.
NOTE O - REVERSE STOCK SPLITS
On January 17, 2006, the Board of Directors authorized a 1,000 to 1 reverse
stock split of the Company's $.001 par value common stock. As a result of the
reverse split, 2,535,359,053 shares were returned to the Company and additional
paid in capital was increased by $2,535,359. All references to the accompanying
financial statements to the number of common shares and per share amounts for
2005 and 2004 have been restated to reflect the reverse stock split.
On April 4, 2005, the Board of Directors authorized a 100 to 1 reverse stock
split of the Company's $.001 par value common stock. As a result of the reverse
split, 962,151,879 shares were returned to the Company and additional paid in
capital was increased by $962,152.
On August 13, 2004, the Board of Directors authorized a 40 to 1 reverse stock
split of the Company's $.001 par value common stock. As a result of the reverse
split, 473,185,733 shares were returned to the Company and additional paid in
capital was increased by $473,186. All references in the accompanying financial
statements to the number of common shares and per share amounts for 2005 and
2004 have been restated to reflect the reverse stock split.
SOVEREIGN EXPLORATION ASSOCIATES INTERNATIONAL, INC.
(F/K/A - CALI Holdings, Inc.)
NOTES TO FINANCIAL STATEMENTS
June 30, 2006
NOTE P: RELATED PARTY TRANSACTIONS
OFFICERS LOANS
As of June 30, 2006, $128,519 was owed to certain officers of the Company. These
funds were advanced to the Company for cash flow purposes in the form of demand
notes bearing no interest.
ACCRUED PAYROLL AND EXPENSES; DUE TO RELATED PARTIES
As of June 30, 2006, $817,929 was owed to certain officers of the Company for
accrued payroll and unreimbursed expenses.
RELATED PARTY NOTE PAYABLE
In connection with the Exchange Agreement discussed in Note K, Historic
Discoveries, Inc. agreed to pay an aggregate of $600,000 to the Company's former
management in partial consideration for the termination of executive management
contracts and a consulting contract with the Company. Sea Hunt, Inc., a related
party to the Company, advanced $300,000 at the closing of the Exchange Agreement
and Venture Planning Inc. provided, and subsequently paid, a note for the
remaining $300,000. Both Sea Hunt, Inc. and Venture Planning Inc. are controlled
by the Company's Chairman, Peter Knollenberg. Because the underlying executive
management and consulting contracts were obligations of the Company, the Company
has agreed to repay the full $600,000 to Sea Hunt, Inc. and Venture Planning
Inc.
AGREEMENTS
Prior to the Exchange Agreement, there is a Revenue Agreement as outlined in
Exhibit B of the Exchange Agreement, that requires 20% revenue participation
payable to the original owners of the permits from the net recovery of the
shipwrecks for the permits that have been assigned to the subsidiaries of the
Company's portfolio company, Historic Discoveries, Inc. The 20% revenue
participation allows Historic Discoveries, Inc. to defer permit transfer fees
and align site permit cost with revenue generation, eliminating the exposure
associated with sites that do not produce a material number of artifacts.
Historic Discoveries, Inc. is only required to pay the 20% revenue participation
when sites produce net revenue. The 20% revenue participation also provides
Historic Discoveries, Inc. the right of first refusal on future sites, creating
a mechanism for Historic Discoveries, Inc. and its operating companies to build
site inventory while deferring the associated cost and reducing financial risk.
The Revenue Agreement with the original owners was executed prior to October 17,
2005.
RELATED PARTY OWNERSHIP OF PERMITS
The original owners of the permits, as discussed in Agreements are the
beneficial owners of the controlling interest in the stock of the Company
received in the Exchange Agreement dated October 17, 2005.
OFFICERS AND DIRECTORS OF THE COMPANY
Certain officers and directors of the Company hold certain executive positions
in Historic Discoveries, Inc. and Sea Hunt, Inc. and their respective
subsidiaries.
SOVEREIGN EXPLORATION ASSOCIATES INTERNATIONAL, INC.
(F/K/A - CALI Holdings, Inc.)
NOTES TO FINANCIAL STATEMENTS
June 30, 2006
ACQUISITION OF SEA QUEST, INC.
On December 26, 2005, the Company issued 100,000 shares of common stock for 100%
ownership of the stock of Sea Quest, Inc. Sea Quest, Inc. is a wholly owned
subsidiary of Sea Research, Inc. Sea Quest, Inc. was owned 50% by a private
unrelated individual and 50% owned by Sea Hunt Holding, LLC, which is owned by
the Chairman of the Company.
SOVEREIGN EXPLORATION ASSOCIATES INTERNATIONAL OF SPAIN, INC. (SEAI - SPAIN)
On November 05, 2005, the Company formed SEAI - Spain. SEAI-Spain has secured
the finder's rights to four (4) shipwrecks in Spain with potential historic and
intrinsic value.
On November 15, 2005, the Company issued $800,000 of convertible debentures. The
debentures are due on November 15, 2006 with accrued interest at a rate of six
percent (6%) per annum. The Company may, at any time prior to November 15, 2006,
convert the principal amount of the debenture into free trading common stock of
the Company at the average closing price of the Company's common stock for the
ten (10) business days prior to the conversion date. The debenture holder may,
at any time after November 15, 2006, convert the principal amount of the
debenture into free trading common stock of the Company at the average closing
price of the Company's common stock for the ten (10) business days prior to the
conversion date.
STOCK ACQUISITION - EXCHANGE AGREEMENT
Pursuant to the Exchange Agreement dated October 17, 2005, Sovereign Marine
Explorations, Inc and Sea Hunt, Inc. collectively own 90% of the Company's
outstanding common stock.
For additional information, see Note Q - Subsequent Events.
NOTE Q - SUBSEQUENT EVENTS
On July 10, 2006, an officer of the Company loaned the Company $177,700. These
funds were advanced to the Company for cash flow purposes in the form of a
demand note bearing no interest.
The Company on September 20, 2006, held a special meeting of its shareholders to
consider a proposal for the Company to withdraw its election to be a BDC under
the 1940 Act. The shareholders approved the proposal, and the Company on
September 22, 2006, withdrew its election by filing Form N-54C with the
Securities and Exchange Commission.
Following the withdrawal of its election, the Company carries on a marine
recovery and explorations business, which it conducts through subsidiaries and
controlled companies. The Company will continue to be a reporting company under
the Securities Exchange Act of 1934, but will be managed so that it will not be
subject to the provisions of the 1940 Act.
SOVEREIGN EXPLORATION ASSOCIATES INTERNATIONAL, INC.
(F/K/A - CALI Holdings, Inc.)
NOTES TO FINANCIAL STATEMENTS
June 30, 2006
NOTE Q - SUBSEQUENT EVENTS, continued
The withdrawal of the Company's election to be treated as a BDC under the 1940
Act will result in a significant change in the Company's required method of
accounting. BDC financial statement presentation and accounting utilizes the
value method of accounting used by investment companies, which allows BDCs to
recognize income and value their investments at market value as opposed to
historical cost. Operating companies use either the fair-value or
historical-cost methods of accounting for financial statement presentation and
accounting for securities held, depending on how the investment is classified
and how long the company intends to hold the investment. Because of an absence
of reliable market data as to the value of its assets, the Company has used
historical cost as a proxy for fair value. Accordingly, the Company does not
expect the change in valuation to have any immediate material impact on the
reported value of the Company's assets. In the future, however, changing the
Company's method of accounting could reduce the market value of its investments
in privately held companies by eliminating its ability to report an increase in
value of its holdings as they occur. In addition, as an operating company, the
Company will consolidate its financial statements with subsidiaries.
The Company on September 21, 2006, filed Amended and Restated Articles of
Incorporation with the Utah Division of Corporations & Commercial Code. Under
its Amended and Restated Articles of Incorporation, the Company is authorized to
issue 250,000,000 shares of Common Stock, par value $.001 per share, and
100,000,000 shares of Preferred Stock, par value $.001 per share. The Preferred
Stock is "blank check" preferred stock, and the Board of Directors of the
Company is vested with the authority to divide the Preferred Stock into series
and to determine the terms and rights of each such series. No such series have
been authorized to date.
Following the withdrawal of the Company's election to be treated as a BDC, the
Company intends to issue 303,333 shares of Common Stock to KMA Capital Partners,
Inc., 303,333 shares of Common Stock to Mr. Jenkins, and 303,334 shares of
Common Stock to Mr. Giannetto, as required by the Settlement Agreement described
in Note L.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
Item 9A. Controls and Procedures.
The Company carried out an evaluation, under the supervision and with the
participation of its principal executive officer and principal financial
officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of the end of the period covered by this
report. Based on this evaluation, the Company's principal executive officer and
principal financial officer concluded that the Company's disclosure controls and
procedures were effective in timely alerting them to material information
required to be included in the Company's periodic SEC reports. It should be
noted that the design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions, regardless of how remote; however, the Company's principal
executive officer and principal financial officer have concluded that the
Company's disclosure controls and procedures are effective at a reasonable
assurance level.
There have been no changes in the Company's internal control over financial
reporting, to the extent that elements of internal control over financial
reporting are subsumed within disclosure controls and procedures, that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
Item 9B. Other Information.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
------------------------------- ------------------------- ----------------------------- ------------------------------
Name, Age and Address Position and Length of Principal Occupation and Other Directorships
Term Business Experience
------------------------------- ------------------------- ----------------------------- ------------------------------
Robert D. Baca President, CEO and President and CEO of
(50) Director since October Sovereign Exploration
503 Washington Avenue, Suite 2005 Associates International,
2D Inc. ("Sovereign
Newtown, PA 18940 Exploration")
(2005-present); Chief
Financial Officer of
Sovereign Marine
Exploration, Inc.
(2004-present); President
of Monarch Group
(consulting)
(2001-present); President
of Premier
Neurodiagnostics, LLC
(mobile EMG (neurology)
services) (2004-present);
Chief Financial Officer of
Artifact Recovery and
Conservation, Inc. (marine
exploration)
(2005-present); President
of Clinical Strategy
Partners, LLC (subject
recruiting) (2005-2006);
President of Monarch
Clinical Strategies
(subject recruiting)
(2004-2005).
------------------------------- ------------------------- ----------------------------- ------------------------------
John J. Barr Director since October Attorney, Palmer & Barr
(49) 2005 P.C. (1989-present).
503 Washington Avenue, Suite
2D
Newtown, PA 18940
------------------------------- ------------------------- ----------------------------- ------------------------------
James J. Cavan Vice President since Director of Research of
(40) October 2005 Drexel University College
503 Washington Avenue, Suite of Medicine (2003-2005);
2D Associate Director and
Newtown, PA 18940 Director of Research
Office, University of
Medicine and Dentistry of
New Jersey (2003).
------------------------------- ------------------------- ----------------------------- ------------------------------
Kevin J. Conner Director since October Managing Director of Conner
(44) 2005 & Associates, PC
503 Washington Avenue, Suite (accounting firm)
2D (1992-present).
Newtown, PA 18940
------------------------------- ------------------------- ----------------------------- ------------------------------
Donald G. Conrad Director since October Retired. Chevy Chase Bank, F.S.B.
(76) 2005
503 Washington Avenue, Suite
2D
Newtown, PA 18940
------------------------------- ------------------------- ----------------------------- ------------------------------
Barry Gross Senior Vice President Senior Vice
(55) and Secretary since President-Project
503 Washington Avenue, Suite October 2005 Operations of Sovereign
2D Exploration (2005-present);
Newtown, PA 18940 Northeast Regional Manager
of Taut, Inc. (laparoscopic
medical device
manufacturer)
(2001-present).
------------------------------- ------------------------- ----------------------------- ------------------------------
Peter Knollenberg Chairman and Director
(56) since October 2005
503 Washington Avenue, Suite
2D
Newtown, PA 18940
------------------------------- ------------------------- ----------------------------- ------------------------------
Curtis R. Sprouse Chief Operating Officer President and CEO of Boston
(41) since October 2005 Market Strategies, Inc.
503 Washington Avenue, Suite (consulting)
2D (1993-present); President
Newtown, PA 18940 and CEO of iBall, Inc.
(software consulting)
(2003-present); Chief
Operating Officer of
Sovereign Exploration
(2005-present); Chief
Operating Officer of
Sovereign Marine
Exploration, Inc.
(2005-present); Chief
Operating Officer of
Artifact Recovery and
Conservation (marine
exploration)
(2005-present); Vice
President of Clinical
Strategy Partners, LLC
(subject recruiting)
(2005-2006); Vice President
of Research Clinical
Strategies (subject
recruiting) (2004-2005).
------------------------------- ------------------------- ----------------------------- ------------------------------
The Company does not have a separate Audit Committee because the Board of
Directors determined that a separate Audit Committee was not necessary due to
the relatively small size of the Company. The Company's Board of Directors
serves as the Audit Committee, overseeing (i) the integrity of the Company's
financial statements; (ii) the independent registered public accounting firm's
qualifications and independence; (iii) the performance of the Company's internal
audit function and independent registered public accounting firm; and (iv) the
Company's compliance with legal and regulatory requirements. The Board of
Directors has determined that Kevin J. Conner is an "audit committee financial
expert" as defined by the rules of the SEC and is "independent" as defined in
Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act.
The Company has not adopted a code of ethics that applies to its principal
executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. The Company has not adopted
a code of ethics because the Company's Board of Directors feels the Company's
small size makes written standards of conduct unnecessary. However, the Company
will consider whether to add a written code of ethics in the future.
The Company's securities are not registered under Section 12 of the
Securities Exchange Act of 1934 and, therefore, the Company's directors,
officers and beneficial owners of more than ten percent of the Company's
outstanding Common Stock are not required to file Forms 3, 4 and 5 with the SEC.
Item 11. Executive Compensation.
The following table discloses compensation received for each of the three fiscal
years ended June 30, 2006, June 30, 2005, and June 30, 2004 by (i) the Company's
Chief Executive Officer and (ii) the other highly compensated executive
officers.
-------------------------------------- ------------------- --------------------- ------------ ---------------------------
Name and principal position Fiscal year Salary ($) Bonus ($) Other annual compensation
-------------------------------------- ------------------- --------------------- ------------ ---------------------------
Robert D. Baca, President and CEO 2006 185,000 - -
-------------------------------------- ------------------- --------------------- ------------ ---------------------------
Curtis R. Sprouse, Chief Operating 2006 185,000 - -
Officer
-------------------------------------- ------------------- --------------------- ------------ ---------------------------
James Cavan, Vice President 2006 150,000 - -
-------------------------------------- ------------------- --------------------- ------------ ---------------------------
The Corporation lacks information on compensation to James E. Jenkins, who was
President and CEO of the Company until October 17, 2005. The officers listed
above joined the Company on October 17, 2005.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The following table sets forth, as of August 21, 2006, the beneficial ownership
of the Company's Common Stock (i) by any person or group known by the Company to
beneficially own more than 5% of the outstanding Common Stock, (ii) each
Director and executive officer, and (iii) by all Directors and officers as a
group.
---------------------------------------- -------------------------------------- --------------------------------------
Name and Address(1) Number of Shares Percent of Outstanding Shares
---------------------------------------- -------------------------------------- --------------------------------------
Robert D. Baca 11,864,790(2) 45.3%
President, Chief Executive Officer and
Director
---------------------------------------- -------------------------------------- --------------------------------------
John Barr -0- *
Director
---------------------------------------- -------------------------------------- --------------------------------------
James Cavan 7,242 *
Vice President
---------------------------------------- -------------------------------------- --------------------------------------
Kevin J. Conner 4,800 *
Director
---------------------------------------- -------------------------------------- --------------------------------------
Donald G. Conrad 220,000 *
Director
---------------------------------------- -------------------------------------- --------------------------------------
Barry Gross 11,822,582(3) 45.1%
Vice President and Secretary
---------------------------------------- -------------------------------------- --------------------------------------
Peter Knollenberg 11,815,368(4) 45.1%
Chairman and Director
---------------------------------------- -------------------------------------- --------------------------------------
Curtis R. Sprouse 11,824,725(5) 45.1%
Chief Operating Officer
---------------------------------------- -------------------------------------- --------------------------------------
All Executive Officers and Directors 23,957,067(6) 91.5%
as a Group
---------------------------------------- -------------------------------------- --------------------------------------
Sea Hunt, Inc. 11,791,368 45.0%
120 Alpine Road
West Palm Beach, FL 33405
---------------------------------------- -------------------------------------- --------------------------------------
Sovereign Marine Explorations, Inc. 11,791,368 45.0%
503 Washington Avenue, Suite 2D
Newtown, PA 18940
---------------------------------------- -------------------------------------- --------------------------------------
* Denotes less than 1%
(1) The address for each Director and executive officer is c/o Sovereign
Exploration Associates International Inc., 503 Washington Avenue, Suite 2D,
Newtown, PA 18940.
(2) Includes 73,422 shares owned directly and 11,791,368 shares as to which Mr.
Baca may be deemed to have beneficial ownership by reason of his status as
a director and officer of Sovereign Marine Explorations, Inc. ("SME"). Mr.
Baca disclaims beneficial ownership of shares held by SME.
(3) Includes 31,214 shares owned directly and 11,791,368 shares as to which Mr.
Gross may be deemed to have beneficial ownership by reason of his status as
a director and officer of SME. Mr. Gross disclaims beneficial ownership of
shares held by SME.
(4) Includes 24,000 shares owned directly and 11,791,368 shares as to which Mr.
Knollenberg may be deemed to have beneficial ownership by reason of his
status as president, director, and sole shareholder of Sea Hunt, Inc.
(5) Includes 13,653 shares owned directly, 19,704 shares held through the
Boston Market Strategies, Inc. Employee Profit Sharing Plan ("BMSI"), and
11,791,368 shares as to which Mr. Sprouse may be deemed to have beneficial
ownership by reason of his status as a director and officer of SME. Mr.
Sprouse disclaims beneficial ownership of shares held by SME and through
BMSI.
(6) Includes 11,791,368 shares that may be beneficially owned by directors and
officers of SME, each of whom disclaims beneficial ownership of such
shares; 11,791,368 shares beneficially owned by Mr. Knollenberg as
president, director, and sole shareholder of Sea Hunt, Inc.; and 19,704
shares that may be beneficially owned by Mr. Sprouse through the BMSI, who
disclaims beneficial ownership of such shares.
Item 13. Certain Relationships and Related Transactions.
The Corporation on October 5, 2005, while under prior management, issued 800,000
(split-adjusted) shares of Common Stock to KMA Capital Partners Ltd. ("KMA"),
which at that time was a portfolio company of the Corporation and contractually
provided consulting services to the Corporation. Current management has been
unable to confirm that the Corporation received any consideration for these
shares.
Immediately prior to and in connection with the entry into the Exchange
Agreement, the Corporation disposed of substantially all of its assets. The
Corporation sold nine Limited Partnership Units in KMA to Kairos Holdings, Inc.
for a total consideration of $10, and it sold its interests in six portfolio
companies, its brokerage account at NevWest, three notebook computers, furniture
and fixtures, and office and computer equipment to KMA Capital Partners Ltd.
Inc. of Texas for a total consideration of $10. The Corporation realized losses
of $2,525,274 on these divestitures. The Corporation does not have sufficient
information to determine the value of the assets sold or the validity of the
transactions, nor does it have any information on the relationship, if any, that
KMA or prior management may have had with the purchasers. The Corporation has
sought further information on these transactions from the purchasers and prior
management, but its efforts to date have been unsuccessful. The Corporation
retained its interest in one portfolio company, Gold Coast Records, LLC, which
the Corporation currently carries at a fair value of zero, as well as prepaid
legal fees and security deposits of $7,375, also subsequently written down to
zero.
The Corporation on October 17, 2005, entered into an Exchange Agreement with
Sovereign Exploration Associates International, Inc., a Pennsylvania corporation
now known as Historic Discoveries, Inc. ("Historic Discoveries"). The Exchange
Agreement provided that Historic Discoveries would contribute 100% of its
capital stock to the Corporation in exchange for 90% of the capital stock of the
Corporation. As a result, the former shareholders of Historic Discoveries gained
a controlling interest in the Corporation. In addition, all of the Directors of
the Corporation resigned and new Directors took office. Historic Discoveries
intended, by entering into the transaction, to improve its ability to raise
funds for its marine recovery and explorations business in the capital markets.
For accounting purposes, the Board of Directors of the Corporation determined
that, in the absence of more reliable evidence as to its value, Historic
Discoveries should be valued at its historical cost, which was subsequently
determined to be $1,161,410 on that date.
In connection with the contribution of ARC and SRI to the Corporation's
wholly-owned subsidiary Historic Discoveries, the Corporation and Historic
Discoveries agreed to distribute 20% of the net profits arising out of the
exploitation of permits, licenses, finder fees rights, contracts and other
rights (collectively, "permits") held by ARC to its former corporate parent,
Sovereign Marine Explorations, Inc. ("SME"), and to distribute 20% of the net
profits arising out of the exploitation of permits held by SRI to its former
corporate parent, Sea Hunt, Inc. ("Sea Hunt"). The agreement continued a
pre-existing arrangement among Historic Discoveries, SME, and Sea Hunt.
The Exchange Agreement provided that at a future point, but in no event later
than April 1, 2006, the Corporation would conduct a reverse stock split,
following which Historic Discoveries would have 90% ownership of the
Corporation. The reverse stock split and issuance of shares to the former
shareholders of Historic Discoveries were effected on January 17, 2006. The
Company issued 11,791,368 shares to Sea Hunt and 11,791,368 shares to SME. Peter
Knollenberg, the Chairman of the Corporation, is the president and sole
shareholder of Sea Hunt, and Robert D. Baca, the President and Chief Executive
Officer of the Corporation, is the chief financial officer and a director of
SME. The Corporation on January 17, 2006, also canceled all outstanding shares
of preferred stock. All holders of outstanding preferred stock were parties to
the Settlement Agreement discussed below and have no further claims with respect
to their holdings of preferred stock.
Prior to the Change in Control, the Corporation was a party to executive
management contracts with James E. Jenkins, its President and Chief Executive
Officer, and Charles Giannetto, its Secretary and General Counsel. In addition,
the Corporation was a party to a consulting contract with KMA, pursuant to which
KMA provided it with consulting services. In consideration of the termination of
the executive management contracts and the consulting contract, Historic
Discoveries agreed to pay to Mr. Jenkins, Mr. Giannetto, and KMA an aggregate of
$600,000 and to provide them with 5% of the Corporation's Common Stock. Sea Hunt
paid Mr. Jenkins, Mr. Giannetto, and KMA $300,000 at the closing of the Exchange
Agreement. As noted above, Sea Hunt holds 45% of the outstanding Common Stock,
and its president and sole shareholder, Mr. Knollenberg, is the Chairman of the
Corporation. In addition, Venture Planning Inc., another corporation controlled
by Mr. Knollenberg, provided Mr. Jenkins, Mr. Giannetto, and KMA with, and
subsequently paid, a note for the remaining $300,000. Because the underlying
obligations to Mr. Jenkins, Mr. Giannetto, and KMA were obligations of the
Corporation, the Corporation has booked payables of $600,000, which remain
outstanding, to Sea Hunt and Venture Planning Inc. in consideration of their
payment of these amounts.
Following the Change in Control, certain disputes arose between the Corporation
and Mr. Jenkins, Mr. Giannetto, and KMA. As a result of these disputes, the
Corporation did not issue any Common Stock to Mr. Jenkins, Mr. Giannetto, or
KMA, and they commenced an arbitration proceeding against the Corporation. The
Corporation and Mr. Jenkins, Mr. Giannetto, KMA, KMA Capital Partners, Inc., and
CF Holdings, LLC (collectively, the "Former Management Parties") on June 30,
2006, entered into a Settlement Agreement and General Release (the "Settlement
Agreement") in order to reach a comprehensive resolution of their disputes. The
Settlement Agreement provides that the Former Management Parties release all
claims that they may have against the Corporation, its parents, subsidiaries,
affiliates, predecessors, successors, assigns, partners, agents,
representatives, and attorneys (collectively, "affiliated parties") and that the
Corporation releases all claims it may have against the Former Management
Parties and their respective affiliated parties. The Settlement Agreement also
provides that the Corporation will issue 303,333 shares of Common Stock to KMA
Capital Partners, Inc. (the successor by merger to KMA), 303,333 shares of
Common Stock to Mr. Jenkins, and 303,334 shares of Common Stock to Mr.
Giannetto. Because of concerns as to the legality of such issuance by a BDC,
such shares have not yet been issued. The Corporation intends to issue these
shares now that its election to be a BDC has been withdrawn.
The Corporation on December 26, 2005, issued 100,000 shares of Common Stock for
100% ownership of the stock of Sea Quest, Inc., which became a wholly-owned
subsidiary of Sea Research. Sea Quest, Inc. was owned 50% by a private unrelated
individual and 50% owned by Sea Hunt Holding, LLC, which is owned by Mr.
Knollenberg. By acquiring Sea Quest, Inc., Sea Research acquired a vessel known
as the Sea Quest.
Item 14. Principal Accounting Fees and Services.
FEES PAID TO THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
During the fiscal years ended June 30, 2006 and June 30, 2005, professional
audit services were performed for the Company by Baumann, Raymondo & Company,
P.A. ("Baumann Raymondo"), the Company's independent registered public
accounting firm. During the fiscal years ended June 30, 2006 and June 30, 2005
professional tax services were performed by Conner & Associates, PC ("Conner &
Associates"), certified public accountants. Set forth below is information
relating to the aggregate fees billed by Baumann Raymondo and Conner &
Associates for professional services rendered for each fiscal year. All fees and
services were approved by the Board before the respective firms were engaged.
Audit Fees. The aggregate fees billed, or to be billed, for the audit of the
Company annual financial statements, the audit of management's assessment of the
company's internal control over financial reporting and Baumann Raymondo's audit
of the Company's internal control over financial reporting, review of the
financial statements included in the Company's Form 10-QSB filings, and services
that are normally provided by the independent registered public accounting firm
in connection with statutory and regulatory filings or engagements were $22,937
and $37,816, for fiscal 2006 and 2005, respectively.
Audit-Related Fees. During fiscal 2005 and 2006, Baumann Raymondo did not
perform any services for assurance or related services on behalf of the Company
that were reasonably related to the performance of the audit or review of the
Company's financial statements and are not reported under "Audit Fees" during
fiscal 2006 and 2005.
Tax Fees. The aggregate fees billed, or to be billed, by Conner & Associates for
services related to the preparation of tax returns and other tax compliance
services were $7,500 and $5,000 during fiscal 2006 and 2005, respectively.
All Other Fees. Not applicable.
PRE-APPROVAL POLICY FOR SERVICES BY INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
The Board of Directors has implemented procedures for the pre-approval of all
engagements of the Company's independent registered public accounting firm for
both audit and permissible non-audit services, including the fees and terms of
each engagement. The Board annually meets with the independent registered public
accounting firm and reviews and pre-approves all audit-related services prior to
the commencement of the audit engagement. For permissible non-audit services,
the Board has delegated pre-approval authority to the Kevin J. Conner, the audit
committee financial expert, and Mr. Conner reviews the nature and terms of any
proposed engagement of the independent registered public accounting firm. Mr.
Conner will discuss the matter with management and, as necessary, with the
independent registered public accounting firm, prior to making any determination
to approve or reject any such engagement. Any approvals of non-audit services
are then reported by Mr. Conner at the next Board meeting for approval by the
Board.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
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Exhibit No. Description
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EX-3(i) Articles of Incorporation
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EX-3(ii) By-Laws
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EX-10.1 Exchange Agreement
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EX-10.2 Settlement Agreement
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EX-21 Subsidiaries of Registrant
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EX-24.1 Power of Attorney for Kevin J. Conner
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EX-24.2 Power of Attorney for Peter Knollenberg
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EX-31.1 Section 302 CEO and CFO Certification
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EX-32.1 Section 906 CEO and CFO Certification
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
SOVEREIGN EXPLORATION ASSOCIATES INTERNATIONAL, INC
October 13, 2006 By: /s/Robert D. Baca
Date Robert D. Baca
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
/s/Robert D. Baca October 13, 2006 President, Chief Executive Officer,
Robert D. Baca Date Chief Financial Officer, Chief
Accounting Officer, and Director
October 13, 2006 Director
John Barr Date
* October 13, 2006 Director
Kevin J. Conner Date
October 13, 2006 Director
Donald G. Conrad Date
* October 13, 2006 Chairman and Director
Peter Knollenberg Date
*By:/s/Robert D. Baca October 13, 2006
Robert D. Baca Date
Attorney-in-fact
Supplemental Information to be Furnished With Reports Filed Pursuant to Section
15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to
Section 12 of the Act
The Corporation has not sent any annual report to security holders covering the
Corporation's last fiscal year. The Corporation mailed proxy solicitation
materials to its shareholders on or about September 8, 2006, in connection with
a special meeting of shareholders held September 20, 2006. The Corporation
voluntarily filed its definitive proxy statement on Schedule 14A on September 8,
2006.